Friday, February 28, 2014

Tax (or arbitrarily raise the price of) something, and you get less of it...

This morning's Seeking Alpha's Wall Street Breakfast: Must-Know News reads:
Japanese economic activity bumps up ahead of sales-tax hike. Japanese industrial production grew at the fastest pace since June 2011 in January, jumping 4% on month after a drop of 0.9% in December. Retail sales leapt 4.4% vs +2.5%. The strong figures are not a total surprise, as a bump in economic activity has been expected ahead of a rise in sales tax in April, which is forecast to then drag on the economy. Core inflation held steady at 1.3% on year in January, while the unemployment rate was unchanged at 3.7%.

So "a bump in economic activity has been expected ahead of a rise in sales tax in April, which is forecast to then drag on the economy." Well, of course, that's a no-brainer: you tax---or arbitrarily raise the price of---something, and you get less of it. I mean it doesn't take a PhD in economics to figure that one out, right?

So why then would anyone in his right mind, let alone an economist, suggest that a hike in the minimum price of labor would not result in less labor? Well, when we're talking economists, it almost has to be purely political.

History schmistory....

If you thought January was bad for stocks, wait for February, was the title of the, February 3rd, 2014 article. Here's a snippet: 
February is historically a rocky month for stocks, but it's bound to perform even worse when January is negative.

Since 1971, when January was negative, the S&P 500 extended its losses into February 72 percent of the time, falling on average 2.4 percent. That ratio stands at 65 percent for the Dow and 57 percent for the Nasdaq.

Well, so much for history being your guide. Not only did the S&P 500 not fall 2.4 percent in February, it rose 3.74%. The NASDAQ gained 5.13 percent.

I don't suppose regular readers need me to repeat, for the thousandth time, my you-can't-time-the-market mantra. So I shan't. I'll just warn any short-term investors who may have stumbled onto my blog to try and not get carried away by reports suggesting that there's good times in store for March and April. Like Springing to life? In last 20 years, stocks’ largest gains came in March, April, posted in Wednesday's online edition of the Wall Street Journal. Here's a snippet: 
March and April have been the S&P 500’s two best months over the past two decades, says Ryan Detrick, senior technical strategist at Schaeffer’s Investment Research.

March and April on average have delivered returns of 1.52% and 2.19%, respectively, topping all other months.

So, does my warning to short-timers mean I'm predicting something other than the usual March/April gains? Not at all. Although that is clearly what many "sophisticated" short-timers are indeed expecting.

There's this stat they call "short interest", it's the percentage of a company's outstanding shares that have been sold short. Short-selling is the practice of borrowing, through an intermediary, someone else's shares of stock, and immediately selling them. Of course the borrower has to eventually return what he borrowed, meaning he'll have to buy them back and return them to their rightful owner. Why would someone do such a thing? Because he believes the shares he borrowed are going to plummet in price. If he's right, he'll wait till he thinks the shares are somewhere near as cheap as they're going to get, buy them, give them back to the lender and pocket the difference.

Example: short-seller (SS) borrows 100 shares of ABC and sells them for $100 per share (for $10,000). ABC drops to $50, SS buys them back for $5,000, returns them and pockets a cool $5,000.

Back to "short interest": It was on the rise the beginning of February. Those "sophisticated" short-timers were no doubt figuring that 72% odds of a February decline was something worth betting on. And, interestingly, they remain undeterred as we enter March. In fact, presently, short interest for the stocks comprising the S&P 500 Index is at a 52 week high---so now they're betting against history's bullish case for March and April. Hmm... So should we be short-term worried? I mean they are "sophisticated".

Well, yeah, short-term I'd say we're way overdue for a correction (that's 10-20% down), but the rise in short interest doesn't, in my view, in anyway suggest it'll happen in March or April. In fact, it kinda suggests not (don't hold me to that). You see, a rise in short interest is essentially a rise in pessimism. And pessimism is generally a good thing for a bull market, in that it means that there's lots of folks who've yet to join the party. Party's go longer when new guests keep showing up. It's when everybody's arrived that you know the end is near. I mean you can't party forever.

Plus, you should see what happens when short-sellers capitulate. In fact, you've already seen it a number of times over the past 5 years. It's those days when, out of the blue, the Dow jumps like 300 points. Those are (can be) what they call "short-covering rallies".

It goes like this: SS borrows 100 shares of ABC and sells them for $100 per share (for $10,000). ABC rises to $125, SS panics and buys them back for $12,500 and returns them, depocketing a not cool $2,500. He bought them back because he was afraid of losing everything he's got if ABC turns into Google and goes to $1,200 per share. Imagine what the market does when lots of SS's have to cover their short positions (buy stocks like mad) --- yep, it goes up bigtime.

So why do I bother you with all this short-term stuff? Just giving you a little insight into what (and why) to maybe expect over the coming weeks. Whether it comes by way of short-covering rallies, margin call selling (kinda the opposite of short-covering), overdue corrections or the next bear market, the one thing I will predict for 2014 is a lot more volatility than we saw in 2013.

Thank goodness you’re neither a frustrated short-seller nor a heavy-duty partier. You’re a long-term investor who understands that all things are cyclical, that no one can consistently time the ups and downs, that a diversified portfolio is essential to investment success (and personal sanity), and who looks to enjoy—for years and years to come—the goods and services provided by the global companies whose stocks occupy that all-important long-term, growth-oriented, portion of your portfolio. Sound familiar?

Wednesday, February 26, 2014

Who has it right, stock traders or bondholders? Doesn't, ultimately, matter...

The market got the year off with a decline that, depending on the index, was close to the depth of the single notable sell-off of last year. Notice I use the terms "decline" and "sell-off"---at merely 5-7%, the downdrafts of last year and this never reached correction, let alone bear market, territory. Now, if either or both of those moves made you nervous, you need to rethink how you think about the market. I assure you, last year---in terms of volatility (lack thereof)---bore no resemblance to market reality.

If many economists, including those at the Fed, have it right, 2014 will be the year the economy finally reaches escape (from quantitative easing [QE]) velocity. Problem is, not only has the economy not thus far found its wings, it has in fact waned (in terms of the rate of growth). But of course all flights are cancelled amid a polar vortex.

So then, the stock market---having almost recouped January's recoil---is telling us that when the weather warms up, so will the economy. Makes sense to me. However, as I've been complaining lately, the bond market ain't buying it. Bond yields have been flat to lower, while the S&P 500 is a digit or two from its all time high. The question of the day, therefore, is what's up with the bond market? Why, while the stock market is clearly discounting an accelerating economy, the bond market clearly isn't?

Well, it could be simply that stock and bond investors are at odds with one another. Or it could be that the stock market is not discounting a robust 2014 economy after all. Meaning, we could be back to bad-news-is-good-news---back to a market where traders focus on the Fed and the stimulative (for, they think, the stock market) effects of QE. Maybe if economic growth tapers, the Fed will taper the QE taper. I.e., maybe the Fed will continue pumping billions into nowhere (well, onto bank excess reserve accounts held at the Fed earning .25%). Which would, alas, likely inspire speculators to further distort the markets for, say, bonds of all stripes, emerging market currencies, gold, or who knows what.

Or maybe the U.S. bond market is receiving inflows from investors exiting currently risky currencies---they call it a flight to quality---which would put downward pressure on interest rates. If that's the case, the present high demand for bonds may not be all about fear over a slowing economy.

Honestly, my best guess is my first guess: That stock traders get that the Fed has overstayed its welcome and that they believe the economy will deliver as the year unfolds. And that bond investors remain recovery-skeptics---they're going to have to see it to believe it (or, as I pondered the other day, perhaps the bond market has yet to sober up).

Thank goodness you're neither a confident stock trader nor a nervous bondholder. You're a long-term investor who understands that all things are cyclical, that no one can consistently time the ups and downs, that a diversified portfolio is essential to investment success (and personal sanity), and who looks to enjoy---for years and years to come---the goods and services provided by the global companies whose stocks occupy that all-important long-term, growth-oriented, portion of your portfolio...

Ego trumps truth...

Don Boudreaux is fast becoming the most quoted economist on this blog. His recent column in the Pittsburgh Tribune-Review ---where he explains why he once turned down a nomination to serve on the president's Council of Economic Advisers---gives you insight as to why. As well as insight into what's behind the often bewildering findings of studies performed claims made by politically-appointed economists.

Here's a snippet:
Third and most importantly, my conscience prevents me from taking such a position. I don't judge others who took, or will take, such a post. But I could not have done the job that the administration invited me to do. That job is principally not to give economic advice. That job, instead, is to give credibility to political maneuvers.

I have to say that Don is far more charitable than I with regard to those who would take such a post. I find it utterly appalling that an economist would knowingly give credibility to economically-destructive, liberty-limiting political maneuvers.

Be sure to read the entire article...

And I highly recommend Don's blog for daily reading...

Today's TV Segment (video)

This morning Zara and I discussed the market, the weather, corporate cash and the economy going forward. Click here to continue...

Tuesday, February 25, 2014

Liberty is indivisible... (video)

How gullible are we? Seriously. The Editorial Board of the New York Times would have us believe that the "$832 billion stimulus package" has saved the U.S. economy from the next Great Depression. That government spending deserves all the credit for every new job, and every decimal point of GDP growth, that occurred over the past five years:
The stimulus could have done more good had it been bigger and more carefully constructed. But put simply, it prevented a second recession that could have turned into a depression. It created or saved an average of 1.6 million jobs a year for four years. (There are the jobs, Mr. Boehner.) It raised the nation’s economic output by 2 to 3 percent from 2009 to 2011. It prevented a significant increase in poverty — without it, 5.3 million additional people would have become poor in 2010.

How incredibly gifted are the members of today's New York Times Editorial Board! Of the literally uncountable factors that influence an economy, to know that "the stimulus" did all the "good" that's been done over the past few years is utterly amazing! Unbelievable even! Literally, unbelievable!

Well, I'm guessing that if you happen to be a committed Democrat, you share that New York Times state of mind all day long. And if you're a staunch Republican you see it as the worst sort of political hogwash.

Now ask yourself, Mr./Ms. "Conservative", and answer honestly, if a Republican had resided in the White House over the past five years---all else, in terms of economic performance, being equal---would you not indeed be trumpeting those very same numbers as testimony to the efficacy of your ideology?

In "Products of Our Environment", the last essay in Leaving Liberty? (shameless plug, my bad), I confessed that I am no less a product of my environment than is my son's former college professor. That said, as my first book Making Lemonade (sp, mb) attests, I at one time suffered (unwittingly) from a touch of Keynesianism myself. However, the few subsequent years of observation and study have entirely purged my mind of any belief that prosperity can be had at the hands of politicians, be they "liberals" or "conservatives".

So then, the fact that I did not confine my studies to but one ideology proves that I am not merely a product of my environment, right? Well, alas, I suppose it doesn't---in fact I know I spent more time on Hayek than I ever did on Keynes. And, besides, if my convictions haven't indeed sprung from the seeds strewn along my path, would that not leave me the victim (or beneficiary) of my genetics? And of course there can be no genetic predisposition when it comes to ideology, right?

I mean, surely, Krugman's "progressivism" and Limbaugh's "conservatism", for example, can only reflect their respective upbringings. Rewind and insert Baby Rush and Baby Paul into each other's environment, have each experience the other's experiences---the successes, the failures, the tutors, the molders, the shapers---and a bearded, medium-build tenor ultra-conservative would emerge to dominate the airwaves, while a full-figured bass-baritone would lever the Nobel Prize in Economics to become the "liberal" hack of a generation.

Now, all that said, I guess I should Google "is there a genetic predisposition toward political preference?". "Political", as opposed to "economic", being the operative word, for when we're talking the New York Times Editorial Board and the Krugmans and Limbaughs of the world, their politics unequivocally determines their economics.

Well, shoot, I might have known:

Here's a snippet from a paper by the University of Sydney and Queensland Institute of Medical Research's Peter K. Hatemi, and 13 other braniacs:
In numerous studies, involving different time periods and populations, it has been reported that genes contribute significantly to the variation in liberal and conservative political attitudes (Hatemi et al. 2010; Martin et al. 1986). However, any pathway from DNA to social behavior is certain to be convoluted, involving networks of genes, genetic expression, multiple intervening neurobiological processes, development, and a multitude of environmental contingencies.

So, yes, or maybe...

Okay, so perhaps there exists some genetic linking that would bend one's thinking in a certain political direction. That's fine. However, and here's the point I'm hoping to make, while both sides---predisposed environmentally or genetically---may be miles apart when it comes to public policy, there is one place where they stand firmly together: Both sides possess an intense desire to limit the freedoms of others.

Think about it: "Progressives", while professing their allegiance to, as Don Boudreaux puts it below, "non-economic" freedom (save perhaps for one's freedom to speak out against a "progressive" mode of expression), want to limit our economic freedoms in the worst way. And "conservatives", while professing their allegiance to economic freedom (save [often] for when it comes to foreign trade, immigration, certain government subsidies, and a whole host of etceteras), are keen on limiting our non-economic freedoms when they don't jibe with their various strictures. Neither side, therefore, champions freedom to nearly the extent they'd have us believe...

Here's Don Boudreaux excellently making the point that "liberty is indivisible, and when you threaten it in one area, you inevitably and invariably put it at risk in another":

Saturday, February 22, 2014

Return-free risk...

The Dow, ever so slightly, dipped on the week, last week. Which was quite the accomplishment given relatively poor economic reports and the prior week's rally. Clearly, traders are discounting an economic rebound once the skies clear over the East Coast. But the thing is, the bond market simply ain't buying it. Yes, yields are higher than they were a year ago, but, historically speaking, they remain REALLY LOW.

You see the bond market is that bellwether indicator that tells us whether weather is truly a factor or whether there's something more pernicious threatening. Truly, if the bond market (bond investors collectively) were seeing an economic bounce coming, we'd, in my view, see yields bouncing a good bit higher---and prices a good bit lower---than where they sit today.

That said, the bond market hasn't been its old self for quite some time---roughly 5 years that is. While there are many who praise the Fed for keeping bond yields low for so long, my concern is that when an entity essentially corners (if not becomes) the market for a given commodity all sorts of strange and not so wonderful distortions are bound to develop. And when the market is given back what should have never been taken from it to begin with, it can exact some pretty tough love while rediscovering equilibrium.

My point? While the weather is such a convenient, and often feeble, excuse a CEO might use to explain away a quarter of poor earnings---or a bullish analyst to justify his bullishness---when we're talking the "polar vortex" that had gripped a large swath of our nation (more projected for March btw), I'm thinking this time it very well could be legit. Now the bond market is either signaling that I'm dead wrong, or that the Fed's relentless injections have it effectively tranquilized. We'll know soon enough.

So here we go: The Fed, at last---by tapering QE---is attempting to wean the patient junky off the meds. It'll be interesting to see what occurs when the bond market awakens to a combination of a brighter economy (whenever that shows up) and a clearer head. I'm not as committed to the bond-bubble-bursting notion as I was three years ago (simply because there've been too many "experts" calling for it), but I'm still thinking that the process of regaining equilibrium will not be a pretty sight. I.e., if you own bonds (U.S./non-U.S. corporates, governments, mortgage backed or munis) and you think you're safe, please think again.

Last week I heard an analyst say that currently all the bond market has to offer is return-free risk. I couldn't agree more!

Thursday, February 20, 2014

Conversation with Jane...

Here's an email I received today from my dear client Jane (btw, all my female clients, when I write about them, are named Jane):
Hi Marty,

I am getting more and more disgusted every day about how this country is being run. Our domestic and foreign politics stinks and nobody stands up for anything. The news people talk about a coming crash. Since my anxiety level is high (my doc says), I am worried about a big loss at my age. Now you have to be my money doctor and give me some medicine. You probably have a waiting list....


Here's my reply:
Hi Jane,

I completely understand. Here are my thoughts:

For starters, and most importantly, we have to figure out a way to make sure your portfolio is not the source of your anxiety.

For the moment, we're attempting to do that by keeping your exposure to stocks relatively moderate. All things being equal (meaning if your portfolio moved in lockstep with the major averages), your portfolio would suffer roughly 1/3rd of the magnitude of a "coming crash". If that thought causes you anxiety, then we have a few options:

1. Reduce your target allocation to stocks to something less anxiety-provoking for you. Maybe 25%. Maybe less.


2. Decide on a percentage loss and put in stop-loss orders. For example: if we were to re-position your stock exposure entirely to exchange-traded securities (meaning we'd sell your mutual funds and buy all ETFs [you have both now]), we could put in stop-loss sell orders that would trigger the minute the share price of a given security declined by a certain percentage. If we chose, say, 10%, and the market subsequently declines by more than 10%---and all of those orders filled right at their stop price---you'd mitigate your losses (dramatically in the case of a "crash"). There are, however, some risks inherent in this strategy:

For one, a stop-loss order is, again, a sell order. Meaning the position is for sale (not necessarily sold) when it hits the stop price---it could fall further before someone buys it, resulting in a loss greater than we intended. That's why, when we do this sort of thing, we try to use the most heavily traded securities (they're the most liquid). Also, if bad news happens overnight, a position could open the next trading day at a price lower than the stop price: which would trigger the sell order somewhere below the price we intended. Lastly, and, in my opinion, most dangerously, the market might drop by the percentage we chose then rally back from there, leaving you "stopped out" (everything sold), while the market moves higher. You'd then have no option---if you're to buy back in---but to buy back at a higher point than where you sold (I've, alas, seen it happen).


3. We can re-position your portfolio into "optionable" securities. We would then buy "put options" that would guarantee you a set price for each position regardless of what the market does. I.e., if it tanks, you're entirely protected. Although you would pay a premium for each option, and it can get expensive over time.

I would be very happy to further explore any or all of these options with you...

As for the things that worry you (other than the way this country is run): the part about people talking about a crash is actually a good thing. Seems strange, but the time to fret over the stock market is when nobody's fretting over the stock market: When optimism peaks, everybody (well, maybe not everybody) is fully invested, and a bit of bad news can send everybody to the exits at once. Which, for lack of buyers, can exacerbate, and accelerate, the decline. When, on the other hand, pessimism/skepticism is high, there are plenty of potential buyers to prop prices up when the market takes its hits. Which is what's been going on lately. Doesn't mean there's not a crash coming. In fact there's always a crash coming---just don't know when or how deep. That's why having the right allocation for your stage in life, and your temperament, is essential to your longer-term investment success, and sanity.

Should we get together soon to discuss further?


P.s. Jane, would you mind if I recreate our communication in a blog post, while of course changing the name to protect the innocent?

My purpose for sharing my conversation with Jane is, in addition to making you aware of a few methods of potentially reducing downside risk, to remind you that when it comes to investor sentiment, fear is a beautiful thing. And, as always, to stress the importance of maintaining an asset allocation strategy that fits with your time horizon and, most importantly, your temperament...

Wednesday, February 19, 2014

Yesterday's TV Segment (video)

Yesterday Zara and I discussed the possibilities behind why the stock market has risen of late, in the face of poor economic indicators -- and how the bond market doesn't seem to be on the same page.

Tuesday, February 18, 2014

Arrogantly Clueless...

So I'm all set to pick apart EJ Dionne's Op-Ed titled Raising the minimum wage is the right idea for the right (not that raising the minimum wage is bad politics [it indeed might work for Republicans], it's just bad economics---particularly for those who work/compete for the minimum wage) when I click on his link to an ABC News interview with "conservative" Silicon Valley millionaire/failed Republican candidate for California governor Ron Unz.

While Dionne's obliviousness (and political bias) with regard to basic economics, given his post at the Washington Post, is almost (but not quite) excusable (or, let's say, understandable), Unz, given his profile, is more than deserving of the following.

I'll begin with the tidbits in Dionne's essay that I couldn't resist, then I'll finish up with the Unz interview.

All Dionne essentially does is cite the "findings" of a few sources that support the notion that, by some magic, raising the cost of labor will defy the basic laws of economics and somehow improve conditions for labor. Sources such as (I'm shocked) Jason Furman and Betsey Stevenson of the White House Council of Economic Advisers, who have figured out just how many millions of folks would receive a raise---and that it would have "little or no impact on employment". No kidding! Mr. Furman and Ms. Stevenson have found decided that employers can literally be forced to pay people more than their productivity warrants and will do little or nothing to compensate for the hit. Okay, they don't presume that we're quite that naive: They conclude decide that
a substantial portion of the cost to employers of minimum wage increases is offset by savings from reduced employee turnover and higher worker productivity.

Nah, they're still insulting our intelligence. Of course we know that if it paid employers---who have firsthand knowledge of worker productivity and the cost of turnover---to pay higher wages, higher wages they would pay. Force employers to pay higher than productivity warrants and, among other measures, they'll pay fewer people going forward. We're talking the most rudimentary economics here.

Here's one more from Dione's article:
In an important article in the economic journal Challenge, “A Conservative Case for the Minimum Wage,” Oren Levin-Waldman, professor of public policy at Metropolitan College of New York, offered a similar view and made compelling moral points. Higher pay “increases the autonomy of low-wage workers,” he said, thus advancing “personal freedom” and “a core concept in conservative thought, which is personal responsibility.” This, in turn, means less dependence “on the largesse of others.”

Well, I don't suspect that Mr. Levin-Waldman pays anyone a salary, for if he did he'd know that forcing employers to pay folks wages above what their productivity supports is the definition of folks depending on the largesse, forced largesse, of others. Of course forced largesse isn't largess at all---it's extraction, if not extortion.

Not that employers aren't inherently charitable people, it's just that they, like everyone else, like to personally direct their personal donations. And I can't imagine that they'll offset the higher cost of labor by reducing support to their near and dear causes. They'll compensate in the business for the higher cost of doing business, in as many ways as you might imagine: Like eliminating employee perks/benefits, and/or employees themselves, like squeezing as much as they possibly can out of every man hour, like employing employee-replacing technology (you've seen those self-checkout lanes), like raising the price of their goods and/or services, etc. And of course the guy/gal looking to get his/her entry-level foot in the door is yet another casualty of one of the most ill-conceived and discriminatory (toward un/low-skilled folks) laws on the books.

Now for the Unz interview:

For starters, I knew something was amiss when ABC News asked Unz whom he voted for in the last election. He said:
To be honest, I didn't like either candidate, Obama or Romney. I think I may have written in Ron Paul's name.

Now that election was in November 2012, right? I suppose I could stop there and just dismiss the bloke altogether. I mean who doesn't remember whom they voted for in a Presidential election held 15 months ago? Or ever for that matter?
ABC: What's behind your advocacy on the minimum wage?

Unz: One aspect of the minimum wage rise, which I think is underappreciated, is [that] it would function as a massive stimulus package, a government stimulus package. If the minimum wage nationwide were raised to $12 an hour, probably between $150 billion and $175 billion a year would go into the pockets of the lower-wage families that spend every dollar they earn. It would cause a tremendous boost in economic demand.

Another important factor: One of the strange things in our society right now is that we have all these low-wage workers who are getting $7.50, $8 or $9 an hour, and because they earn such small wages, the government subsidizes them with billions or tens of billions of dollars of social welfare spending that comes from the taxpayer.

It's a classic example of businesses' privatizing the benefits of their workers while socializing the costs. Forcing the taxpayers to supplement the salary of their own employees.

So Unz would have us believe that the extracting of $175 billion from producers---the folks who provide job opportunities for lower-wage families---and having every dime of it consumed would somehow be good for the economy and, ultimately, for lower-wage families? That the $175 billion in welfare coming out of the pockets of producers wouldn't get passed on to the taxpayer? Really?
ABC: Is there a political reason why Republicans should raise the minimum wage?

Unz: Absolutely. There's been a massive influx of impoverished immigrant workers, which depresses the wages of American workers. The best way of preventing that is a much higher minimum wage.

The reason that businesses hire them is that they're willing to work at such a cheap rate. They're willing to undercut American wages. If the minimum wage were much higher -- say, $12 an hour -- a lot of businesses would hire Americans.

While the influx-of-immigrant-worker argument may seem like basic economics---increasing the supply of labor reduces its cost---further inspection suggests otherwise. Here's Philippe Legrain in his enlightening book Immigrants: Your Country Needs Them explaining why my raisin farmer client has had such difficulty finding workers to pick the crop: 

"the typical migrant from rural Mexico has six years of education and does not speak English, is it really plausible that they are competing for the same jobs at any level? More likely, immigrants take jobs that local workers shun, such as street cleaning and pizza delivery, and thus do not compete with natives at all. So it is not surprising that studies fail to find any evidence to confirm that prejudiced view that immigrants harm the job prospects of local workers."

ABC: But wouldn't companies still hire illegal immigrants and pay them under the table in order to pay them the lower wages they're willing to work for?

Unz: Obviously, some of that would happen. The vast majority of illegal immigrants right now earn above the minimum wage.

Wait a minute! Didn't he earlier say that foreign immigrants are willing to "work at such a cheap rate"? That they're "undercutting American wages"? He then turns right around and suggests that the "vast majority" of them (uneducated and lacking in communication skills as they are) earn above the minimum wage. I suspect he's distinguishing between legal and illegal immigrants, then asserting that the illegals---desperate as they are---earn more than do legals. Oh, that's right, he's not sure whom he voted for in the 2012 election.

Am I being too hard on Mr. Unz? Is my picking on his short-term memory loss (and his ignorance of the facts [and basic economics]) just plain cruel? Okay, I'll stop here. But I have to tell you, it is extremely difficult to be charitable to the likes of Mr. Unz when he is so utterly, and arrogantly, clueless (or doesn't give a rip) as to the cruel effects proposals such as his would have on unsuspecting low-skilled individuals. 

News Flash: the CBO reported today its findings that raising the national minimum wage to $10.10 could cost 500,000 jobs as employers switch to technology "and the like", per the reporter in this CNBC video (I haven't read the report). I happened to catch CNBC's live coverage and, sadly, they didn't include the followup in their video. Their economics reporter, the friendly-to-Washington Steve Leisman, voiced a bit of frustration with the CBO's leaning to one side of the issue. He was disappointed that it didn't acknowledge other economists' findings suggesting that such legislation would have minimal effect on labor. However, he remains unperturbed by the White House's constant clinging to those other economists assertions without acknowledging the plethora of empirical studies---not to mention the commonsense---that supports the CBO's findings. Hmm...

Monday, February 17, 2014

History rhymes, repeats, whatever...

If I had a nickel for every time a stock market analyst, fund manager, etc., invoked Mark Twain's "history doesn't repeat itself, but it does rhyme", I'd have one serious stash of nickels. Just read it again in an article dated today titled "How 2014 Could Be Like 1929". 

Here's a snippet:
Let me make my position clear. There is little basis to expect a stock market crash, and I place a low level of importance in the usefulness of market analogs. But history does rhyme, and I am open to the possibility that the 1929 pattern can repeat itself with a 10-15% downdraft in stock prices.

The startling similarity to the 1929 chart aside, the author sees "little basis" for a 1929-style market crash, although he is open to the possibility that the 1929 pattern "can repeat itself with a 10-15% downdraft".

Hmm... If all we see is a 10-15% downdraft, it won't be the 1929 pattern that repeats itself (there'd have to be a ton more to go for that repeat), it'll be more like the charts of 1957, 1960, 1962, 1966, 1969, 1970, 1971, 1973, 1974, 1977, 1978, 1979, 1980, 1981, 1982, 1984, 1987, 1990, 1997, 2000, 2001, 2002, 2003, 2005, 2008, 2009, 2010 and 2011 (illustrating just the last half-century). Dang!!

Okay, there are a few in there that exceed 15% to the downside, and of course you might get away with comparing the bear markets that began in 1973, 2000 and 2008 with 1929, but what would be the use?

You see the stock market is a place where buyers and sellers meet. Where prices go up and prices go down. In that respect history indeed always rhymes, repeats, whatever. And it takes no amount of genius to lay charts showing the simple rising and falling of prices on top of one another and point to some remarkable similarities. You can play with the dates, you can shorten or lengthen the time periods, you can have all sorts of fun discovering/creating patterns and coming up with some frightening or encouraging (whichever you're after) patterns.

Case in point, after reading the aforementioned article and reviewing its chart, I came across an article dated last Friday in Yahoo! Finance titled "This 70-year chart shows why we're in for a major bull run". Hmm... So one "expert" shows a chart that suggests a Depression-Era-ish bear market is in the offing, but, nevertheless, forecasts something not nearly that dire, while another presents a chart suggesting the sky's the limit. Now what do I do with all them nickels?

Makes me think of that other quote popularized by Mark Twain (he attributed it to 19th-century British Prime Minister Benjamin Disraeli):
There are three kinds of lies: lies, damned lies, and statistics.

Not at all to suggest that the authors of the above referenced articles are, by definition, lying (in fact the former was only responding to someone else's "work"). They're just fooling around with some charts and looking to get a little attention. 

Friday, February 14, 2014

The Definition of Dignity - OR - The Safety Web...

I know, I've been picking on Paul Krugman a lot lately. Yep. Anyway, on with today's picking.

Virtually every claim in his Op-Ed in today's New York Times can be so easily refuted that I considered pasting the entire article and adding my own comment beneath each paragraph. But, in the interest of time, I decided to just pick one and go with that.

Here's the second-to-last paragraph. I picked this one because it sums up much of the gist of his essay:
The truth is that if you really care about the dignity and freedom of American workers, you should favor more, not fewer, entitlements, a stronger, not weaker, social safety net.

His article rambles a bit about dignity after quoting a Republican politician who made reference to "the dignity of work". He chastises the politician for associating dignity with work in the face of such grave income inequality.

I suppose dignity means different things to different people. When I think of dignity, I think of pride in my efforts, not in their material results. I don't believe I would feel the least bit dignified if my physical well-being was handed to me, as opposed to earned by me.

In fact, if you Google the definition of dignity, here's what you'll see:
1. the state of quality of being worthy of honor or respect.

* a composed or serious manner or style.

* a sense of pride in oneself; self-respect.    

   synonyms: self-respect, pride, self-esteem, self-worth.

So I'm thinking Krugman misses the mark when he equates the social safety net with dignity.

And with regard to freedom, when one thinks of a net one generally thinks in terms of ensnarement. Of course that wouldn't be the context here. Krugman's talking safety net, like, for example, the net suspended below a trapeze artist. The thing about the trapeze artist is that if he misses the bar the safety net indeed saves his life, however he'll only remain in the net long enough to sufficiently lever its elasticity to land him back on his own two feet. Safety nets are designed to land, not hold, the fallen.

Oh, and make no mistake, the performer feels anything but dignified (humiliated more likely) having landed in the net. It's in fact his dignity that gets him out of there and back up the ladder as fast as humanly possible.

This is not, in any way, me discounting or disrespecting the poor (or the American worker)---quite the opposite in fact. I simply feel that our existing safety net is plenty sticky as it is, and that making it yet "stronger" is akin to dangerously adding to its stickiness---thus making it easier for government to numb the ensnared into believing the system has somehow been woven in a manner that affords him little chance of escaping the net web and regaining his dignity. Leaving him, therefore, to vote as the politician, and the pundit, instructs.  

Thursday, February 13, 2014

If we could only Walmart the skies...

What would you think of an airline carrier that took full advantage of all available global resources to deliver its customers the most competitive fares available to Europe?

I think that if you're thinking about traveling to Europe, you'd think highly of such an airline. You'd save several hundred dollars that you might use to enhance your international experience, maybe upgrade your seat, or you might even use your savings to spring for a ticket for Grandpa Sven who would love to visit the homeland one last time.

(To keep this brief, I'll dispense with my usual exposé of all the wonderful economic potentialities [the local vendors, the exporters, the property owners, etc., who might reap benefits from your reaping] that result when one avails oneself of the best value the world has to offer.)

Well, if you're indeed thinking about Europe, I have good news. Here's the New York Times on what Norwegian Air is up to: (HT Darren Thomas)
Norwegian is moving its long-haul operations from Norway to Ireland, basing some of its pilots and crew in Bangkok, hiring flight attendants in the United States, and flying the most advanced jetliner in service — the Boeing 787 Dreamliner.

Bjorn Kjos, Norwegian’s ebullient chief executive, is confident that his unconventional approach will allow the airline to offer fares 50 percent cheaper than the competition’s.

Ah, globalization! The taking advantage of what the world has to offer in order to deliver the best possible value.

Of course if you happen to be Lee Moak, president of the Air Line Pilots Association, an opponent of Norwegian’s plans, you'll have none of it. Here's more from the Times article:
“They want to exploit legal and regulatory loopholes to give them an unfair economic advantage over U.S. airlines that operate in a global marketplace.”

The pilots union said Norwegian was trying to “cheat” the agreement, first struck between the United States and Europe in 2007 and expanded in 2010, which gave easier access to major airports like Kennedy and allowed airlines to operate more freely across the Atlantic. Critics said Norwegian was pursuing a “flag of convenience” strategy, and compared it to the exodus of the domestic cargo ship industry to countries with weaker regulatory oversight like Liberia. Another union called it “the Walmarting” of the airline industry.

"The Walmarting of the airline industry"? My, if the airline industry could only be Walmarted! If it could indeed provide low and middle-income Americans access to a good that was previously out of reach and increase employment opportunities in the industry many times over... I'm literally getting goosebumps as I type!!

Of course we all understand where the U.S. airlines and the unions are coming from. But we must never lose sight of the fact that any protection from competition that government would provide a company, industry or union comes at the expense of the consumer. I say we side with the consumer...

Ask a silly question...

Every once in a great while a client will ask me "Marty, if you see something coming, will you reduce my exposure to stocks?" Of course he/she would either be a brand new client whose expectations have yet to be tempered, or a client who's spending too much time watching CNBC and too little time reading my blog. My reply is typically "you know, if I could see things coming, I'd be seeing the French Riviera from my 300 foot yacht right about now".

In their book Valuing Wall Street, Andrew Smithers and Stephen Wright explain why reliably predicting the ups and downs of the market is impossible: cannot be possible to make reliable predictions about when the market will rise or fall. If it were possible, the market would respond in advance and it could not then rise and fall in the way it does. The fact that market timing must be unpredictable, but that investors nonetheless clamor to know when things will happen, is probably the single main reason why so much nonsense is written about the stock market. It is an old English adage that if you ask a silly question, you will get a silly answer. [like my 300 foot yacht]

Tuesday, February 11, 2014

The economics of a reduction in labor supply...

Here's economist/columnist Paul Krugman on the recent CBO report that predicts the Affordable Care Act will inspire some folks to work less: 
Oh, and because labor supply will be reduced, wages will go up, not down.

Just to be clear, the predicted long-run fall in working hours isn’t entirely a good thing. Workers who choose to spend more time with their families will gain, but they’ll also impose some burden on the rest of society, for example, by paying less in payroll and income taxes. So there is some cost to Obamacare over and above the insurance subsidies.

Of course Krugman sees paying less taxes as the burden on society.

Here's economist Greg Mankiw thinking deeper: (HT Don Boudreaux)
In a couple of recent articles written by smart economists, I have read the following claim: CBO says the incentives in the Affordable Care Act will reduce labor supply. If it does, then real wages will increase.

That sounds like reasonable, textbook economics. But I don't think it is true. The problem is that the logic is entirely partial equilibrium. It is holding everything else constant. But that is surely not right in the long run. Lower labor supply means lower income, which means lower saving, which means lower investment, which means a lower capital stock, which means lower productivity, which means lower labor demand.

Monday, February 10, 2014

Storms are the norm...

Calm has returned to the stock market. After the drubbing (mild drubbing) the market withstood to start the year, the end of last week saw prices spike higher then land smoothly into Monday with a flat Dow and S&P, and a nice gain for the NASDAQ. Thank goodness the bad stuff's come and gone! Now we can get back to what we're used to: mostly up days, a few minor setbacks here and there, and another nice increase in the value of our portfolios---just like 2013.

Makes perfect sense. I mean why should we expect anything less? Washington risk is but a fraction of what it's been the past few years. And even though the Fed is tapering back the bond purchases, somebody---given how rates have remained low---is picking up the difference. And the new Fedhead, Janet Yellen, is, they say, as dovish as they come. And better yet, this earning's season has seen over 70% of the companies having reported beating expectations. In fact the earnings growth rate (like 7.5%) this go-round is very respectable. And perhaps best of all, the economy just might gain a little traction this year (you read my recent piece on this year's business investment forecast, right?) Again, why shouldn't this year be just as calm as last year? 

Well, darn it!, I'm thinking maybe this year shouldn't be as calm as last year---not nearly. I'm thinking maybe the fact that the last time we had a year like 2013---a year with only one pullback reaching the 5% mark---was, you ready?, 1961. That's right, the last year we saw that kind of volatility is now a half-century old. It can join AARP for crying out loud!

Sorry folks, last year was an anomaly. I give zero odds for a repeat in 2014. Doesn't mean we won't see gains this year---I've offered up both the fundamental and the technical arguments (along with the usual anything-can-happen caveats)---it just means that during the course of a calendar year, more frequent, and more severe, storms are the norm.

I know, you really liked 2013, we all did, and you want more! Well, my friend, you're just going to have to be patient. The good news is 2065 will be here before you know it...

Sunday, February 9, 2014

"We" Demand "Our" Freedom, not yours...

I like the "idea" of being an American. Not in a belonging sense but in an entirely self-interested sense. I suppose I should say that I like living in America. In America I can pursue my personal objectives in mostly unfettered fashion. In America I can travel freely from border to border and, with mild inconvenience, beyond. From America I have access to much of the goods and services the rest of the world has to offer. In America I can practice whatever religion I choose, or I can choose to practice no religion. In America I can own my own property without, for the most part, fear that government can arbitrarily take it from me. In America I am free to express myself in virtually whatever mode I choose. In America I can love whomever my heart desires.

Words cannot do justice to my love of liberty. And, in my wildest dreams, I would not restrict the freedom of others who would avail themselves of the opportunity to build better lives for themselves and their families---the opportunity bestowed upon me by the happenstance of my birthplace.

Mine is not the popularly shared view. Many of my friends and neighbors, "progressives" and "conservatives" alike, while highly valuing their own liberty, support/promote a set of laws that limit the freedoms of other human beings. Laws that restrict the ability of people born in other lands to come to America. Restrictions that were not imposed on the ancestors of those who today promote and impose such restrictions.

I love how, virtually without exception, the champions of closed borders (of restricting others freedoms) begin every speech or essay with the feebly-empathetic declaration that he/she descends from immigrants. For example, here's a snippet from an article by A.M. Fantini, the editor-in-chief of the European Conservative and, ironically, the secretary general of the Hayek Institute in Vienna, Austria titled "The U.S. Shouldn't Relax Restrictions".
Stories of the search for a homeland abound in most families’ personal histories. As the child (and grandchild) of immigrants to the United States, I’m familiar with the poignant reasons people have for leaving their native lands. It is never easy. And as debate over the Senate’s immigration overhaul bill intensifies, it’s important to acknowledge these universal themes.

He goes on to suggest that the ideology of open borders is a threat to individual freedom, justice and property rights:
Indeed, some of the best arguments against open borders have been expressed by Austro-libertarians like John Hospers and Hans-Hermann Hoppe. Simply put, some considerations are more important than cheap labor, economic efficiency, and financial gains—principles like individual freedom, justice, and property rights. The ideology of open borders is a threat to these principles.

Throughout history, political communities have thrived so long as a majority of their members accepted certain principles—and the shared values that uphold them. This is necessary to “weave” a social fabric, develop intricate networks of trust, and forge common, unifying bonds. In the United States, learning about the political, philosophical, and moral foundations of the American experiment in liberty and self-government used to be essential for generations of immigrants. No longer.

Mr. Fantini seems to understand the economic benefits to be gained by an open border policy. Ironically, it's the misconceptions around the economics of immigration that generally embolden today's restrictionists. His concern is that the granting of individual freedom, justice, and property rights to "foreigners" would somehow threaten the American foundation of individual freedom, justice, and property rights.

I have a fundamental problem with the notion that an ideology of freedom can somehow threaten the principles of freedom. I would in fact argue precisely the opposite. I would argue that a nation that would forcibly restrict any individual's freedom to move and live freely within its borders possesses not, not nearly, the foundation Fantini speaks of.

The American experiment in liberty has been a marvelous success. And make no mistake, the vast majority of folks who yet today risk life and limb to cross "our" borders need no lessons on the "political, philosophical, and moral foundations of the American experiment"---they passionately embrace them. It troubles me that too many Americans do not...

My good friend Bill recently solicited my feedback on the following presentation (which has, along with the present political debate, inspired me to explore the subject beyond my simple devotion to freedom. I.e., the economics of it). With his permission, my response follows the video:

Hi Bill,

Consider this just a slice of what I believe to be a convincing counter-argument to the gentleman's gum ball routine.

To begin with, speaking for myself, while I haven't been to this point much of a student of the empirical evidence surrounding the modern economics of immigration, having a number of clients who make their living in agriculture I can sympathize with their case for open borders. Last year during a review with a local raisin farmer he complained that he couldn't find the labor to pick the crop (very sad given California's unemployment rate and welfare rolls). If this keeps up he said he'll bite the bullet and go mechanical.

And of course you know me to be a rabid advocate for free trade---unilateral free trade even. So, as you would suspect, that thinking applies to the importation of labor as well.

I confess as well that I have a strong moral objection to the sort of closed border policy the gentleman in the video advocates. For one, if I desire to invite in any number of folks for whatever reasons I deem appropriate---after they perhaps undergo screening for infectious diseases and criminal background checks---I, a free American citizen, the ancestor of Spanish immigrants, strongly object to any law that would restrict my ability to do so. And if any number of immigrants---subjecting themselves to the aforementioned screening---desire to come to this country and make lives for themselves and bless us with the labor our economy presently demands (think of the case of my raisin farming client), and save our social security system (we need more FICA taxpayers in the worst way) and support local businesses in the process, I believe it is morally wrong and economically foolish to keep them from doing so.

Below is an excerpt from an interview with the British economist who wrote Immigrants: Your Country Needs Them [I haven't read it] (think in terms of the gum ball guy's claim that motivated folks do better for their countries when they stay there):
The economic case for open borders is as compelling as the moral one. No government, except perhaps North Korea’s, would dream of trying to ban the movement of goods and services across borders; trying to ban the movement of most people who produce goods and services is equally self-defeating. When it comes to the domestic economy, politicians and policymakers are forever urging people to be more mobile, and to move to where the jobs are. But if it is a good thing for people to move from Kentucky to California in search of a better job, why is it so terrible for people to move from Mexico to the U.S. to work?

We tend to think it’s fine that foreign financiers cluster together in New York, I.T. specialists in Silicon Valley, and actors in Hollywood, while American bankers ply their trade in London, Hong Kong, and China; surely the same logic should apply to Mexican construction workers, Filipino care workers, and Congolese cleaners coming to the U.S. After all, they are all simply service providers plying their trade abroad.

From a global perspective, freer migration could bring huge economic gains. When workers from poor countries move to rich ones, they can make use of the advanced economies’ superior capital, technologies, and institutions, making these economies much more productive. Economists calculate that removing immigration controls could more than double the size of the world economy. Even a small relaxation of immigration controls would yield disproportionately big gains.

From an ethical point of view, it seems hard to argue against a policy that would do so much to help people poorer than ourselves. A Rand study of recent immigrants to the U.S. finds that the typical immigrant ends up $20,000 per year better off. And it’s not just the migrants themselves who gain — it’s their countries of origin, too. Already, migrants born in poor countries and working in rich ones send home much more — some $200 billion a year officially, perhaps another $400 billion informally — than the miserly $100 billion that Western governments give in aid. These remittances are not wasted on weapons or siphoned off into Swiss bank accounts; they go straight into the pockets of local people. They pay for food, clean water, and medicines. They enable children to stay in school, fund small businesses, and benefit the local economy. What’s more, when migrants return home, they bring with them new skills, new ideas, and the money to start new businesses that can provide a huge boost to the local economy. For example, Africa’s first Internet cafés were started by migrants returning from Europe.

And keep in mind Bill that the currency those folks send home is the U.S. dollar. Which means that the practice of sending that money into their countries of origin generates huge business for U.S. exporters [and expands the global pool of investors in U.S. assets].

Okay, I guess I'm getting a little carried away. So I'll calm down here and leave you with a link to a 5 minute video interview [featured below] with the author the book Let Them In: The Case For Open Borders [I haven't read it]...

Have a great weekend my friend!

P.s. Would you have any objection to me referencing our discussion in a future blog post, should I someday decide to royally tick off a large number of my readers?

Friday, February 7, 2014

Now that (the capex forecast) is encouraging...

Here's a snippet from my recent commentary "Into New Woods - And - One Thing the Market Has Going For It"
Now, back to all that corporate cash. There are two schools of thought: The prevailing one among policymakers and Keynesian economists is, alas, (in my humble view) the wrong one—that consumption grows the economy. The other one, the correct one, says that production grows the economy—that, ultimately, we must produce before we can consume (read Goods Buy Goods). Which speaks volumes about one of the chief reasons why we remain mired in a historically slow recovery: it’s that companies have been reluctant to invest in the research, development and, eventually, the production of new stuff—the kinds of activities that would grow the economy and put people to work. I’d love to explore with you why companies have, to this point, idled the fuel that would propel themselves and the global economy to greater heights, but that would take more time than you and I can spare at the moment (just think new regs, the probability of more new regs, and the threat of higher taxes). So, for now, suffice it to say that despite what I just alluded to, I suspect (or hope) that—barring the next Great Recession occurring anytime soon—companies are about to begin (ever so gingerly, alas) doing more than simply buying back their own stock with all that cash. Which, again, could do wonders for the economy, employment, and, ultimately, earnings growth and share prices going forward. Time will tell…

Here's a snippet from today's International Business Times article "US Companies Set For Record $2 Trillion Of Capital Investment In 2014, Reversing Restraint Shown In Recession: BMO"
“The U.S. is on the verge of an early capex [capital expenditure] recovery, one that is likely to have some considerable legs,” Brian Belski, BMO chief investment strategist, said.

Ford Motor Co. (NYSE:F) plans to increase investment from $6.5 billion to $7.5 billion this year to add capacity, Bloomberg reported. Analysts predict U.S. auto sales will shoot up to pre-recession levels this year. Microsoft Corp. (NASDAQ:MSFT) plans to increase investment by more than 200 percent in its fiscal 2014 ending in June to $6.5 billion, on data centers and networking equipment. Honeywell International Inc. (NYSE:HON), the New Jersey-based manufacturer, is investing $1.2 billion, about a 30 percent increase from 2013, partly to build new chemical factories in Louisiana and Alabama, Bloomberg reported.

Now that's encouraging. For that (profit-seeking capital investment) --- as I explained last night --- is how you grow an economy and create jobs. 

Thursday, February 6, 2014

Mark's Customer - Or - The Myth of the Meek Consumer - Or - The Truth About Savings and Consumption (video)

Mark, the ski equipment guru at Aspen Sports, spent all of an afternoon last week determining, first, that my wife's foot pain was the result of her boots being too big and, second, that they didn't have a pair of new boots that would adequately serve her uniquely dainty feet. After 3+ hours of trying on and adjusting several pairs, Mark suggested that she ski our last day in the best-fitting rentals he could come up with---at a cost of $39. He gave her his card and permission to call him for advice after she returns home to California and continues her quest for the perfect boot. Suffice it to say that, after paying Mark and the young lad who handled the rental fittings, Aspen Sports lost money on the deal.

Not only was Mark an excellent teacher (we learned a ton about ski boots), he was quite the entertainer as well. With glee, he told us about this one customer who has visited the shop every winter for the past several years. According to Mark she turns over her entire ensemble every year to the tune of around $10,000. She buys brand new skis, boots, gloves, pants, jacket, etc., then slides over the snow-covered walkway to the bar where she spends the balance of her vacation.

Now, Mark's understandable (he benefits) lack of disdain notwithstanding, that would be the sort of gluttonous display that totally justifies the popular ire toward the infamous 1 percent. Here's a woman, by all counts spoiled rotten, lavishing herself silly while so many of her fellow Americans can't make ends meet. Her story defines inequality! Tell me she's paying her fair share!

Okay, I'll tell you, in a manner that should leave you scratching your head about why any Keynesian who believes greater consumption is what this economy needs would ever bemoan the rising fortunes of the 1 percent:

For starters, she (along with others like her) is paying Mark's salary. She's paying the wages of the hardworking folks who clean her hotel room, who prepare and serve the food, bus the tables and clean the dishes where she eats. She's paying for the snow plow operators who clear the roads leading to the resort. She's paying for the the folks who catered to her at however many hubs and pubs she visited on the way to Aspen. Oh, and don't forget about all those union workers who build Boeings in Everett, Washington. Make no mistake, she's paying every step of her red-carpeted way for all the folks whose livelihoods depend on making certain she has the best possible experience. Folks who (save for maybe a union member or two [certainly their representatives] in Everett, WA) couldn't give a rip about some politician's self-serving assertion that somehow the system favors such creatures. In essence, in the words of that 1-percent-basher himself, famed Keynesian Paul Krugman, her spending is their income.

So there you have it: the argument for leaving the 1 percent the hell alone, and the argument that, given the visible economic good fortune resulting from Mark's customer's consumption, that more of the same (more demand, more consumption) is what we need to get the economy humming.

And there my friends is where the Keynesian closes. There's where the economist who sees only to the end of his nose---or would have you and I see only to the ends of our noses---composes and completes his argument.

Oh but how he misses the forest when all he sees is the trees. Let's now trek a little deeper into the woods:

So what in the world transpired that would allow this woman the ability to shower dollars onto so many people during the course of one vacation? Did she simply begin spending every dime she had from the moment she had her first dime. If I only had a nickel, let alone a dime, for every Keynesian commentary I've read complaining that the economy's weak because the post-recession consumer is meek. If that were true, if they indeed believe their own words, why on earth would they even begin to propose policy that would threaten the lifestyles of the rich and shameless. I mean those cats live above the economic cycle. Recession be damned!---they've got cash to burn. Seriously, "trickle down" ought to be the Keynesian's mantra. Trickle down consumption that is.

Back to my question, what allows this woman the wherewithal to spend like she does? Well, it's not what you may think, that is if you think consumption drives the economy. I'll answer by simply tweaking my story:

Her story defines inequality! Tell me she's producing her fair share!

Okay, I'll tell you, in a manner that should disabuse you once and for all (if you're not too far gone already) of any notion that consumption drives the economy.

For starters, she, or her benefactor, or her benefactor's benefactor, produce, or have produced, goods and/or services of such value to others that she has amassed the kind of income and/or resources to enjoy the most lavish vacations. It may very well be that the desire to consume is what inspires the woman, or her benefactor, etc., to produce. Make no mistake, the horse (production) indeed always comes before the cart (consumption).

As for Mark: he loves to play golf. So much so as to inspire him to produce customer service at a level that inspires folks like his rich customer to return year after year and drop ten grand into his employer's coffers. I have no doubt that Mark sits atop the pay scale for his position at Aspen Sports. And I have no doubt that he has a nice set of golf clubs. And I could no doubt use Mark's golf clubs as a segue to a whole new inspiring tale of production-led economic growth.

And what about those hardworking folks who produce the clean hotel rooms, the delicious dishes, the snow-free roadways, the spritzers and the jet planes---the goods and the services, that is, that they must produce for the likes of Mark's customer if they are to later consume at the levels they desire? I think my question answered my question. Production at every level precedes consumption.

Do you see how utterly backward are the Keynesians' claims? The whole notion that your spending is my income and my spending is your income, and, therefore, how robust our economy would be if we'd only ramp up our spending. Clearly, my income is the result of my production, and your income is the result of your production. It's the saving (not the spending) and the investing of savings into production that ultimately creates real wealth and wonderful lifestyles. Do you see the correlation causation between the atypical lack of expansionary capital investment that has characterized these post-recession years and our atypically slow economic expansion---in the face of record-high government spending? Do you see how ludicrous is the notion that we can somehow grow the economy by simply spending our money---by, in essence, net destruction (consuming more than we produce), and by extracting yet more capital from the hands of producers?

I repeat: It's the saving (not the spending) and the investing of savings into production that ultimately creates real wealth and wonderful lifestyles (not to mention economic growth and jobs).

Wednesday, February 5, 2014

Computers and nincompoops...

Other than folks getting scared out of the market and/or taking profits, what else might cause the sort of downward volatility we've seen of late? Two things come to mind: computers and nincompoops.

When I say computers I'm talking about trading programs: Algorithms set to sell large blocks of shares for some institutions when some technical support line (might be simply a level of the S&P, might be the level in relation to the 50-day moving average, might be something else) is breached. Let's say the market begins declining when the ISM manufacturing index comes in soft (inspiring traders to unload a few shares), followed by the tanking of the Turkish Lira, inciting yet more selling to the point where the S&P 500 pierces a key support level and sets off a computer-selling frenzy. Bam! The Dow drops another 300 points and you're thinking What the hell's going on!! Why is everyone bailing out on one soft data point and the dropping of the currency of a country with a pimple on a gnat-sized economy? (Actually, Turkey's economy isn't all that tiny (relatively speaking), it's the 17th largest in the world. You just thought it was tiny).

Well, in reality, everyone (in my example) isn't. In fact, given the inanimateness of a computer program, nobody is (yeah, I know, an animate being established the program and didn't get in the way when the sell signal approached. Just go with it). And you're sitting there thinking investors are in a blind panic. Not that a computer-selling frenzy couldn't incite blind panic---in which case you'd be selling the farm to buy all the stocks you can get your hands on, right?

When I say nincompoops I'm talking about the euphoria-ridden folks who were so naive late last year as to think that one of the longest correction-less market rallies in history had the moon left to go. Their naiveté hit such an extreme that they hit their brokers up for margin loans against their accounts. That's right, you (not you, of course you wouldn't) can actually borrow from your brokerage house against your brokerage account, typically as much as 50% of your account's value.

Example: You (not you) have an account with stock positions totaling $100,000 and you think the market's going to the moon and you want all you can get. So you call your broker, he/she gets you the paperwork needed to make yours a margin account, and you borrow the max. You end up with $200,000 worth of stocks. $100,000 you bought with cash, $100,000 with borrowed money.

Now what happens? Well, if you're right you pay a little interest, but you net a mountain on your way to the moon. If you're wrong, your equity drops below your brokerage house's required minimum---and your rep has your cell number. You receive the dreaded proverbial margin call. It goes like this: "Hey you, your account's equity has tanked along with the market, so we need you to pay down (or off) that loan immediately. Can you get here first thing in the morning with a $XX,XXX check?" You pretend your connection's bad, power down your phone and head straight for the liquor cabinet. You then pray that the rally of all one-day rallies occurs tomorrow and sends your account back into the black. What you didn't stay on the line long enough to hear was your broker telling you that if you can't do the check he needs you to instruct him as to what to sell to square your account? Of course without your instructions the selling's gonna happen anyway.

The bottom line is that stocks that might not have otherwise been sold get sold. And when it happens en masse, like when margin debt is really high---like it was at the beginning of this year---the market takes an additional, and perhaps un-fundamentally-deserved, often dramatic, hit. And when it's un-fundamentally-deserved the market tends to correct in the opposite direction (up) in a hurry---therefore it's generally a very bad idea to react to the occasional dramatic hit.

Am I suggesting that the extent of the recent pullback (which, honestly, hasn't been all that much) is at all the result of either or both of the above phenomena? I suspect a little. But regardless, good fundamentals or not, the only thing that keeps a bull market (if we're still in one) healthy is a good correction every now and again. So then, I guess computers and nincompoops---when you (yes you) are not influenced by either---aren't such bad things after all...

P.s. When we experience that crazy seemingly-unjustified snap-back rally I'll be back to describe yet another kind of nincompoop---the naive short-seller...

Today's TV Segment (video)

This morning Zara and I discussed recent market volatility, normal market volatility, and what the everyday investor ought to be thinking/doing. Click here to view...

Tuesday, February 4, 2014

Market Commentary (audio)

Click the play button below for today's commentary:

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Monday, February 3, 2014

The market could use a little panic right about now...

Seriously, we all knew a correction was coming, right? (Although we still gotta get to down 10% [it's officially a pullback at this point]). They say the market has experienced one per year on average, and it's been two years since we've had one. Therefore, they say, we're way overdue.

Here's why this pullback should feel good:

It's happening while the fundamentals and corporate earnings are relatively good---as opposed to occurring when valuations are extreme, balance sheets are over-leveraged, and euphoria is the sentiment going in.

Here's why this one shouldn't feel good:

It feels too good. Meaning there's no panic (virtually everyone's viewing this as ultimately a great buying opportunity). If you want a bull market, you want worry. There's that old adage: bull markets climb a wall of worry. Last year's rally was continually dubbed "the most hated rally in history". That was a beautiful thing, in that it assured that there was plenty of liquidity on the sidelines---bull markets need liquidity.

That said, today's 300+ point decline in the Dow, the volume level (kinda high) and where the volatility index (VIX) (also referred to as the "fear index") sits, tells me fear's on the rise. But not, alas, a panic just yet. Again, as counterintuitive as it sounds, fear's a good thing, but panic (tends to occur at the tail-end of a downturn) is even better.

Just for the heck of it, here's the history of the extended declines (according to CNBC TV this morning) that have occurred since the stock market bottomed in March of 2009:

Total number of pullbacks/corrections: 19
Average duration: 31 days
Average decline: 8%

Does that mean this one has maybe a few more days and a percent or two left in it? Not at all (and keep in mind, those are just averages). It simply means that so far the dips have been bought. Sooner or later we will indeed experience that 10% correction (or worse)---I say the sooner the better. My point being that from these levels and given the current fundamentals, if you had to pick a time for a correction (or worse), now would be perfect. Of course, sadly, you can't pick the time, so don't even try...

Sunday, February 2, 2014

Market Commentary (audio)

Click the play button for today's commentary...

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Intellectualizing can be hard to do...

Last week I shared a few fundamental givens that might suggest that the stock market's present pullback is nothing to lose any sleep over (of course if your portfolio's makeup is right for you, you don't lose sleep regardless of the extent of a pullback [note: if you're our client and you're losing even a wink, and our next review meeting is not on the calendar, call or email me]). I also intimated that the longer-term technicals might support that notion as well. And while I don't kneel to the technicals, I do pay attention to them due to the simple fact that so many others do (call it self-fulfilling prophesy risk).

I pay particular attention to the 200-day moving average (calculated by dividing the sum of a security's average closing price over the last 200 days by 200) for the major indices as well as the various sectors our clients' portfolios hold. It is a widely followed---and respected---gauge of the long-term market trend. I'll here throw in the short and intermediate-term indicators as well---just to clue you in on what the technicians may be trading on in the coming weeks.

The moving averages charts for the S&P 1500 Index (combines the S&P 500, the S&P Mid Cap 400 and S&P Small Cap 600 indices) are sending bearish short-term, neutral to bearish intermediate-term and bullish long-term signals to the technicians. So as not to numb you with all the details, here are the highlights (source: Bloomberg):

Short-term trend signal: Only 30% of the stocks in the S&P 1500 are trading above their 20-day moving average, with only 31% (in relation to the 20 day MA) rising---that's bearish.

Intermediate-term trend signal: 42% are trading above their 50-day moving average, while 50% are (in relation to the 50 day MA) rising---that's neutral to bearish.

Long-term trend signal: 72% are trading above their 200-day moving average, while 75% are (in relation to the 200 day MA) rising---that's bullish.

In terms of sectors: It's very much the same picture with four in particular---tech, industrials, materials and healthcare---showing very bullish long-term trends.

Now, like I said, I don't bow to the technicals. I don't subscribe to (although I don't entirely discount) the notion that identifying trends in the pricing of stocks---as well as a zillion other visuals---can form the foundation of a sound long-term investment strategy. My purpose for bringing this sort of stuff to your (I'm really speaking to our clients) attention is to stand between you and the barrage of media hyperbole that these days comes from all directions. I know, from 30 years (this August) of experience, that while clients may profess their understanding of the volatile nature of markets, intellectualizing can be hard to do during sell-offs.

So what happens if the longer-term technicals turn bearish? They'll either inspire a deeper sell-off (which they're supposed to), or they'll occur right when stocks have become so cheap that the fundamentals simply won't allow for more selling (meaning sellers won't settle for yet lower prices). If you're a long way from retirement (and, therefore, heavily in stocks) you'll, if you take my advice, continue to fund your long-term accounts right through the next bear market (picking up more shares at cheaper prices along the way). If you're retired, or close to it (and, therefore, moderately in stocks), you'll, if you take my advice, rebalance your portfolio to a predetermined target a couple times a year (buying when prices are falling and selling when they're rising) and, if you're our client, rotate among sectors at the margin.

Again, if you're our client and you're losing even a wink, and our next review meeting is not on the calendar, let's get together...