Monday, March 31, 2014

Is the market rigged against the individual "investor"? - OR - Should you lose your rhythm over some algorithm?

I didn't catch last night's 60 Minutes program (caught a clip from it this morning) where author Michael Lewis exposed the stock market as a game rigged against the individual investor. Through high frequency trading (HFT), gamers are able to see your trade, get in front of it, make it a little more expensive for you, and make a little, or a lot of, money, for themselves in the process. There's much not to like about that phenomenon, and I suspect regulators are gearing up to further explore the practice.

Without getting into the debate about whether HFT is, on balance, good or bad for the market, allow me to make a very important distinction by simply re-phrasing the first sentence above:
I didn't catch last night's 60 Minutes program (caught a clip from it this morning) where author Michael Lewis exposed the stock market as a game rigged against the individual trader.

So, if you happen to be a short-term trader; if your strategy is to buy the hot stock, hold it for a very brief period, then dump it at, you hope, a higher price, your game is rigged against you. If, however, you're a long-term investor; if your strategy is to invest in, and hold, good companies---either individually or through a fund---you shouldn't lose your rhythm over some algorithm that might cost you a few pennies a share...

Here's a snippet from Kevin Roose's article Should You Be Worried About High Frequency Trading?:
Another way to frame Lewis's "stock market's rigged" thesis is this: High-frequency traders have conspired to impose a speed tax on investors. This tax is taken from the pockets of people who buy and sell stocks and put them into the pockets of the HFT firms, and it's volume-based. Trade only a few stocks a year, and your tax is small – fractions of pennies, perhaps. Trade millions of shares every day, and you'll end up paying much more.

How small is the speed tax? A 2013 study examined blocks of trades coming through HFT firms and estimated that "HFTs’ have revenues of approximately $0.43 per $10,000 traded." In other words, the net loss to the average, small-time investor from HFT is probably very minimal. (In fact, given what preceded HFT – a set of firms known as "NYSE Specialists" who were given preferential access to stock trades in exchange for providing liquidity – the HFT speed tax may be a lot lower than what most normal investors used to pay.)

Saturday, March 29, 2014

Not yet finding euphoria...

Regular readers are very familiar with this John Templeton quote:
Bull markets are born on pessimism, grow on skepticism, mature on optimism, and die on euphoria.

Having done what I do since the mid-80s, I have come to regard that assertion by one of modern-history's great investors as almost prophetic. Operative word being "almost": So as not to suggest that you should take comfort in others' present discomfort---in case, that is, you've noticed a general sense of skepticism and angst around today's stock market---I can't remind you enough that the stock market is as unpredictable as the wind.

Now, that said, in the midst of my typical early Saturday morning routine---after reading one analyst's view of what the currently high margin debt readings may or may not say about the market going forward---I began reminiscing on my experiences during past market tops. For this essay, a market top would be the place immediately preceding a major, and extended, stock market decline. Two periods in particular, the spring of 2000 and the fall of 2007, came to mind.

I recalled the late-90s, when stocks, in the aggregate, were trading at previously unspeakable valuations---and every Tom, Dick and Mary, by the osmosis of their E-Trade accounts, became stock-pickers extraordinaire. They quickly learned, then fervently followed, a most complex stock-picking strategy: if a company's title began with "E", or ended in ".com", you buy it with everything you got! I had a few clients back then who just couldn't figure out why I couldn't figure that out. For a time, their accounts with me were so grossly underperforming their E-Trade accounts (that they traded from their desks at work), that I had become their greatest frustration. And if their frustration with me happened to peak before the peak of that amazing ridiculous bull run, well, I try not to think about what likely became of those folks's retirement plans---all having been transferred to their E-Trade accounts---during the ensuing three-year blood bath.

Yes, "euphoria" would be how you'd characterize stock market sentiment in the late 90s.

Interestingly, the euphoria of the mid-2000s---the euphoria preceding the Great Recession/bear market of 2008---wasn't about stocks, it was about real estate. Stock valuations, in the aggregate, were nowhere near the levels seen during the run-up to the breakdown of the Nasdaq Composite Index. Folks weren't throwing everything down on the chatroom four-digit symbol du jour like they were in the late 90s. Nope, they were, instead, throwing their credit ratings and stated income numbers at banks willing to lend them barrels full of money against the appraised value of their family shelters. Some sought to parlay their ever-growing equity into great fortunes by investing in additional properties, while others sought to simply enjoy the fruits (jet-setting, jet skiing, sport car-ing, new pool-swimming, remodeling, etc.) of the Fed's labors (artificially low interest rates), and the banker's greed/stupidity.

Without, again, getting deep into the weeds of that great credit bubble (other than to say that, while 2007 stock prices weren't frighteningly high when compared to earnings, earnings couldn't be sustained amid the bursting of the credit bubble), suffice it to say that we know what happened next.

So then, if euphoria, as the Templeton quote, and my observations, suggest, is a determinant of market tops (we can't, however, know that it is), the question for the day is, are we feeling euphoric? And, if so, with regard to what?

Personally, while I do have a few clients who seem, to me, overly optimistic, by and large I'm not sensing euphoria for stocks among the folks I counsel. In fact, quite the opposite in many cases. And I'd have to say the same goes for real estate. There was a time recently when I thought folks were way too optimistic over gold, but that sentiment has, for the most part, come and gone without taking the global economy with it. Some, me included, do believe the bond market has tread into some very dangerous territory, but I wouldn't characterize today's bond investor as euphoric. I'd say, particularly when we're talking retail investors (folks like you and me), they're complacent. Which I consider nearly as ominous. As I've expressed here, ad nauseam, I see the ultimate process of the bond market finding its equilibrium (whenever that begins to occur) as becoming a potentially serious headwind for the economy, and asset prices.

Now, with regard to bonds, there's a different, and legitimate, argument to be made. It goes like this: Rather than complacency, the bond market is reflecting intense skepticism about the economy going forward---folks are willing to buy 10-year treasury bonds at 2.7% because they don't yet see light at the end of the economic tunnel. Folks buy bonds for safety... This argument of course emboldens the wall of worry believer---as in the Wall Street adage: bull markets climb a wall of worry.

In summary, I'm not suggesting that the next bear market isn't close at hand simply because you're not mortgaging your family's shelter to buy Tesla stock, or a Tesla (although I suspect some people, just not everyone you know, are). In fact, I'm not at all suggesting that the next bear market isn't indeed close at hand. For all we know, it may very well be. It's just that---if it's to begin anytime soon---it will not, like the previous two, have been preceded by what I'd consider euphoria...

Thursday, March 27, 2014

Pure fallacy...

As I approached the close in Harold Meyerson's column The Coming Job Apocalypse, I was thinking Wow! this guy's going to go the distance on how technology, and trade, has destroyed (and will continue to destroy) millions of American jobs, without the merest reference to how that combination has so miraculously improved the human condition.

I somehow don't believe that Meyerson is entirely ignorant of the phenomenal benefits that the striving for profit has bestowed, and will continue to bestow, upon the world. Perhaps his closing paragraph tells of his motivation for doing such a blatant disservice to his readers:
Eventually, however, as computers pick up more and more skills, we will have to embrace the necessity of redistributing wealth and income from a shrinking number of Americans who have sizable incomes from their investment or their work to the growing number of Americans who want work but can't find it. That may or may not be socialism; certainly, it's survival.

Ah, redistribution. You can't go there if you go below the surface. Let's go where Meyerson won't:

Whether we're talking in-housing technology or offshoring labor, we're talking the gaining of efficiencies. To ignore such gains is to ignore the areas in which freed-up resources are allocated. I mean, entrepreneurs wouldn't innovate or offshore if it didn't mean higher profits. And companies that grow their profits tend to grow their enterprises. And companies that grow their enterprises tend to grow their workforces (at home as well as abroad). And companies that grow their profits through innovation help grow the companies (and the jobs) that create the technology that grows their profits. And companies that grow their profits through offshoring labor help grow business (and jobs) for U.S. exporters that market their wares to the markets where U.S. offshorers invest their U.S. dollars. And, make no mistake, there's little chance that I'd be typing this message on my iPad, and that you'd be receiving it on whatever device you're gazing into at this moment---or that our lives would be so enriched by uncountable other amenities---were it not for trade and innovation.

The suggestion that the jobs lost to technology and trade somehow represent a net loss to society is pure fallacy...

Wednesday, March 26, 2014

Why traders should be worried, and why they shouldn't. And what matters to successful long-term investors...

As is always the case, and being that there must exist a seller for every buyer (and vice versa), there are presently bullish and bearish cases to be made for the stock market going forward. And they all make some sense.

Here are some things that traders (I distinguish from investors), who are long stocks (own them), should be worrying about:

  • The current bull market, while not the longest ever, has run longer than the average. 

  • Margin debt (loans against portfolios), is historically high. A correction could spark margin calls (happens when an account's equity drops below the allowed threshold, requiring that the loan be paid off), which could---assuming the loans are mostly against equity portfolios---require lots of correction-exacerbating selling.

  • The potential for bonds to sell off more than expected (pushing interest rates higher than expected) as QE winds down and tightening (the Fed raising short-term interest rates) appears on the horizon.

  • Some geopolitical event(s) raising doubt about the global economic recovery.

  • China's economy showing signs of further weakness.

  • The major averages dipping below technical support levels, sparking sell-offs among chart-watchers.

  • Continued reluctance by corporations to invest their huge cash troves.

  • A strong pick up in overall bullishness. Per John Templeton, "bull markets die on euphoria."

  • Certain sectors (consumer discretionary, healthcare and staples, for example) and styles (smallcap growth, for example) are showing signs of relative frothiness (valuations are high relative to other sectors/styles).

And here's what traders ought to be feeling good about:

  • Valuations in the U.S., while not cheap, are relatively reasonable.

  • Corporate balance sheets are, by and large, in decent shape.

  • Relatively calm political environment in the U.S.

  • Valuations in Europe are attractive.

  • Emerging markets stocks are very cheap.

  • Still lots of naysayers. Per John Templeton, "bull markets grow on skepticism."

  • The individual investor has yet to rush in. Which tends to coincide with market euphoria.

  • The anticipated pick up in job/economy-boosting capital expenditures (businesses expanding).

  • The major averages have reached all time highs, however, the economy has yet to achieve anywhere near a typical post-recession rate of growth. If indeed economic growth is to revert to the post-recession mean---given today's reasonable valuations---the market remains in decent shape.

  • Certain sectors (financials and energy, for example) and styles (large cap value, for example) remain relatively attractive.

Note: Sectors not mentioned in either case, remain, by my calculations,  reasonably valued.

So why, given that I presume my readers are long-term investors---as opposed to short-term traders---do I present the things short-term traders can feel bad or good about? Because that's the stuff the financial media will focus on as the year unfolds. And I will no doubt be here and there commenting on most, if not all, of the above going forward.

And of course, beyond making sense of all the noise, I will forever remind you of the stuff that matters to successful long-term investors. Stuff like:

  • Remaining agnostic on the market, short-term. I.e., you're not committed to a bullish or bearish scenario. Nor do you concern yourself with volatility.

  • The importance of maintaining a broad, and globally, diversified mix of assets.

  • The importance of maintaining a mix that is consistent with your temperament (a mix that won't incite panic [and selling] during the inevitable bear market), and your time horizon (generally, the older you get the less exposure you have to stocks).

  • A willingness to periodically rebalance your portfolio (selling when stocks are rising, and buying when they're falling).

  • Knowing that attempting to time the ups and downs of the market is a fools game.

  • And, above all, having faith in the future: That is, believing my currently favorite Adam Smith quote:

"The natural effort of every individual to better his own condition is so powerful that it is alone, and without any assistance, not only capable of carrying on the society to wealth and prosperity, but of surmounting a hundred impertinent obstructions with which the folly of human laws too often encumbers its operations."


Today's TV Segment (video)

This morning Zara and I discussed recent market volatility in response to the potential timing of Fed tightening. Click here to view...

Tuesday, March 25, 2014

No more exporting acetone!!

Considering the many applications for the use of acetone, the efficacy of the product and its necessity in terms of the daily lives of virtually every American------I mean, it's the best nail polish remover, paint thinner, etc., and, by the way, its industrial use is off the charts, and it's huge in terms of the production of other chemicals------I propose that Washington immediately ban Dow Chemical from exporting acetone to other nations. By limiting the global market for acetone the price would surely decline, saving the U.S. consumer, well, a lot of money, and boosting the U.S. economy in the process.

Ludicrous? Of course. Is it any more ludicrous than a push by Dow Chemical (the Dow Chemical that does two-thirds of its business outside the U.S.) to ban the exporting of U.S. natural gas would be? Of course not. Well, that's what's occurring as I type.

I've written lots on this topic. Click here if you're interested...

Sunday, March 23, 2014

Not all smoke and mirrors...

If you're in the camp of the Peter Schiffs and David Stockmans of the world (each was at the top of his game on "Fed Day" last week), you believe the economic growth (as tepid as it's been), as well as the rise in stock prices, occurring since the bottom of the Great Recession is nothing more than an illusion conjured up by the members of the Federal Open Market Committee with strategically-positioned mirrors, veiled by the smoke emanating from their many commentaries.

While I am sympathetic to the ideology I think these gentlemen subscribe to, I can't quite join the party when it comes to how we've arrived at this juncture. With regard to Schiff (who I'm more familiar with) in particular: he's been throwing himself out there with predictions of a market collapse, all the way back to when the market was done collapsing in the spring of '09. Watch an interview with him and you'll witness a man with great conviction, and little tolerance for anyone with a competing theory. Whenever I watch Mr. Schiff, I think man, this guy's bright, and he may ultimately be right, but my goodness he could use a little humility. I mean, he hasn't been the best market forecaster for quite some time now. 

To believe that the stock market reaching all time highs is entirely the result of the Fed pumping money into bank excess reserve accounts is to give zero credit to the folks who manage the companies that comprise the major market averages. And I'm not in that camp: To some degree, private sector enterprises have enacted the kinds of policies Schiff, Stockman and yours truly say need to be adopted by the public sector. The closing of unprofitable facilities and subsidiaries, and the laying off of unproductive personnel, for example. Essentially doing what needed to be done to become/remain profitable in what remains a very uncertain environment. Today's S&P 500 company sits atop a huge pile of cash that, if deployed (to things other than stock-price-supporting share buybacks), could be an economic game changer going forward. Oh, and yes (nodding to Schiff), they have of course refinanced their debt, and some (in many instances to fund buy backs), at Fed-suppressed interest rates.

As I've stressedad nauseam, here from day one, I am to no small degree concerned with the potential fallout resulting from the unavoidable misallocation of resources that occurs when government attempts to direct the allocation of resources (Schiff has legitimate grounds for his concerns). And I have little doubt that the market will bring deliverance to Schiff's waning rep as a forecaster. But that, the next recession/bear market, would be inevitable, with or without a penny's worth of accommodation from the Fed.

You see, the economy is cyclical: recessions serve to purge expansion-born excesses. And, yes, I agree, government has, once again, gotten in the way of the process: Poorly run companies and executive name badges remain today only by the grace of their cronies in Washington. And---as a result of all the Fed's QE---trillions of dollars rest in bank excess reserves that, if it were to begin pouring into the economy, could take up all that inflation-suppressing slack in a hurry and send the Fed's heads spinning. To ward off (or, perhaps more likely, to attempt to contain) inflation, the Fed would have to sell its bonds back to a market that, I suspect, would require yields substantially higher than their coupon rates (the rates at which the bonds were issued).

All this circumventing of economic nature, as you can see, is potentially very hazardous in the long-run. It's akin to cordoning off miles of underbrush from a forest fire---leaving it to grow, unabated, and choke any new growth---and leaving nature to ultimately conjure up the kind of flames that an army of firefighters won't be able to subdue. That, a policy-induced depression, is what the Schiffs and the Stockmans of the world are betting their reputations on---and they could very well be right. But, then again, some black swan (unforeseeable development) could prove them wrong. Some new technology, wireless electricity (HT Darren Thomas) perhaps, or allowing the world's greatest producer of energy (us) unfettered access to the global market, or something---or combination of things---else, might tilt the economy in a way that could indeed circumvent the extreme pain these soothsayers see coming. The Internet surely did real damage to the reputations of some latter 20th Century fortune tellers.

So then, as much as I subscribe to the notion that government intervention into the economy can't help but create dangerous distortions, in the long run---inevitable recessions (great and small) notwithstanding---I remain optimistic. I believe Adam Smith, way back in the 18th Century, had it right:
The natural effort of every individual to better his own condition is so powerful that it is alone, and without any assistance, not only capable of carrying on the society to wealth and prosperity, but of surmounting a hundred impertinent obstructions with which the folly of human laws too often encumbers its operations.

Stop right now and look around you---what you see is not all smoke and mirrors. What you see is the proof that Smith knew what he was talking about.

And of course there's always this from F. A. Hayek:
The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design.

And to demonstrate to the Schiffs and Stockmans how little they really know about what they imagine they can predict.

Thursday, March 20, 2014

Unprecedented consequences - OR - Come hell or high interest rates...

I heard a commentator on CNBC this morning characterize Janet Yellen's press conference performance yesterday as "magnificent"---in that she was candid with regard to the future of interest rates. Well, I happened to have been listening when the question, regarding the timing of the first increase in short-term rates (post-QE), was asked, and I'd say it caught the Fed Chair entirely off guard. And I'd add that if she had it to do all over again, there's no way she'd, after several seconds of hemming and hawing, say "6 months". I picture Ben Bernanke, while she was painfully searching for an answer, somewhere, screaming "data dependent, data dependent" at his television screen.

Now, while her answer looks to have sparked a 200 point selloff in the Dow, her answer itself shouldn't concern anybody who has even a short-term interest in the price of a share of stock. The short-timer's concern ought to be the fact that the Dow sold off by 200 points on her answer. An answer that, upon proper scrutiny, should've sparked a 200 point rally. That's right, the fact that the Chairperson of the board of geniuses that sets the rate banks pay for short-term money says they may be raising that rate sooner than later suggests that the board believes the economy is going to begin picking up sooner than later. Which should be very good news for stock prices.

So why wasn't her answer very good news for stock prices? Well, it could be a number of things, but my best guess has to do with interest rate risk. About the only thing I can say with confidence that the Fed has achieved with 3+ trillion worth of dollar creation is that they've managed to keep interest rates artificially, and unprecedentedly, low. And the world has to be on pins and needles as to the ultimate impact on asset prices of rates rising at what could be an unprecedentedly rapid pace---given that rates have been suppressed at unprecedentedly low levels for an unprecedentedly long period of time.

Suffice it to say that there is a lot of money in bonds that could exit in a hurry should its owners decide that the days of record low interest rates and/or record low economic growth are about to end. And if bondholders do exit their positions in a hurry, you'd see a spike in interest rates that could do a number on economic (and, thus, stock market) sentiment in a hurry. Here's a 5-day chart of the yield on the 10-year treasury bond (notice the straight shot up yesterday afternoon. That was when Ms. Yellen said "six months"):

5 day treasury (click chart to enlarge)

At the end of the day, however, rising rates in response to a rising economy should indeed be, short-timer reactions notwithstanding, good news for stock prices (but no guarantees). It's just that the Fed has, in my estimation, got things all out of whack. The good news is, come hell or high interest rates, the market will straighten it out...

The gist of protection...

Here's the gist of Air Line Pilots Association president Lee Moak's letter, Viking Skies, in today's Wall Street Journal (HT Don Boudreaux):
The Air Line Pilots Association International strongly supports greater access to international markets where airlines compete on commercial merit. However, Norwegian Air ShuttleNAS.OS -2.15% Norwegian Air International (NAI)'s parent company, seeks to dodge Norwegian laws to gain an unfair competitive advantage over U.S. airlines. NAI's business plan sets a precedent that threatens the jobs of tens of thousands of U.S. airline industry employees, union and nonunion alike.

Here's the gist of Don Boudreaux's response:
Capt. Moak forgets that competition is not about fairness or unfairness for suppliers.  Markets and competition are about serving consumers.  Period.  Suppliers are valuable only because, if, and as long as they serve consumers in ways that consumers themselves - rather than politicians or the suppliers - judge best.  The “unfair competitive advantage” here is not, therefore, one enjoyed by the foreign supplier that Capt. Moak seeks to prevent from serving American consumers; it is, instead, the privilege of being protected from competition that he himself seeks for his union members at the expense of those consumers.

Here's more from Mr. Moak, and "another union", from a recent NY 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.

This was the gist of my response to that NY Times piece:
“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…

As Don said, "Markets and competition are about serving consumers.  Period." The only thing I would add is !!!!

Wednesday, March 19, 2014

Today's TV Segment (video)

This morning Zara and I discussed the Ukraine situation, and today's pending Fed announcement. After watching this segment, listen to the audio commentary I just posted to understand why, contrary to what I suggested on TV this morning, there were indeed fireworks in response to something Ms. Yellen said during her press conference. Click here to view...

Market Commentary (audio)

Click the play button for today's commentary:

[audio m4a=""][/audio]

Tuesday, March 18, 2014

A little more on China and treasury bonds...

Yesterday, I wrote:
China is not nearly ready to even begin to attempt to do harm to its best customer. And besides, were it to, in that fashion, its best customer would barely (if rates rose), if at all, be harmed. While we can spend lots more time on this topic, for today, suffice it to say that the global market for treasury bonds is very very deep. In essence, if China would like to sell U.S. debt, happy buyers would emerge instantly.

Let's go ahead and spend a little more time on this topic. With "if rates rose" I'm suggesting that rates might not rise if China dumped, say, a trillion worth of treasury bonds on the market. Now, that (the rates maybe not rising part) would have to be a stretch for most of us who believe we understand the bond market. Surely, that much supply hitting the market all at once would have to drive down the price (and up the yield) of treasuries, right? Well, it all depends on the timing.

Think about the Fed's QE program: Over the past couple of months the Fed has cut the demand for treasury and mortgage-backed debt by almost a quarter of a trillion, annualized (two rounds of taper). Essentially leaving a heap of bonds ($30 billion) in the market to be bid on by other buyers. Buyers who fully expect the Fed to be out of the QE business altogether by this coming fall (leaving a full trillion a year for others to deal with). Did rates spike higher like so many had predicted? Nope, rates are actually a little lower than they were when the first taper occurred. Meaning, others stepped in and picked up the slack (like I said, the market is very very deep). Of course the fact that the Treasury is borrowing less these days, and that the economy has struggled a bit to start the year, and that there's been no shortage of geopolitical angst in the world---the latter two in particular---helps out as well.

Clearly, there's no guarantee that China selling treasuries would, as many predict, kill the market for treasuries.

So then, should we be sanguine about the bond market? Can we simply sit back and expect that the world will be forever willing to lend Uncle Sam ten-year money at 2.6%? Absolutely not! Like I said, it's all about the timing. A little sustained economic acceleration, and/or inflation, would likely spook bond investors and send yields rising. Now, were China to sell into that scenario, we'd be having an entirely different conversation.

Like I suggested in a recent blog post, I am presently anything but sanguine about the bond market. It's just that China selling U.S. debt in an effort to harm its best customer, is not the worry. Here's a snippet:
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.

Monday, March 17, 2014

Never shoot your underwriter...

How many times have you heard that the U.S. would be in deep trouble if China were to sell its U.S treasury bonds? For starters, if that noise in anyway troubles you, fear not, for China is not nearly ready to even begin to attempt to do harm to its best customer. And besides, were it to, in that fashion, its best customer would barely (if rates rose), if at all, be harmed. While we can spend lots more time on this topic, for today, suffice it to say that the global market for treasury bonds is very very deep. In essence, if China would like to sell U.S. debt, happy buyers would emerge instantly.

As for why China might ever be inclined to attempt to harm the U.S. economy, well, thanks to that much maligned, yet magnificent, phenomenon, Globalization, its becoming less inclined by the moment. The Chinese Internet company Alibaba has decided to launch its IPO, not in Asia, not in Europe, but, that's right, in New York. This looks to be the biggest IPO in at least the last couple of years. Here's USA Today on the subject:
The initial public offering of the Chinese e-commerce site, expected to be the largest Internet deal since Google, is a big win for US markets. By choosing to list on the New York Stock Exchange over the Hong Kong market, the USA is again emerging as the premier place for high-growth companies to list their shares. It's a blow to skeptics who thought domestic markets were not competitive with London and Hong Kong.

Bottom line: you never shoot your customer, or your investor, or your underwriter...

Sunday, March 16, 2014

When the dust settles over Ukraine...

I particularly liked the following synopsis of last week from New Ark Investment's Jeff Miller's Weighing the Week Ahead column:
As predicted, there were many articles of the laundry list type. That is where the pundit or journalist starts with a scary theme that can be expected to be popular and then looks back to find some similarities with the past. What a joke! Suppose you had a group of summer interns. Ask them to take any year in history and read newspapers, listing anything that is similar to current times. They will deliver.

Most people have a low bar for research findings, particularly when it suits their own conclusions.

This morning I found myself pondering the Ukraine situation, thinking back to periods past that reminded me of the present, thinking maybe there's some parallel to be drawn that I can use to help you shape your short-term expectations. And while a number of past events indeed came to mind, I couldn't bring myself to even begin to offer up some would be facsimile in the pretense that because the market reacted a certain way in the past, that it is about to act that way again. I would be contradicting statements I've made here countless times. Statements like: anyone who professes to know the future—of the economy or the financial markets—should indeed be committed. There are simply too many (uncountable even) moving parts—far too many dots to connect. Jeff is spot on: pundits tend to cite the history that best supports their own conclusions.

That said, without citing any history, I'll offer up my own conclusion: I believe that when the dust settles over Ukraine, the powers that be will have ultimately bowed, without admission of course, to global market forces. What the stock market does along the way is anybody's guess...

Saturday, March 15, 2014

Honestly (intellectually honestly), there's no legitimate case for raising the minimum wage...

Anyone who would tell you that economists agree that raising the minimum wage will not negatively impact the market for wage earners, didn't poll the more than 500 economists who signed this Statement to Federal Policymakers (HT Don Boudreaux). Here's a snippet:
As economists, we understand the fragile nature of this recovery and the dire financial realities of the nearly 50 million Americans living in poverty. To alleviate the burdens for families and improve our local, regional, and national economies, we need a mix of solutions that encourage employment, business creation, and boost earnings rather than across-the-board mandates that raise the cost of labor.

One of the serious consequences of raising the minimum wage is that business owners saddled with a higher cost of labor will need to cut costs, or pass the increase to their customers to make ends meet. Many of the businesses that pay their workers minimum wage operate on extremely tight profit margins, with any increase in the cost of labor threatening this delicate balance.

Apparently the petition never made it to the well known Nobel laureate economist Paul Krugman. Which is a shame because surely Mr. Krugman, given his published statements on the subject (well, those he made as economist Krugman, before he became NY Times columnist Krugman), would have signed it in a heartbeat.

Here's one:
What is how this [Card and Kruger's] rather iffy result has been seized upon by some liberals as a rationale for making large minimum wage increases a core component of the liberal agenda.... Clearly these advocates very much want to believe that the price of labor--unlike that of gasoline, or Manhattan apartments--can be set based on considerations of justice, not supply and demand, without unpleasant side effects.

And lastly, supporting the position outlined in the petition, here's White House economic adviser Jason Furman (of course he wouldn't be one of the 500+), back in 2005 (his pre-White House days), making the case that low-margin businesses (which tend to be the employers of low-skilled individuals) can be literally wiped out by what many would consider a minor increase in costs:
Overall, it is no easier for Wal-Mart to change compensation than many other companies. This year Wal-Mart will earn about $6000 per employee. This is virtually identical to the average for the retail sector and somewhat below the national average of $9000 in profits per employee in the corporate sector. Some companies make substantially more, like Microsoft ($143,000 per employee) or General Motors ($12,000 per employee). Overall, it is not much easier for Walmart to change compensation than say a small business making $24,000 a year and employing four people.

If Microsoft paid each of its employees an additional $5000 or extended its health benefits, its profits would be largely unchanged. If Walmart took the same step---and did not pass the cost onto customers---it would be virtually wiped out.

All together now, Hmm...


Thursday, March 13, 2014

Yep, higher prices mean less buying...

Mid-terms are approaching, and, from what I'm hearing, the President's party isn't polling so well. Which might explain why, in addition to his push for a higher minimum wage---and, amazingly, in the face of high unemployment---he's looking to force employers to pay overtime wages in situations where they aren't currently required to.

While at first blush, adding such additional costs to employers might appear to benefit the targeted group of voters (those who might receive the overtime pay, and those who advocate for their idea of "fairness"), basic economics---as it does in the case of minimum wage legislation---strongly suggests otherwise.

I was messing around the other day with the following pretend Q and A after listening to a report of Ferrari's 2013 sales numbers. In light of the latest developments, I figure I may as well post it. While my method (my effort to drown the minimum wage debate in commonsense) may seem silly, make no mistake, for people looking for work (and not just entry-level), this is serious stuff.


If a brand new Ferrari happens to be on your bucket list, you better get after it right away---it's getting more out of reach by the minute. The high-end automaker has committed to keeping total sales to no more than 7,000 cars per year. Thus, this year, you'll have to pony up anywhere from $200k to $1.7 mill if you're to check a Ferrari off your list.

To help us understand the logic of what Ferrari is up to, our ace reporter, Ace Reporter, recently caught up with famous investor/economist Warren Krugman and asked him a few questions. Here's that brief interview:

AR: Warren, help me understand why Ferrari would limit the production of its cars to such a small quantity.

WK: Well, Ace, they clearly want their brand to remain the most exclusive among automakers.

AR: Okay... and of course it allows them to charge very high prices in the process.

WK: You got it.

AR: So, why would they set the number of cars at 7,000, as opposed to pricing their models at where they believe the market will produce 7,000 buyers?

WK: Of course that's what they're in effect doing: If more than 7,000 buyers come knocking, Ferrari will gradually raise prices to a point that prices all but 7,000 buyers out of their market. They actually sold more than 7,000 in 2012, so they raised prices and came in just below that number in 2013.

AR: Oh, okay. That makes perfect sense.

WK: Yep, it's basic economics.

AR: Changing subjects a bit: I see an opportunity here for government to control toxic emissions. If Washington would mandate a higher price for all cars with gas engines, automakers would sell fewer dirty autos, and they'd be doing a good thing in terms of climate change. Am I thinking straight?

WK: Well, yes, you're thinking straight in terms of price and demand. Certainly, if government were to step in and force higher prices onto buyers of a certain type of automobile, without  question, folks would buy less of that type.

AR: Does it work that way with everything?

WK: Of course.

AR: Really?

WK: Yes.

AR: Seriously?


AR: So then, given that, as you've convinced me, it works that way with everything: if certain politicians, as they're threatening to, succeed in raising the minimum wage---that is, if they mandate a higher price for unskilled labor---there's for sure going to be less buying of unskilled labor going forward. Now isn't that a crying shame for all of those folks who are desperate to enter the workforce, and for those who'll lose their jobs because their productivity doesn't justify 39% higher wages?


AR: Hey, where'd he go?

Today's sell-off, and why a Chinese corporate default is a good thing...

As I suggested in this morning's audio commentary, Wall Street, for much of the day, seemed at a bit of a loss as to what truly sparked today's sell-off. By the end of trading, however, the experts settled on Ukraine and China, which I believe the rally in treasuries supports (although I still believe the technicals, and energy, contributed as well). The fact that overall volume (the number of shares trading hands) was very average, tells us that today's sell-off was anything but panicky. Call it a buyer's strike...

With regard to the Ukraine situation, as of the moment, I'm still pretty much where I was here and here on the subject.

Here are my thoughts on China:

This week got off to a rough start on news that China's exports declined last month to the tune of 18%, against expectations of a 7.5% increase. China chalked it up to the Lunar New Year. Well, we'll see. Additional angst came from other data (industrial production, retail sales and urban fixed investment) suggesting that China's economy is indeed slowing. And, to top it all off, on March 7th, Chaori Solar became China's first company to default on its on shore debt.

With regard to its slowing economy: For starters, economies, even centrally-controlled ones, are cyclical---and China's has been growing at a breakneck pace for an awfully long time. Plus, China's leadership has been making a concerted effort to "rebalance" its economy to one more driven by domestic consumption (we are talking the largest population on Earth), as opposed to exports---which ought to be good news for other countries' exporters. This transition is expected to result in a growth rate somewhat less than they've grown accustomed to---and its leadership appears to be resigned to that reality. As for the corporate default, while some view it as cause for serious alarm, I see it as cause for celebration. In that that's how true markets work---and it's a beautiful thing. Here's what I mean:

When allowed to function properly, markets reward good management and punish bad. While an economy will cycle its way through expansions and contractions, this natural phenomenon (the risk of loss) inspires prudence; essentially protecting society from the kinds of bubbles that arise out of central planners' efforts to avert political pain by spending other peoples' (taxpayers) money on other people (those whose risk-taking reflected their expectation of a government bailout should they come up short). Knowing they can fail, corporate execs must thoroughly calculate how they allocate their companies' resources. You gotta wonder how different things might have been in the U.S. these past few years had bankers not known all along that their dear friends, central bankers, were there to backstop their bets.

Now, all that said, in my wildest dreams I cannot fathom China's leaders allowing for the kind of pain their economy would have to endure to properly purge the excesses they themselves have fostered---I mean if the U.S. politician can't do it. Which means there's virtually no chance, at this juncture, of a major run on Chinese credit markets.

Lastly, one thought on Ukraine. I believe Putin cares what Li Keqiang (the Chinese Premier) thinks. And, clearly, Li is not the least bit interested in seeing a serious hit to the global economy resulting from the present conflict. Nor, at the end of the day---contrary to what many think---do I believe Putin is. Which, alas, certainly doesn't mean that it can't get uglier before it gets better.



Market Commentary (audio)

Click the play button for today's commentary:

[audio m4a=""][/audio]

Wednesday, March 12, 2014

My oh my, how far we've come!

Someone says to me recently "So Marty, it seems like the market is so high I feel like it's just going to come crashing down any minute. Should I just get out of the way now and be ready to buy back after it crashes?"

With all due respect, that kind of question (a frequently asked kind of question) virtually proves that the individual investor has little clue when it comes to the stock market in general, and/or how to look at it from a valuation standpoint (but that's okay, that's why I have a job). The untutored investor tends to look at investing in terms of numbers: He's thinking the Dow is at 16,200 today, and it was at 14,400 the last time it peaked---before plunging to 6,600 over the ensuing year and a half. Therefore, being that the Dow is 2,200 points higher than the last peak, the bubble's gotta pop, and soon---without any regard whatsoever for the various valuation ratios, balance sheets, profit margins, interest rates, etc.

That said, I really shouldn't be so hard on the individual investor. Especially when I consider the commentaries of so many professional investors. As I watch CNBC, listen to Bloomberg and read other professionals' commentaries (which, for my sins, I must) I realize that---for all of his/her valuating and chart-gazing, the typical professional investor/adviser can be, in fact often is, every bit as mixed up as is the individual investor.

As for yours truly, being that I know my brain sports no more than average capacity, I won't even begin, my vocation notwithstanding, to forecast the future of the stock market.

Do you see the asset I bring to my clientele? The fact that I know my limitations.

In fact, with regard to prognosticating the market, not only do I know my own limitations, I know the limitations of every fortuneteller who's been fortunate enough to make the media circuit: Not a single one of them, for all their sophisticated tools and cognitive talent, has the capacity to know the future. While the very brightest can be very convincing, the fact that in most cases, I fear, they've convinced themselves that they indeed know the future, says something about the correlation between the measure of one's mental capacity and the size of one's ego. And, sadly, the larger the adviser's ego, the lesser the value (and, potentially, the higher the risk) he is to those whom he advises.

Note: My criticism is of those who make hard-fast predictions. There are indeed many thoughtful analysts who explore history, the fundamentals and the technicals in their efforts to intelligently assess the environment and make the best possible recommendations on behalf of their clients---without predicting the near-term future.

All that said, I will of course continue to offer up my thoughts with regard to history, fundamentals, technicals, the global economy and, alas, public policy (there'll be some coming later this week), and how all that impacts the recommendations we make to our clients. But for today, I thought I'd focus on what I believe you, me, and all those geniuses ought to be able to agree on---in terms of why one should own stocks (in the appropriate quantity) for the long-term:

I believe we all can, but surely won't, agree that the paradigms of our children, and their children, and their children's children will expand beyond yours and my wildest imagination. I believe we've barely scratched the surface in terms of the evolutionary potential of virtually all manner of technology. Think in terms of the improvement of the human condition over the past century. Heck, think in terms of the past half-century. Think back to life in the 70s, and know that anyone who would dare assert that the average American, at every rung of the income ladder, hasn't experienced an utterly amazing improvement in his/her overall quality of life, has to have some political motivation in making such a ludicrous assertion.

We have no reason to believe that future generations won't look back to 2014, just as you and I look back to 1974 (1984, 1994, 2004), and think My oh my, how far we've come!

Make no mistake, you want to own the companies that will create and benefit (in virtually every sector) from the inevitable miracles of technology to come...


Monday, March 10, 2014

Stomach for war?

Bloomberg's editors are calling for China to speak out "now against Putin's aggression." Which I suspect wouldn't hurt. However, I'm still thinking that Putin has traded (as in international trade) himself into a corner on this one. As I suggested the other day, the pundits who believe they know Putin have to be spot on (that he cares not about the Russian economy) if he's to go the distance in Ukraine.

Here's Bloomberg's accounting of who's beholden to whom:
If Putin continues to advance in Ukraine, forcing a military confrontation or breakup of the country, he may well push China to take a stronger stand. The truth is that in material terms, China gains less than Russia does from their relationship. The latter accounts for a little more than 2 percent of China's external trade. While volumes are growing, in 2011 China got only about 6 percent of its imported oil from Russia.

And here Bloomberg's editors tell of how Russia is playing in other sandboxes as well:
And though China is Russia's largest trading partner, Putin has also been hedging his bets. He has sought to expand rail links, pipelines and energy exports not just to China but also to both Koreas and to China's archrival Japan. Russia is aiming to sell sophisticated weaponry to India, and has deepened economic and military relations with Vietnam.

So will Russia, for all its courting, garner international support for a continued advance in Ukraine? Well, think of it this way: if there's one thing China, South Korea, Japan and India have in common, it's that they're all beholden to the economies of the U.S. and the European Union, and vice versa.

Not that it can't happen, but clearly, the more Russia looks to expand its economic interests, the less stomach it'll have for war...

Making sense of today's market...

As I keep saying, stocks aren't cheap like they were a year ago. Which should elicit a big duh!, since the major averages were up 30% in 2013. But the thing is, stocks could have gained 30% over the past year and remained cheap like they were to begin with---that is when we look at them through the prism of the price to earnings (P/E) ratio. The reason they didn't remain cheap is because stock prices expanded faster than did the earnings of the companies they represent.

Here's the ever-thoughtful money manager and Bloomberg View columnist Barry Ritholtz making sense of today's market (this will sound familiar to regular readers): 
So, what does this market need in order to build additional gains?

Ideally, I would like to see five things occur:

1. Global economic growth must continue. Almost half of the Standard & Poor's 500 Index’s profits come from abroad. That means that U.S. economic growth may not be sufficient to keep things going.

2. Corporate spending and hiring needs to improve. Companies are sitting on enormous piles of cash and they need to start deploying some of it for the economic expansion to continue. We are starting to see some signs of this occurring.

3. Corporate revenue needs to expand. Surprisingly, the lack of corporate spending hasn't led to modest top-line growth. We continue to see earnings gains, but too much of it comes from a combination of cost cutting and productivity gains. I'd like to see top-line growth across the board.

4. Market needs to stay broad. Market rallies die when they become too narrow. Think back to the "Nifty Fifty" or the horsemen of the dot-com era. Broad-based participation in the market is usually a sign the end isn't approaching.

5. Sentiment needs to be skeptical, not giddy. This rally continues to be hated, as most of Main Street is indifferent to equity gains. So long as this rally remains a low-volume, low-excitement affair, gains can continue. Be careful once Mom and Pop come in. Historically, their timing is awful.

Note that I didn't mention valuations. If the five things listed above occur, valuation will take care of itself.

Market Commentary (audio)

Click the play button for today's commentary:

[audio m4a=""][/audio]

Saturday, March 8, 2014

Does Washington deserve a little credit for the bull market? Yes, actually...

What if I told you that President Obama, with a little help from the Republican-controlled Congress, deserves some credit for what has become one of the longest and strongest bull markets in stocks in history?

Well, if you're a devoted Democrat, I suspect you (save for my suggestion that Congress deserves a pat on the back) very much like the sound of that. Of course if you're a loyal Republican, you think I've pretty much lost it. If you happen to be a committed Tea-Partier, you think I should be committed, literally, and right away. If, however, regardless of your political bent, you read all of my stuff (if you happen to be that one subscriber), and connect a few dots, while you may not agree with my opening line, you get where I'm coming from.

Here's what I'm talking about:

I'm guessing that I've featured the following John Templeton quote at least a couple dozen times since I started blogging back in 2009:

"Bull markets are born on pessimism, grow on skepticism, mature on optimism and die on euphoria."

I wrote the following a week ago last Friday. As you read the bit about short interest (a measure of the extent to which traders are betting on a decline in stocks) and short-sellers (SSs) themselves, think about last week's 480 point spike (from down 250 points intraday on Monday to up 230 points at the close on Tuesday) in the Dow:
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 at that point 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 panic and cover their short positions (buying stocks like mad) — yep, it goes up bigtime.

So then, to the extent Washington folly has led to Wall Street pessimism,  Washington maybe deserves a little credit for the amazing resiliency of today's bull market.

Now, going deeper, here's something I wrote last Thursday:
Politicians, lacking the vision, the passion, the instincts, the integrity and the skin in the game, cannot even begin to deploy capital in a profitable, economically-stimulating, job-producing, life-improving manner. Which brings me to my main point: Not only has government’s meddling not stimulated the U.S. economy, as Fortune stresses below, it has, alas, hindered it:

"How much is Washington dysfunction harming the U.S. economy? Policymakers’ disaccord could be doing major behind-the-scenes economic damage. According to economists Juan Sanchez and Emircan Yurdagül at the St Louis Federal Reserve, U.S. companies are hoarding loads of cash specifically because of policy uncertainty. As a result, corporate spending habits could be costing the country millions of jobs."

So what's so good for stock prices about CEOs' woeing over Washington? Well, for starters, policy uncertainty has, in my (and others') very strong opinion, kept industry from expanding (yes, that's bad, but stay with me). Regulatory uncertainty---fearing some government agent, with a chip on his shoulder, will come a knocking, and knock the sound out of their balance sheets, and their expansion plans---makes for very tight-vested CEOs (stay with me). Therefore, rather than investing in the capital and the people it'll take to bring the next great idea to market, corporate America has made efficiency its primary focus of late. The results being healthy balance sheets, huge profit margins and, consequently, higher stock prices.Yes, government imprudence has led to corporate prudence.

Now, all that said, and as much as we all love bull markets, our present state (save for the stock market) remains a, historically speaking, pretty sad state of affairs. Yes, that gloomy assessment has, along with inspiring the scrubbing of corporate balance sheets, engendered a level of pessimism that has kept a supply of money out of the market sufficient---to this point---to buy the dips and propel the averages to all-time highs. But of course you can only enjoy so much of a bad thing. Sooner or later, a persistent bad thing has to lead to, well, bad things.

The rate of gain in productivity can only accelerate to a point. Sooner or later CEOs will have to take some risk if this economy is to gain some real traction, and if, most importantly to them, they're to keep their shareholders engaged.

Now, as it currently stands, I maybe have some good news: The Fed is gradually pulling in QE, and, if CEOs meant what they said at the start of the year, we'll see a pick up in capital expenditure (business expansion) as 2014 unfolds. The latter is what could indeed propel the economy to a growth rate that, given where we've been, begins to make sense. Which, at a minimum, would confirm what record stock prices are telling us: that things are about to get better. 

Dang! I really wanted to close right there. But, sorry, I just can't leave you on such a hopeful note: That maybe good news notwithstanding, anyone who professes to know the future---of the economy or the financial markets---should indeed be committed. There are simply too many (uncountable even) moving parts---far too many dots to connect. I.e., while I remain hopeful---while I believe we're nowhere near exhausting the marvel that produces the goods, services and opportunities that'll make 2014's vast amenities good sport for our grandchildren---again, no one can know the future. 

So, on that note, I'll leave you with quotes from two of history's most sincere economists/philosophers:

F.A. Hayek"

"The curious task of economics is to demonstrate to men how little they really know about they imagine they can design."

And Adam Smith:

"The natural effort of every individual to better his own condition is so powerful that it is alone, and without any assistance, not only capable of carrying on the society to wealth and prosperity, but of surmounting a hundred impertinent obstructions with which the folly of human laws too often encumbers its operations."

I guess I left on a hopeful note after all...


Thursday, March 6, 2014

No need for a first-time iPhone-buyer tax credit...

Elon Musk has plans, and apparently has the funding ($5 billion), to build a battery factory that'll employ some 6,500 workers by 2015. And that's not counting all the folks it'll take to build the plant itself (at least I don't presume so). You see, Tesla has received orders for 500,000 mid-priced electric automobiles (and anticipates at least as many every year going forward), and Musk has determined that if his company is to meet the demand, profitably, it has to mass-produce lower-cost batteries.

This virtually proves that economic growth, and job growth, is all about demand. And of course all that demand for a Tesla car---that has yet to be invented---would not have materialized were it not for president Obama's stimulus programs and the trillions of brand new dollars the Fed has created over the past few years, right?

Well, wrong. And of course I was kidding: there hasn't been 500,000 orders for a mid-priced electric sedan that has yet to be invented. However, Tesla will build the battery plant and create thousands of jobs nonetheless. Musk, that filthy rich one-percenter (along with some unnamed filthy rich one-percenter investors), has the vision, the passion, the courage, the confidence and the resources to risk going where no automobile manufacturer has gone before.

Quite frankly, today's Keynesian simply has it wrong. While he credits what little growth we've seen these past 5 years to an historically mammoth amount of government intervention, the fact of the matter is that simply giving away newly created (and other peoples') money in an effort to increase consumption does not---as the economy's performance over the past 5 years attests---a growing economy make.

Growth/prosperity/jobs comes by way of the risk-taking of seers who, like Ford, Kroc, Walton, Gates, Jobs, Musk---and millions of small business owners---invest their (and others') capital beyond what's required to produce yesterday's products. Not that ongoing, or increased, demand for yesterday's products mustn't be met---it indeed must. However, the emphasis is on doing so by employing evermore efficient means (I have used the self checkout lanes at my neighborhood supermarket). It's the life-improving stuff of tomorrow, produced in a free, competitive marketplace, that requires the kind of investment that expands industry and creates lasting employment.

Here's Andrew Beattie on Sam Walton:
Sam Walton picked a market no one wanted and then instituted a distribution system no one had tried in retail. By building warehouses between several of his Wal-Mart (NYSE:WMT) stores, Walton was able to save on shipping and deliver goods to busy stores much faster. Add a state-of-the-art inventory control system, and Walton was lowering his cost margins well below his direct competitors. Rather than booking all of the savings as profits, Walton passed them on to the consumer. By offering consistently low prices, Walton attracted more and more business to where he chose to set up shop. Eventually, Walton took Wal-Mart to the big city to match margins with the big boys - and the beast of Bentonville has never looked back.

"A market no one wanted" means there was no "demand" for what Walton had in mind. While producing under a model that no one demanded, Sam Walton's enterprise turned into the greatest employer of human beings this world has ever seen.

Here's CNN/Money on Steve Jobs:
Perhaps the most astonishing fact about Jobs was his view that market research and focus groups only limited your ability to innovate. Asked how much research was done to guide Apple when he introduced the iPad, Jobs famously quipped, "None. It isn't the consumers' job to know what they want. It's hard for [consumers] to tell you what they want when they've never seen anything remotely like it."

Instead, it was Jobs' own intuition, his radar-like feel for emerging technologies and how they could be brought together to create, in his words, "insanely great" products, that ultimately made the difference. For Jobs, who died last year at 56, intuition was no mere gut call. It was, as he put it in his often-quoted commencement speech at Stanford, about "connecting the dots," glimpsing the relationships among wildly disparate life experiences and changes in technology.

It's a safe bet to assume that none of Apple's blockbuster products, from the Macintosh to the iPod and iTunes, from the iPhone to the iPad, would have come about if Jobs had relied heavily on consumer research.

Fittingly enough, on the day Jobs launched the Macintosh, a reporter from Popular Science asked him what type of studies Apple had conducted to ensure there was a market for the computer. In a nearly offended tone, Jobs retorted, "Did Alexander Graham Bell do any market research before he invented the telephone?"

There were no stimulus programs, no Cash for iPads or First-Time iPhone-Buyer Tax Credits, that resulted in the employing of 63,000 people and---along with Apple's competitors, and all the ancillary industries (employing thousands more)---the enhancing of the human condition in ways unimaginable a few short years ago. Politicians, lacking the vision, the passion, the instincts, the integrity and the skin in the game, cannot even begin to deploy capital in a profitable, economically-stimulating, job-producing, life-improving manner. Which brings me to my main point:

Not only has government's meddling not stimulated the U.S. economy, as Fortune stresses below, it has, alas, hindered it:
How much is Washington dysfunction harming the U.S. economy? Policymakers' disaccord could be doing major behind-the-scenes economic damage. According to economists Juan Sanchez and Emircan Yurdagül at the St Louis Federal Reserve, U.S. companies are hoarding loads of cash specifically because of policy uncertainty. As a result, corporate spending habits could be costing the country millions of jobs.

Wednesday, March 5, 2014

Political forces seem to trump market forces when it comes to the minimum wage...

Here's a snippet from a CNN report where the brilliant Warren Buffett exposes a lack of brilliance---or, more likely, a stab at political neutrality---when it comes to the minimum wage:
He also said he doesn't really believe any studies on either side of the debate which try to estimate job losses from employers having to pay a higher minimum.

"It's very hard to quantify those trade offs," he said. "People come out with these exact studies. They don't know. Usually you just get proponents of the two sides pulling out figures that substantiate their positions."

I understand the sensitive nature of the minimum wage debate. I get the intuitiveness of how, at first blush, a rise in the mandated minimum wage should equate to a rise in living standards. What I don't get is how some trained economists and experienced business people (like Mr. Buffett), seem to expose their ignorance to the reality that when the price of something, anything, is increased for reasons other than market forces, the purchasing of that something/anything will wane. This truly shouldn't be open for debate among economists and business people. To the extent that it is, it virtually has to be about political---as opposed to market---forces, and/or about the advantage that above-minimum-wage-paying businesses gain by the imposition of higher costs onto their minimum wage-paying competition.

Here's economist Don Boudreaux on the subject (be sure to read the entire piece):
So here’s a challenge that I (and others) have posed before but believe to be sufficiently penetrating to pose again. This challenge, of course, is posed to supporters of this hike in the minimum wage: Name some other goods or services for which a government-mandated price hike of 39.3 percent will not cause fewer units of those goods and services to be purchased. Indeed, name even just one such good or service.

If the challengees want to get picky, let’s factor out likely inflation over the next few years. Let’s call the real hike in the minimum wage, not 39.3 percent but, say, 30 percent. Oh heck, let’s assume that inflation will be higher than it will likely be over the next three years. Let’s call the real hike in the minimum wage “only” 25 percent. So I amend slightly my challenge: Name some other goods or services for which a government-mandated price hike of 25 percent will not cause fewer units of those goods and services to be purchased.

Beer? Broccoli? Bulldozers? Coffee? Haircuts? Natural gas? Automobiles? Housing? Preventive health-care? Lawn-care service? Tickets to the movies? Smart phones? Subscriptions to the New York Times? Books by Paul Krugman? Professors of sociology? Assistant professors of economics? Any of these products work for you? If none of these work, surely you can name at least one other for which a 25-percent price hike will not cause fewer units of that product to be purchased. Or does low-skilled labor just happen to be the one good or service in the entire world for which a government-mandated 25-percent rise in the price that its buyers must pay for it will not diminish buyers’ willingness to buy it?

Seriously, name just one other good or service for which you believe that a government-mandated price-hike of 25 percent will not reduce the quantity demanded of that good or service.

Today's TV Segment (video)

This morning Zara and I discussed the Ukraine situation (it's market impact thus far), and the present jobs picture. Click here to continue...

Monday, March 3, 2014

Thank goodness for trade!!!!

As I was writing last night's commentary about why perhaps the market didn't deliver a sell-off befitting the crisis some were painting the Ukraine conflict to be, columnists for the Washington Post were submitting articles with titles and statements such as: "Obama’s weakness emboldens Putin", "Putin's tightening grip on the Ukraine" and "Vladimir Putin's Long Game".

Apparently history strongly suggests that it would take a lot more than a falling ruble and a tumbling Russian stock market to deter the likes of Vladimir Putin. That he would announce the end of the shortest of military operations along with words directed specifically to financial markets---moments before the ringing of the Russian stock market's opening bell---was not something many experts were predicting.

The great 19th Century economist Frederic Bastiat once said "if goods don't cross borders, troops will."

Could it be that, as Russian troops crossed the Ukraine's borders, Putin imagined goods (think the oil and natural gas export engine that is so critical to Russia's economy) not going and coming across Russia's---as perhaps the U.S. and other producers would step up production and step in to Russia's markets? If indeed this backing off isn't some strategic head-faking on Putin's part, he's more beholden to Russia's economy (as it is more beholding to cross-border trade) than many experts seem to have thought.

Thank goodness for international trade!!!!

The market's, thus far, yawning response to the Ukraine conflict...

According to economist and Reuters columnist Anatole Koletsky, "Russia’s annexation of Crimea is the most dangerous geopolitical event of the post-Cold War era". And according to Ian Brenner, President of the Eurasia Group, “We are witnessing the most seismic geopolitical event since 9/11". While these gentlemen's statements should not be taken in the least way lightly, clearly, the U.S. financial markets, to this point, have taken the Ukraine situation, well, lightly.

Yes, today, the Dow tumbled 154 points, the Nasdaq 31 and the S&P 14, but wouldn't you think that "the most seismic geopolitical event" would wreak a bit more havoc than a less than one percent sell-off of the major U.S. averages (not to suggest that the worst isn't yet to come)? Especially since everyone and his uncle, and his advisor, says the market is way overdue for at least a 10% correction. What better excuse to lock in 2013's amazing profits than the geopolitical event of an era?

So what gives? While, like I suggested, the market's reaction---like the conflict itself---may be far from over, I have a couple of theories as to why, thus far at least, U.S. stocks have greeted the situation rather yawningly:

One, the U.S. market's experience with political, geo or otherwise, events of late---think debt ceiling standoffs, budget battles, "fiscal cliffs" and Syria---has been that politicians will forever politic their way (kick the can) to a market-soothing resolution. It'll be interesting to see if indeed Putin is as careless when it comes to the economic consequences (at home) of his actions as some pundits claim. They'd have to be right if this is indeed to escalate to a level that would cause the market some serious consternation. For, when it comes to energy, for one example, Russia is no longer (potentially) the only game in town, and Putin knows it. And, suffice it to say, if the presently plummeting ruble is any indication, Russia's economy will have hell to pay if Putin can't, sooner than later, find a face-saving way out of this mess he's gotten himself into. Of course he had to know this going in, which is reason to be concerned.

And two, as I reported the other day, short interest on the S&P 500 is at a 52 week high. Meaning there's a fair amount of traders who were betting big on a market decline going into March. Now you'd think that the Ukraine situation, given its potential, would embolden short-sellers to step up their bets in a big way, exacerbating the downdraft, and, for the first time in a long time, actually make a little money betting against the market. But the thing is, life has generally been hell for the shorts for these past few years, and knowing that there's still plenty of sideline cash, perhaps looking for an entry point, they've got to be scared as, well, hell, that they'll get stung yet again at the first hint of resolution (the Dow, out of nowhere, sprung from down 250 to down 100 at one point this afternoon).

Not to say that the Ukraine conflict won't indeed prove to be the catalyst for the inevitable stock market correction to come---and, since its inevitable, I say the sooner the better---at this juncture it's far from certain.

Stay tuned... But don't react...

Sunday, March 2, 2014

Market Commentary (audio)

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

[audio m4a=""][/audio]

Opposing views make the market go round...

Here's the last half of a Seeking Alpha article titled "On The Way To Higher Stock Prices, Something Suddenly Happened", followed by my comment to the author: 
The global economy is going to disappoint in 2014. First in line is Asia. Look anywhere on that continent, and you will see economic slowdown looming in the air. China, the biggest economic hub in the region and the second-biggest in the global economy, is outright slowing down. In February, the manufacturing activity in the country dropped to a seven-month low. The HSBC Flash China Manufacturing Purchasing Managers' Index (PMI) registered at 48.3 in February compared to 49.5 in January. (Source: Markit, February 20, 2014.) Any PMI reading below 50 suggests contraction in the manufacturing sector.

Other major economic hubs in Asia, such as Japan and India, also show the region is in trouble.

The eurozone, the biggest economic hub in the global economy when looked at as a whole, continues to show signs of stress. Countries like Spain and Greece are in a deep economic slowdown, but we continue to see economic data that suggest Germany's economy, the biggest in the region, is also under stress. In February, manufacturing output in the German economy declined to a three-month low. (Source: Markit, February 20, 2014.)

And in South America, the economic slowdown is gaining strength. In February, in Brazil, manufacturing production growth in the country was the slowest since September of 2013. Manufacturing employment also declined in the Brazilian economy with businesses saying they are uncertain about the economic outlook. (Source: Markit, February 3, 2014.)

Tell me, how will all of these troubles in the global economy not impact the key stock indices?

From my experience, you don't make money when everyone is running to buy stocks. You buy when everyone is selling; you buy when no one wants to buy. In 2009, I told my readers to buy stocks. But as it stands now, this is not the time to buy- it's the time to sell.

My comment:
The thing is, if you were right, you'd be right already. It's not that shareholders collectively are unaware of the things that concern you, it's just that, at this juncture (at present levels of growth, at what they anticipate for the global economy going forward), they collectively disagree. And of course when there's lots of you out there (short interest just hit a 52 week high), odds aren't greatly in your favor. But don't sweat it, just stick with your dire prediction, for we all know one thing for certain: the market goes up, the market goes down. I promise, at some point in the future, you'll have the opportunity to say to your readers "see, I told you so earlier this year", or "see I told you so back in 2014", or "see I told you so WAY back in 2014". You'll eventually get there, I promise...

My point: We have a market because we have opposing views. There's a seller for every buyer, and vice versa. I suspect the author has been betting big on a bear market (or at least the elusive 10% correction), hence the hint of frustration in his writing. Better to think longer-term, diversify, rotate among sectors here and there (at the margin), and rebalance to an equity/fixed income target a couple times a year, which ensures that you'll "buy when no one wants to buy" (it'll happen, I promise). You just won't be betting the farm in the process.

Speaking of opposing views: The title of the very next Seeking Alpha article in line is
"S&P 500 - The Bull Market is Only One Year Old". You won't sense a hint of frustration in that one. 

I, by the way, see serious flaws in both arguments...