Monday, April 28, 2014
Bank of America's Royal Screw Up -- OR -- Pray for cousin Rich...
Generally I'll offer to forward him someone else's research on the company with my translation of what it all means. While I'll definitely tell him if, based on what I see, it looks attractive to me, I'm virtually always hoping he decides not to go there. Oh, and early in the conversation I make sure to tell him "if you go there, go with money you can afford to lose a good portion of."
Now, as you may know, I am a huge believer in the long-term holding of the stocks of the companies that will produce the goods and services to a desiring world of consumers for eons to come. That---emphasis on "long-term" and the "s" after stock---is a no-brainer. "Long-term" allows for the living through of the inevitable, yet unforeseeable, periodic declines in stock prices, "s", as in many stock"s", allows for the diversification of business risk (the exposure to the unique business decisions of one particular company).
I'm throwing this out there this morning because of a case in point that emerged over the weekend. Bank of America, frankly, royally screwed up its accounting and is having to renege on a share buyback program and an increase in its dividend. As I type BofA is down a whopping -6.2% in today's trading.
The thing is, the financial sector, by the metrics I track, is among the most attractive sectors in today's market (oh, and by the way, XLF, a financial sector etf we use---and which BofA is a component of---is only down -0.37% as I type). And of course BofA is no small player. One, cousin Rich for sure, might have concluded that BofA was among the more attractive players and, rather than diversifying away the concentrated (and potentially much larger) gains of a strong company in an attractive sector, decided to concentrate his financial sector exposure there. There's a term for that, it's called "greed". Which, by the way, is fine when we're talking about that little bit of money one is willing to risk losing a good deal of, but not fine when we're talking about the long-term money one plans to retire on.
Pray for cousin Rich...
P.s. BofA is by no means boo.com. And, therefore, I'm not suggesting, while anything's possible, that the shareholders who decide to hang on will see their position go to zero. I'm just thinking it's wiser, certainly safer, to buy the sector instead...
Sunday, April 27, 2014
Oops! I think I missed Earth Day...
Oops! I think I totally missed Earth Day this year. I for sure didn't acknowledge it here on the blog (I realized it when I stumbled on the below while searching for links for the last post). The good news is I---as I, and you, do on most days---was busy doing my part in preserving our planet, as I explained back in July of last year. Here's that entire essay:
I climbed out of bed at around 7 this morning (the office is closed today)---after checking futures from my smart phone two or three times from midnight on. Not that I wake up in the wee hours to check index futures mind you, it's just that, for some reason (it's not age damn it!), well, let's just say I must be drinking too much water---and I figure I may as well check the futures action while I'm at it.
Just read an article on global warming and got to thinking:
Last night my wife and I listened to our favorite music which is, by some marvel of technology, stored on my iPhone and piped all throughout the house --- I will never again buy a music CD or a machine that plays them. My overnight checking of futures involved a simple tapping on the screen of my phone --- I will never again fire up a computer just to see what's happening in the world. This morning I "wrote" a commentary on the bond market and distributed it to literally hundreds of people without using a dot of ink, a smear of graphite, a single piece of paper, an envelope or a postage stamp. I also performed a variety of functions related to client portfolios from the comfort of my home office. At one point my connection to our office system was off line, so I text (or texted?) our in-house tech guy Nick (on his day off), and he, from the comfort of his home, somehow logged on and had me up and running in minutes. My wife just walked in and, after I told her what I'm up to, said she remembers in the old days having to fire up the TV and wait for a weather report before deciding what to wear each day. Now she just goes to the weather app on her smart phone.
Trust me, I could ramble on all day with examples of how profit-seeking innovators are cleaning up the planet, but since Don Boudreaux does it so beautifully I'll simply link to his blog here (type "cleaned by capitalism" in the search bar).
The bottom line: I have had a very productive morning without touching a single energy-gulping machine that requires plugging in (save for the nifty coffee maker that so energy-efficiently makes one cup at a time, and the thirty minutes or so that I charged my smart phone [which will now go for hours without plugging back in]) or, therefore, consuming more than an immeasurably small quantity of natural resources or polluting the atmosphere. Not to mention that I was essentially at the office without having to get dressed up (in clothes that require dry cleaning), hop in my car and burn fossil fuel, tax the battery, or wear down its tires to get there.
As for the whole global warming phenomenon, I'm not sure what to think. Some "conservatives" would have us believe it's all a hoax. "Progressives" tell us we're on the verge of being torn to shreds by tornadoes and/or swept away by tidal waves. I've read accounts claiming that global temperatures have remained steady over the past 16 years and that air quality has actually improved over the past 40. I've also read where, over some Hawaiian mountain peak, heat trapping gasses have reached record proportions. Listen to a hardcore "environmentalist" and you'd think a recent heat wave in Alaska to be proof positive that hell is upon us. Since I don't own any of the instruments that would measure such things, and have an innate distrust for what I view as politically-inspired information, I don't give either camp much credence. What I do know to be indisputable, however, is that if Mother Earth, in sheer self-defense, is contemplating wiping herself clean of humanity, our best chance of turning the tide (so to speak) is to focus our attention on the business environment. Allow capitalists to breathe freely, as unrestrained as possible by self-serving politicians (who would pretend to protect the citizen through regulations, subsidies, etc., while in reality picking "winners" [think Solyndra and Tesla] and stifling their competition), and we'll continue to gain efficiencies while, albeit unwittingly, cleansing our atmosphere in the process. Should we, however, go the other direction (if we're not there already) and stifle
industry innovation, we'll indeed have hell to pay.
"Kids today simply can't appreciate how technology has improved our lives" says my wife. I add, "and 'environmentalists', for whatever bizarre reasons, simply can't appreciate how capitalism is far and away the cleanest energy on earth."
What if China had hoarded all that cheap labor?
As for the rest of you, know that any effort among policymakers to hoard natural gas---to, that is, keep American producers from exporting to the world market---is nothing more than their effort to please their political supporters at your expense. As I suggested in the following:
No More Exporting Acetone
Utterly Idiotic Protectionism
Lines Drawn on Maps are Entirely Insignificant
Friday, April 25, 2014
The debate is over!
Now---changing subjects---let's consider another great political debate that has been brewing large over the past 6 or so years (although it's a forever debate): Whether the "progressive" notion that government intervention, in an effort to boost consumption, is the way you rescue an economy from the throes of recession. Well, unlike with the ACA, progressives can't seem to produce even fuzzy numbers that support their economists' original projections/expectations in terms of what the record uptake in fiscal and monetary "stimulus" has produced over these years since the end of the last recession.
So then, can we free-market, limited government, advocates---we naysayers---declare an end to the great debate? Can we point to the numbers and say "see, growing the size of government, its debt and all, doesn't grow the economy. It, in fact, stifles it." Well, we can, but will it satisfy the Keynesian? Will it inspire a whole new consensus that says getting government out of the way and letting the market correct the imbalances (address, then dress, the economy's wounds), and allocate resources to their best use is the correct policy? Not hardly. Any more than the ACA's opponents are even close to ceding their position. In fact, the record slow recovery only emboldens the growers of government and their apologists. Here's Paul Krugman:
So next time someone goes on about how we had this huge stimulus that failed, you can tell him that the “huge” stimulus — in response to the worst financial crisis in three generations — peaked at a whopping 1.6 percent of GDP, and was effectively gone in a bit over two years.
Okay, so maybe we should have doubled the stimulus (the addition to the national debt) to 3.2 percent of GDP (actually, he's referring to potential GDP). Had we, and had that not worked either, do you suppose Krugman would have offered up a chart showing that government borrowed and spent a paltry 3.2%? I do. Double that---borrow a few more trillion---triple it even, and perhaps it would've "worked". Of course, had it not produced, or coincided with, the numbers its facilitators projected, Krugman would yet bemoan Washington's insufficient stimulus spending.
As Don Boudreaux analogized:
It’s as if a person who is bleeding to death because of a gunshot wound in his stomach is brought to a physician. The physician correctly realizes that the patient is losing massive amounts of blood and, also, correctly understands that such blood loss is dangerous to the patient’s health.
So the physician prescribes massive infusions of blood, period. If the patient doesn’t recover, the physician orders that the volume of blood-infusions be increased. If the patient dies, the physician will forever blame himself for not increasing the volume of blood-infusions even further.
If the patient does recover, the blood-infusions will be praised for saving the patient.
Market Commentary (audio)
Wednesday, April 23, 2014
What the heck? Part 2, Apple's numbers, and the missing piece to this puzzlingly slow expansion...
Well, I'll copy below the list of reasons (that the media's chosen few were blaming for that rough patch) I featured in "What the Heck?", and update my comments in italics:
Earnings season is going to be ugly. And it was, but, so far, only for that first week when merely half (I think I heard) of the S&P 500 companies having reported beat estimates. As of yesterday, 73% beat the estimates, which explains a lot, I suspect, about why the market has rebounded.
A correction is way overdue. Yep, still is.
Maybe it's the rolling over of the high flyers, like Tesla. Yep, that happened, but the broader market, while not cheap like a year ago, isn't flying high like it was in the late-90s---which is the comparison today's bears like to make.
How about biotechs? They've bounced, but I wouldn't touch em...
And what about China? Its economy is showing definite signs of weakness. Still is, but, like I suggested they might, they're doing things to try and stimulate growth (they just reduced bank reserve requirements). That sort of thing can calm markets near-term.
And what about tax time? Could it be that lots of folks are having to sell stocks to pay their taxes? Tax time's over... But I didn't buy that argument anyway...
How about stuff I wrote about yesterday? Change of sector leadership, etc.? Well, some of this year's losers were big gainers over the past few days. I still see change in leadership as a legitimate red flag for 2014---with the same caveats (economic backdrop, liquidity, bearishness, etc.) I listed last time.
So then, what the heck? There has to be a reason, right? People don't sell for no reason. Of course today we're talking buying. Here's what I said last time, except I'll have sellers and buyers switch places: That's right, they---the thousands upon thousands of them---buy for their own reasons. To know for sure, we'd have to ask each and every one of them. And when we're done, I'm guessing we'd want to turn around and ask the thousands upon thousands of sellers what inspired them to sell and accommodate all those buyers at those higher prices. I mean, what makes them feel bad about the future when so many others are scrambling to buy shares of stock?
I'll leave you with fair warning: The fact that virtually every dip since the beginning of this bull run has, in fairly short order, inspired a new round of buying that has pushed the major averages to new records doesn't mean the next one will produce the same results---at least not in short order.
P.s. Today Apple surprised the street with a beat on revenue and earnings. It also announced a $30 billion share buyback, an increase in its dividend, and a 7 for 1 stock split. Shares were up 8% in after-hours trading. Obviously investors loved, at least initially, what they heard. Here's what I heard: Apple's last round of share buybacks worked, in terms of boosting per share earnings (call it smoke and mirrors), although that wasn't the whole story: The revenue beat is legitimately good news, and, let's hope, speaks to an improving global economy---they did better than anyone anticipated in places like China and Japan (it for sure speaks to the still-strong appetite for Apple stuff). The new round of share buybacks, raised dividend, and stock split speaks to Apple's desire to boost its stock price in the short-term. For the long-run, if there's another huge growth spurt in its share price, it'll have to hit it out of the park with the yet to be officially announced new products that its CEO, Tim Cook, seems so excited about.
Lately, this (share buybacks and dividend increases) is a lot of what we've seen from corporate America. What I'm looking for is a commitment to capital investment going forward. Companies have the cash, they just---to this point---haven't had the confidence to expand. And, in my view, that's been the missing piece that largely explains this puzzlingly slow expansion. Stay tuned....
Sunday, April 20, 2014
The nature of selling...
Sure, the market offers up a few indicators that make some sense. For example, people tend to buy bonds and utility stocks for the yield (interest on the bonds and dividends on the stocks), which means that when interest rates rise, the prices of existing bonds and utility stocks---as investors move to more attractive yields, or less interest rate sensitive securities---are very likely going to fall. That's easy to understand, however, it's not so easy to time; you have to have a feel for interest rate trends. And there's where we enter another world of variables too numerous to fathom. The following snippet is from the Mises Institute article that inspired this blog post. Everything the following says about the economy can be said about the stock market as well:
Economic activity is based on human actions, with very little empirical regularity. It may be a sunny day, and you have skied for three days. This does not mean you will go skiing on the fourth day. Your actions simply cannot be modeled like the reactions of lab rats in a biology experiment. Unlike the reaction to noise from the zombies in the walking dead, humans do not react necessarily to the same events in the same way. Economists at the Fed must be scratching their heads as to why businesses did not react to lower interest rates as it did after the dot-com bubble. It’s the old adage of “fool me once, shame on you; fool me twice, shame on me.”
All that said, there is one aspect of the investing process that I believe our brains can fully grasp, and that can allow us to comfortably engage in the act of buying and holding stocks: That would be the understanding that, while we can't know what inspires every seller of a share of stock in a given moment, we can know that every seller is, at the moment he sells, approaching the market from a short-term perspective. Here's what I mean:
*Sarah sells because she's making a large purchase and needs the cash...
*Sam sells because his son's college tuition is due in a month...
*Shelley sells because she's retiring and wants to secure enough cash for the next two years worth of withdrawals...
*Steve sells because he's retiring and wants to pay off his house...
*Sally sells because the market's up and it's time to rebalance her portfolio back to its 60% target to stocks...
*Seymour sells simply because he fears the next bear market is about to begin...
Sellers sell because they, for whatever reasons, believe that it's the right moment to move some or all of their portfolio out of the stock market. The decision to sell---while the seller may expect to stay out of the market for a long time, or, in the case of fear of the market, believes that his immediate concerns spell long-term trouble---is always inspired by immediate concerns. The comfort I alluded to above is on behalf of the individual who understands that when sellers force the stock market lower, their reasoning reflects timing considerations that are generally not the concerns of the investor I profile in the second to last paragraph below.
Now, for the buyers: Of course buyers can approach the market from a short-term perspective as well, but not all of them. The ones looking for short-term gains are playing the market in the riskiest manner. The short-term buy is a guess that the price of the market, or a specific stock, or some grouping of stocks, is about to move up quickly, then peak. The
The remaining buyers approach the market from a long-term perspective:
*Bill buys with his 2 year-old daughter's college in mind...
*Bonnie buys with retirement in 20 years in mind...
*Bob buys with his 20+ years of retirement income in mind...
*Brenda buys because the market's down and it's to time to buy back to her 60% target to stocks...
Long-term buyers believe that it's prudent to participate in the potential growth of the companies that will produce goods and services for a world of humans who will forever strive to improve their material lives---and they're, therefore, unconcerned with the short-term timing of their initial investment. In essence, their long-term objectives---for the appropriate portion of their portfolios---and beliefs, allow for the unavoidable volatility that occurs as sellers and buyers/traders determine the moment by moment pricing of the market:
Over the past few months I've offered you my thoughts, and the findings of my research, related to the present state of this unusually, but not unprecedentedly, long bull market---and I'll of course continue in the same vein going forward. My objective for this particular commentary was to offer you a somewhat deeper look into what inspires the closing, and most important, paragraph of virtually every one of my market commentaries. You know, that parting disclaimer that says no one can time the market, and that you shouldn't try, and that sanity in investing comes from diversification and a long-term approach, and etcetera...
Saturday, April 19, 2014
Evidence, from an unlikely source, of the harm in raising the minimum wage...
Harsher penalties, including prison time, should be on the table more often when willful wrongdoing is proved. Thieves caught stealing thousands of dollars from someone’s home can go to jail; the same should be true for thieves caught stealing thousands of dollars from someone’s paycheck.
What Ms. Rampell's exposé points out is the reality that employers will indeed go to great---and, at times, extreme---lengths to save on labor costs. An aggressive campaign to stamp out wage theft in America may indeed accomplish its objective, but, make no mistake, it will not deter employers from doing what it takes to improve/protect their bottom lines. And, with regard to labor costs, there remains plenty of legal measures to do so: Such as cutting hours, mechanization, reduced benefits and perks, layoffs, and so on.
Ms. Rampell essentially (although unwittingly) proves that the President's proposed 39% hike in the federal minimum wage will, in no small measure, adversely impact many of the folks it intends (or pretends) to help.
Friday, April 18, 2014
Income inequality... it's profitable.
I believe we can save CUNY the $225k it's about to pay PK for two semesters of distinguished professoring, and much of what it allocates on behalf of the Income Study Center, by taking a pragmatic approach to the income inequality issue:
For starters, our medium of exchange---the dollar, here in the U.S.---is created by the Federal Reserve. And, yes, those who possess the power to print dollars try to---and, alas, do---influence their "distribution". Among other things, the Fed subscribes to this theory they call the "wealth effect". They believe that if, through the printing of money, the lowering of interest rates and bank reserve requirements, etc., they can create wealth for people, people will become more active agents on behalf of the economy.
And while you can argue that the Fed's manipulations of the past had boosted asset prices of, say, real estate in the mid 00's, and stocks today, the fact remains that a dollar is not, by itself, wealth---true wealth is earned, or created, by its holders, or its holders' benefactors, as opposed to something that gets distributed by some central body. The dollar itself is simply the currency we use to trade wealth amongst ourselves. We use it to buy goods and services produced by individuals who wish to by goods and services produced by other individuals. Its "distribution" is ultimately determined by the production of goods and services. And, therefore, those who produce the goods and services the rest of us hold most dear will of course earn a greater proportion of what those who measure such things manipulatively term "the national income".
So where would "inequality" legitimately enter the discussion? Well, certainly not to the extent that those who produce desirable goods and services receive more "income" than those who don't. That of course should be a great extent. The only place where "inequality", in an income context, would rightly be addressed is where government intrudes onto the marketplace to create a competitive advantage for its supporters. Could be via regulations favoring one producer over another (like, say, big banks over small banks), the subsidizing of a particular group (handing it your tax, or newly printed, dollars), or the tariffing the products of a favored group's foreign competition. These are situations where the playing field has been made unequal---where the politician takes from the consumer and gives to the politically-influential producer. The consumer gets hit hard, and thrice: First by the tax, then by the inflation (when we're talking money printing), and then by the purchasing of a more expensive and/or inferior product when compared to what would have been available in an unobstructed market.
(We could also address the inequality resulting from asset price inflation caused by easy-money Fed policy [i.e., those who own assets reap the benefits], however, as we observed in the mid 00's, such "wealth" is generally ephemeral and self-correcting.)
Beyond that, we could talk about inequality of opportunity. Here the focus would be on anything that obstructs the non-producer from becoming a producer---such as the minimum wage. The minimum wage has to be the most discriminatory---against disadvantaged folks---law on the books. A forced wage above what entry-level labor can profitably produce essentially kills the opportunity for those who lack experience and education. Employers are forced to hire only those individuals who bring the skills that would justify paying the mandatory minimum. Leaving the unskilled without the opportunity to learn, to grow, and to one day become producers who find themselves the subjects of some academic think tank that has completely lost sight of how the real world works.
So then (abandoning pragmatism for the moment), there is something that can be done to reduce inequality in America: Eliminate the politicians', and Fed officials', ability to help their friends and hinder their friends' foes. Of course that---the separation of commerce and state---won't be accomplished with the stroke of a legislator's pen. Alas, the fire chiefs here are truly the arsonists.
Yeah, we could get into the fact that an income inequality institute is about to pay class-warmonger Paul Krugman $25,000 per month (of course some will say that's a pittance for a bloke of his stature)---or that Krugman has accepted it---but that of course speaks for itself. And it speaks to why folks like Krugman, institutions like CUNY, and politicians keep the income inequality farce alive --- it's profitable...
P.s. There's some interesting reading in the links featured in the article I linked above with regard to what's expected of Krugman in return for this "remarkably generous" (in his own words) package...
Wednesday, April 16, 2014
Today's TV Segment (video)
Tuesday, April 15, 2014
Krugman should've loved this one...
The funny thing about Krugman choosing this particular subject to complain about is that he's the Keynesian: You know, the pay-a-man-just-to-dig-a-hole crowd. Here he is quoting from Keynes famous parable:
If the Treasury were to fill old bottles with banknotes, bury them at suitable depths in disused coalmines which are then filled up to the surface with town rubbish, and leave it to private enterprise on well-tried principles of laissez-faire to dig the notes up again (the right to do so being obtained, of course, by tendering for leases of the note-bearing territory), there need be no more unemployment and, with the help of the repercussions, the real income of the community, and its capital wealth also, would probably become a good deal greater than it actually is. It would, indeed, be more sensible to build houses and the like; but if there are political and practical difficulties in the way of this, the above would be better than nothing.
He was right then, and I’m right now — and if you find it strains your personal credulity, so what?
You'd think, therefore, that Krugman would be utterly thrilled with Spread Networks' project. They paid folks $300 million of their own (and their investors') money---as opposed to taxing the average citizen---to dig holes. And, again, if their project fails, the average citizen's good money won't chase after bad to clean up, and maintain in perpetuity, the mess---as it would a failed government project (although that wouldn't be Krugman's concern). Again, Krugman ought to love this one!
P.s. Before you challenge me on the cumulative hit to the small investor resulting from the front running (afforded by the three milliseconds) by some high frequency traders (not saying it's by any means right), know that spreads are substantially narrower (investors are paying far less per trade) than they were before the advent of high frequency trading.
Friday, April 11, 2014
What the heck? (and a white board lesson)
I know, that's not good enough. You want to know what those reasons are. Well, okay, here's what I'm hearing from the media's chosen "experts"---followed by my comments in italics:
Earnings season is going to be ugly. Yep, that's what "they" have predicted. But that---reduced earnings expectations---has pretty much been the story quarter after quarter for a very long time. And you'd think, with high hopes for a later-year economic rebound, traders would be more focused on the forward guidance than past earnings. So I'd say fear over earnings disappointments probably wasn't the main catalyst.
Prospects for Fed tightening. Nah, I don't think so. The Fed is killing itself to signal easy money (taper notwithstanding) for a long time going forward.
A correction is way overdue. No doubt, but what's the catalyst? Wasn't it way overdue when Russian troops lined up along the Ukrainian border? I mean they're still there. You'd think that would have pricked the bloated gut of an extended bull market by at least 10%.
Maybe it's the rolling over of the high flyers, like Tesla. Maybe, but Tesla, for example, has been ridiculously valued for a very long time, and they've got some exciting stuff going on.
How about the biotechs? Now there you go! When a pretty big swath of companies in a way overvalued industry begin to rollover, they could surely take the rest of the market---decent overall valuation or not---down a peg with them. While they've been too expensive for awhile, and I can't give you a catalyst for their fall, I think there's something to this one.
And what about China? Its economy is showing definite signs of weakness. Absolutely! The world's second largest economy slowing down could indeed spark fear that global growth may not support the earnings needed to support a continued bull market in 2014. That said, China's slowdown has been somewhat by design. China is in the process of attempting to reinvent its economy as one more focused on internal, as opposed to export, growth. I'm wondering however if they haven't gotten a little more bang for their efforts than they bargained for at this juncture. If that's the case, look for a new government stimulus program (maybe an aggressive devaluation of the Yuan) aimed at boosting the economic drivers they're supposed to be compromising. Also, if the world's worried about China, how is it that emerging markets stocks have actually rallied throughout most of this developed market selloff? That pours cold water all over the notion that everyone's freaking out and rushing into U.S. treasuries.
And what about tax time? Could it be that lots of folks are having to sell stocks to pay their taxes? Uh, yeah, but, no... I'm not buying that one. At least not to any great extent.
How about the stuff I wrote about yesterday? Change of sector leadership, etc.? Sure, the market is indeed exhibiting a few signs of topiness. But without your classic (to market tops) economic backdrop, I'm doubtful. Plus, bear markets tend not to begin amid huge liquidity, record low interest rates, and waning investor sentiment. Although it could happen...
So then, what the heck? There has to be a reason, right? People don't sell for no reason. That's right, they---the thousands upon thousands of them---sell for their own reasons. To know for sure, we'd have to ask each and every one of them. And when we're done, I'm guessing we'd want to turn around and ask the thousands upon thousands of buyers what inspired them jump in and accommodate all those sellers at those lower prices. I mean, what makes them feel good about the future when so many others are unloading their shares?
Bottom line folks, what we're experiencing is called the stock market. I think the fact that 2013 was so unusual in terms of volatility makes the norm seem abnormal. When in reality, it was 2013 that was abnormal. The last time we had a 2013---only one 5% pullback in the course of a calendar year---was 1961.
Oh, and by the way, the last week and a half, doesn't even qualify as a correction when we're talking the Dow or the S&P. We need a 10-20% decline to call it anything but a pullback. And, as much as you won't enjoy it---in the interest of a healthy market---let's hope we get the real thing soon!
Here's a white board presentation where I explain the very basics of how the market works:
And what about your guy?
Ah, if that were only true. For if it were, Republican voters would be every bit as condemning of, well, Republican politicians as they are of Democrats when it comes to the present lack of job growth.
Here's a snippet from Jonah Goldberg's article on the subject (HT Don Boudreaux):
For a century or more, progressives have believed in public-private partnerships, industrial policy, "Swopism," corporatism and other forms of picking winners and losers. The winners always promise to deliver the "jobs of tomorrow" in return for help from government today. (Solyndra is running behind on keeping its end of the deal.)
Many Republicans are rhetorically against this sort of thing, but in practice, they're for it (even Ronald Reagan supported trade protections for Harley-Davidson). This is especially true at the state level, where GOP governors are willing to do anything to seduce businesses their way. Texas is a good example. Gov. Rick Perry has been heroic in keeping taxes and regulatory burdens low. But he's also helped his friends — a lot. Few on the right in Texas care, because Texas has been doing so much better than the rest of the country.
GOP politicians can't have it both ways anymore. An economic system that simply doles out favors to established stakeholders becomes less dynamic and makes job growth less likely (most jobs are created by new businesses).
Side note: Speaking of politics and job growth, here's Democrat Jamie Dimon, in his latest letter to shareholders, emphasizing one of the benefits to his firm of the new banking regulations:
We still worry about the cumulative effects of all the changes, which cannot be known. It is our nature to worry more about the downside than to guess about the upside; however, some of these changes actually might be good for JP Morgan Chase (and other banks). It could be that these changes make it harder for new competitors.
Yep, he actually said it!
He then goes on to suggest that the greater restrictions could give JPM's non-US competition an edge. Well, not to condone our policy makers' accidental gift to Chinese banks, but, since competition---be it domestic or international---means greater choice, greater opportunity, better terms for savers and borrowers, more jobs and economic growth, so be it...
As for Republican side notes: There are plenty: We can talk about Mitch McConnell, an outspoken Solyndra critic who has lobbied heavily for government aid to clean energy firms in his own state, and he's not the only one. We can talk about Eric Cantor, and a number of others, who support one of the most egregious examples of corporate welfare ever devised, the Export-Import Bank. In case you're unaware, the Ex-Im Bank exists for the purpose of handing taxpayer money (resources) to companies like Boeing, through insurance, loan guarantees, and direct loans to foreign entities for the sole purpose of purchasing the favored institutions' goods. Talk about risky lending! Talk about picking winners and losers! Talk about incentivizing all manner of inefficiency! Talk about buying political favor! Talk about utterly screwing the taxpayer! We can talk about President George W. Bush and the U.S. Steel Industry (his tariffs on foreign steel). We can talk all day...
A couple more Democrat side notes: In 2008, Senator Barak Obama rightly called the Ex-Im Bank “little more than a fund for corporate welfare.” A mere four years later, President Barak Obama, after signing a bill extending the life of the bank, said “We’re helping thousands of businesses sell more of their products and services overseas". I suppose, I'm sure in fact, that if, say, President Mitt Romney had signed such a bill, and made such a statement, Senator Barak Obama would have said to the President, words to the effect, "You're stealing our taxpayers' money and handing it to your political supporters by financing their overseas customers." We can talk about President Barak Obama and the U.S. Steelworkers Union (his tariffs of Chinese tires). We can go on and on....
Here's the problem:
Subsidies (they come in myriad forms) are essentially the taxpayer unwittingly fattening the margins of politically powerful institutions, allowing them to stay in business while pricing their competition out of the market, and their competitors' employees out of their jobs.
A tariff is an especially sneaky form of subsidy, in that the politician, rather than directly taxing the consumer and directly subsidizing the favored industry, accomplishes the same by forcing the consumer to pay more for certain items than the global market demands. Which of course means less discretionary income that would have otherwise supported local enterprises (and the folks who work[ed] for them), less saving and investment, and less business for the U.S. exporters who sell to the foreign markets we buy from---markets that, to make matters even worse, are likely to retaliate by slapping tariffs on American-made products.
The net effect of rampant bipartisan cronyism is to, albeit subtly, hamstring the economy---thus limiting the opportunities for (stealing from) the average citizen and, as Goldberg puts it, bolstering the argument for redistribution:
Politically, the longer we're in a "new normal" of lousy growth, the more the focus of politics turns to wealth redistribution. That's bad for the country and just awful politics for Republicans. In that environment, being the party of less — less entitlement spending, less redistribution — is a losing proposition.
So then, Republicans, if you are truly for free markets, and if you'd like to see your party, not to mention your country, succeed going forward, you need to turn your focus onto the destructive acts of cronyism practiced by your very own representatives, as well as the opposition...
Market Commentary (audio)
This Week's TV Segment (video)
Thursday, April 10, 2014
A little foray into cycles past...
Not to suggest that they're wrong---again, some of the above is my own observation---but of course we know it's never that easy.
Here's the general logic (and basic history) around economic and market cycles. And, in italics, my comparisons to the present. Keep in mind, each new cycle is always a little (or a lot) different than previous ones.
Early stage recoveries are generally characterized by falling interest rates, low inflation, weak commodities prices, rising bond prices (goes with falling interest rates)---and rising stock prices in anticipation of economic and earnings growth. That perfectly describes the early days of the present bull market.
As we get further away from the previous trough, bonds begin to exhibit more volatility, stocks moderate, and stock market corrections gain in frequency. As the bull market continues, fewer industry groups advance while industrial production picks up and the business recovery accelerates.
2013 indeed saw bond prices declining, however, stocks had an epic year. And we've yet to experience what I'd call a "correction"---these small 2-5% pullbacks should not be considered corrections. So far this year, fewer industry groups are indeed advancing (as I suggested above) and industrial production has picked up a bit of late. However, I don't know that I'd just yet hang my hat on an overall accelerating business recovery.
As we get deep into recovery, commodities prices begin to rise. The Fed begins fretting over inflation---as opposed to trying to stimulate business and job growth. Interest rates begin to rise, and, therefore, bonds begin to tank as the Fed begins the tightening process. The stock market shows signs of weakness and becomes more selective (the advance, in terms of number of gainers, narrows further)---despite the fact that business conditions tend to show continued improvement during this topping process.
In terms of commodities prices, it's been a mixed picture. And, clearly, the Fed has yet to fret over inflation. They've been very careful to signal that they'll remain accommodative (keeping short-term interest rates very low) well into the foreseeable future. Stimulating business and job growth remain their stated priorities. And while market leadership has narrowed, having staged no legitimate correction in quite some time, it's too soon to commit to the notion that it's showing discernible signs of weakness. And, keep in mind, your typical bull market is riddled, off and on, by 10-20% corrections---I, for one, would welcome a "discernible sign of weakness" (by way of a real correction) right about now.
As we get really deep into recovery, capacity utilization (the ability of companies to meet demand) gets pushed to its limit. Commodities prices are rising as capacity is stretched, demand is growing faster than supply, and inflation becomes a serious threat---which sends the Fed scrambling to contain it. Interest rates rise sharply and the high cost of money begins doing a number on the economy. Bonds of course are in a full-fledged bear market at this point. And while earnings may be holding up, stock prices, particularly those of the bull-market's biggest gainers, wane.
Well, clearly, economically speaking, we ain't there yet. In fact, we continue to see a fair amount of slack in the economy. Slack is the word that describes to what extent economic activity can accelerate without creating high levels of inflation. Capacity utilization, overall, has remained between 78 and 79 percent since the beginning of 2013 (78.1% early 2013, 78.8% currently). A push above 80 should get the Fed's attention. And the Fed isn't seeing employment costs increasing at anywhere near a threatening pace. Again, they remain ultimately concerned with the present lack of job growth---as opposed to labor costs pushing inflation higher anytime soon.
The beginning of the end: Consumers begin spending less on big ticket items, real estate prices fall against rising interest rates and commodities prices peak. Many investors (particularly retail investors), influenced by their perception---and the pleas of perma-bulls---that the economy remains healthy, buy dips that, alas, don't undip.
There's little out there that would signal we're approaching this stage just yet.
Now, all that said, never forget that it's the stock market's job to anticipate. Could it be that this year's rotation of leadership and narrowing (in terms of advancing sectors) is the market's way of telling us that an acceleration of business, quickly leading to stretched capacity, full employment, rising inflation, spiking interest rates, a restrictive Fed, etc. (all those indicators that suggest the economy is peaking), is close at hand? Could be. But that would be a lot going on over what would have to be a very short period of time. Or, is it telling us that this time is different: that, in the face of palpable uncertainty spawned by policymakers, the economy will, in effect, hurdle the phase where business accelerates, capacity wanes and inflation takes hold, and move right into the next down cycle? Could be. But, well, I'll just say "could be". Or, is it signaling another 2011: when the bull market took a pause---as utilities and staples (those defensive sectors) gained and offered hope to those betting on a bear market---only to resume its ascent into 2014? Time will tell...
Lastly, and most importantly, I want to be very careful here. While this little foray into cycles past may calm your nerves a bit, it in no way should be viewed as assurance that the next bear market isn't indeed lurking around the next corner. It's just me broadening out one side of the current market narrative. For every assertion I made above, there is a plethora of datapoints that could no doubt throw cold water all over this notion that the economy has more work to do before the market begins truly topping out (in fact, I just looked at one [the spread between the 10 yr treasury and the 10 yr German bund] that, according to historical relationships, could be signaling that the next doozy of a bear market is coming to visit in the not too distant future). It's a big world out there and, as I've stressed here time and time again, the factors that influence the global economy are uncountable and, therefore, impossible to gauge (please read again this short article). The picture I painted above is nothing more than a look in the rearview mirror. The future, I promise you, will---to a large or small degree---be different. Which is why I can't stress enough that investing sanity, in my view, can only come to those who understand that the stock market in the near-term is forever a precarious place---and who, therefore, think only long-term when it comes to the equity portion of their portfolio.
Market Commentary (audio)
Monday, April 7, 2014
Your best shot at long-term investment success...
"As a discounting mechanism the market is constantly digesting the flow of information and deciding on the likelihood of its impact on business. Investors, portfolio managers, analysts, brokers, financial consultants, traders, strategists, and financial planners are all involved in the continuous guessing game that shapes the daily, weekly, and monthly movements of both the equity and fixed-income markets. Their opinions, judgements, aspirations, fears, and greed are reflected in the pricing of securities. The market trend is the sum total of all economic, fundamental, and quantitative research and thought. The trend is the melting pot and the meeting of the minds in pursuit of profits. There are the positioners and the traders, the speculators and the investors, the informed and the gamblers." Michael Gayed
Mr. Gayed, in his book Intermarket Analysis and Investing, names the many actors who, in determining at what price they're willing to buy or sell a share of stock, determine the price of a share of stock.
Imagine the myriad methodologies---the work, the measuring, the calculating, the thinking, the processing, the guessing involved in determining the price of a share of stock. Then consider the fact that after all available information is processed by all those players, there remains, for every transaction, one who believes it's a good time to buy, and one who believes it's time to sell.
The final trades of last Friday priced the stocks that make up the Dow Jones Industrial Average some 150 points below where they placed that index at the beginning of the day. I suspect that some of the end of day buyers figured---given the lack of an obvious catalyst for Friday's profit-taking---that heads would cool over the weekend and Monday would be met by opportunists looking to exploit Friday's decline. They were wrong. Monday saw more sellers offering up their shares to a market void of eager buyers. Thus, the stocks that comprise the Dow traded lower to the tune of 166 points. I.e., the patient buyers who waited just a few more hours were rewarded with noticeably lower prices by the trading day's end. By the end of the day tomorrow, today's buyers will either pat themselves on the back for their patience if the market rallies, or they'll kick themselves for their lack thereof if the selloff continues.
To the extent that Friday's, and today's, buyers happen to be those long-term holdouts who've been painfully waiting for an opportunity to join the market at a level somewhere below the major indices' all-time highs is anybody's guess.
And while you can spend from now till bedtime tonight reading any number of online financial news sources, listening to Bloomberg radio's replays of the day, or watching videos on CNBC.com to glean for yourself the whys of the past two days of selling, at the end of this very long day, you'll have, at best, formulated an assumption based more on your own personal experiences, fears, desires and quirks than on any revelations offered up by the "experts" who are simply offering up the data that supports their own experiences, fears, desires, and quirks---and, not to mention, the current positioning of the portfolios they manage. I.e., the fully-invested bulls will present the data that supports their positive bias, while the all-cash, or short, bears will show the stuff that proves they know what they're talking about.
Plus, to confuse matters even more, looking back to Gayed's list of actors, each, by definition, has distinct objectives, and/or pressures, that will profoundly impact his/her view of the world.
Investors look to allocate their money among reasonably valued stocks that they believe have strong long-term growth prospects. Their personal objectives: retirement, college education for their children, etc., is their motivation. Those who prefer not to go it alone work with trusted financial/investment advisors.
Portfolio managers look to outperform some popular benchmark year in and year out. Keeping their jobs is their primary motivation. When the market turns against their theses, they are pressured to figure things out (make bigger guesses) in a hurry.
Analysts look to analyze companies, the macro and the micro of the world, and predict where things go from here. Add here the final two sentences found in my description of portfolio managers.
Brokers look to buy and sell securities on behalf of their clients. Hopefully with their clients' best interests at heart. Add here the final sentence, and, in some instances, alas, the final two found in my description of portfolio managers.
Financial consultants, when it comes to the market, look to make sound, pertinent recommendations to their clients. This one sentence suffices for the good ones. For the not good ones, add the final two sentences in my description of portfolio managers.
Traders look to make fast money: Professionals, on behalf of their employers/clients. Individuals, on behalf of their own portfolios. They generally aren't concerned with long-term fundamentals. Being quick, sometimes very quick (think high frequency), they bring important volume to the market (I distinguish volume [for lack of a better term] from liquidity to circumvent a potential debate with any readers who may be high frequency haters).
Strategists, hmm... I guess any of the above could call themselves strategists.
Financial planners. Add here the description of financial consultants.
My point? To barely (and I mean "barely" in the minutest sense) scratch the surface of what goes into the pricing of a share of stock. And, as always, to stress that your best shot at long-term investment success is to be, well, a long-term investor...
Market Commentary (audio)
Saturday, April 5, 2014
A new book idea for Michael Lewis...
I have an idea for Lewis's next book. It would be along the very same lines, in that he'd be exposing yet another front running scheme. And this one has far greater consequences for society at large than the phenomenon he describes in Flash Boys.
It goes like this: The execs of Large Corporation A receive a tip from the office of a senator/congressman/president (whose campaign they helped fund) that a new regulation is about to be proposed that would directly impact their bottom line. They, in essence, can see it coming in time to get in front of it and tweak it to their benefit. They may sweeten the pot a bit to get their way, and that they will if it means gaining an edge.
While, with just a little research, Lewis can write a book full of examples of how monied interests bend legislation in their favor, I'll here offer up just the first three that come to mind:
Senator Richard Durbin saved his supporter, Wal-Mart, billions by getting the Durbin Amendment tacked onto recent financial reform regulation. He heralded the halving of the per swipe fee retailers pay for debit card transactions as a win for the consumer. Suggesting that the likes of Wal-Mart would surely pass those savings onto their customers. Well, let's hope they did (of course we know better), because as I featured in Leaving Liberty?, excerpt below, the banks surely wouldn't sit still while Washington effectively transferred billions of their revenue to Wal-Mart:
The question now is, how will shareholders, employees and customers share the pain inflicted by the Durbin Amendment? Lower deposit rates, higher loan fees, maybe? I wonder if the amendment wont ultimately cost the customer more than $5 a month.
Well, guess what! Just three weeks later, a New York Times headline reads, Banks Quietly Ramping Up Costs to Consumers (Dash 2012). See!
It was discovered that 70 lines of a recent 81 line bill regulating financial derivatives were written by folks at Citigroup. No kidding! Here's Forbes on the subject:
According to the New York Times, lobbyists from Citigroup played a major role in the bills creation: Citigroups recommendations were reflected in more than 70 lines of the House committees 85-line bill, Eric Lipton and Ben Protess write. Two crucial paragraphs, prepared by Citigroup in conjunction with other Wall Street banks, were copied nearly word for word. (Lawmakers changed two words to make them plural.)
Data: MapLight analysis of campaign contributions to members of the House of Representatives from interest groups supporting and opposing H.R. 992 from January 1, 2011December 31, 2012. Data source: OpenSecrets.org
Citigroup has given $503,150 to current members of the House of Representatives. Representative Jim Himes, D-Conn., has received $66,450 from Citigroup, more than any other member of the House of Representatives. Himes is a co-sponsor of the bill. Co-sponsors of the bill have received, on average, 16.8 times more money from Citigroup than have members of the House who have not signed on as co-sponsors.Speaker John Boehner, R-Ohio, has received $917,500 from interests supporting the bill, more than any other member of the House of Representatives.
Representative Randy Hultgren, R-Ill., the primary sponsor of the bill, has received $136,500 from the Securities and Investment industry, more than from any other industry.
In 2009, the American Steelworkers Union succeeded in convincing the President that America should tariff Chinese tires. Here's a snippet from , and white board lesson, on the subject:
Now I'll add the manipulation: The United Steelworkers Union cries foul (actually happened in '09 by the way), buys favor with a U.S. President (Obama) - who points to the trade deficit with the surely-cheating China - and Voilà! we tariff Tianjin Tires. And, alleluia, we save American (tire manufacturing) jobs. And, alas, we destroy American (tech industry, etc.) jobs.
If Lewis runs with this one, he'll surely have yet another blockbuster on his hands...
Friday, April 4, 2014
The expense of the many... (video)
Harold Meyerson complains that capitalism enriches the few rather than the many. Peyton Manning, through years of practice and study, has enhanced, and capitalized on, bigtime, his unique abilities. Meyerson complains about the large share of "Americans' income" going to the wealthiest 1 percent: "capitalism itself enriches the few at the expense of the many", he writes.
For starters, I didn't realize that the income the Bronco's organization distributes to Peyton Manning, or, for that matter, the income Apple distributes to CEO Tim Cook somehow belongs to me. I mean, I am an American, and Meyerson did say "Americans' income". Oh, wait a sec, he's right! While I can't go right to an example of where Manning's enrichment comes at my expense, I certainly can when it comes to Cook. Over the past few years, I have expended quite a bit on Apple. That is, on two or three Macbooks, a few iPads, multiple iPhones (considering kids, and upgrades), and who knows how much on iTunes and the App Store.
And I don't suspect "the many" Bronco's fans are the least bit concerned with what their team pays its star quarterback.
Of course I'm messing with semantics. When Meyerson refers to "expense" he's referring to loss. In a Meyerson world, those who produce---whether (I presume) it be touchdown passes or iPhone 5s---should do so on behalf of the many who don't happen to be the many who buy their stuff. Meaning, frankly, that---in a world where not every soul can afford a ticket to a game, or unlimited texting---the 1 percenters have no business hoarding as much of "America's income" as they do. Therefore, he, and the biased economists who confirm his bias, would look to big government to redistribute those big incomes.
The question, then, a freedom-biased individual must ask is, would "America's income" be what it is if it were more evenly, and coercively, distributed among those who produce the goods and services folks happily buy, and those who don't? Would we be a more prosperous society? I, like Margaret Thatcher (see below), would say no. I don't believe---as Milton Friedman pointed out (see below)---that any form of collectivism, to this point, has remotely delivered on its utopian promise. Quite the opposite in fact...
Market Commentary (audio)
Thursday, April 3, 2014
Is a correction close at hand?
I also track a number of other indicators, one being the American Association of Individual Investors' (AAII) sentiment survey. And while I'll take the can't-time-the-market mantra to my grave, if I were a market-timer, overall sentiment would be near the top of my list of key actionable indicators.
On January 15th of this year I offered the good and the bad on the "current state of equity markets". One of the bad happened to be "very high bullishness". I got that from the 55% bullish reading (that's a very high reading) from the AAII survey. Then, just a few days later, I reported that bullishness had declined to 39%---and reported that as "good news for the stock market". So, can we blame high optimism going into January as the reason for the ensuing sell-off, and credit the waning attitudes as January unfolded with February's snap-back rally? I wish I knew...
This afternoon I listened to thoughtful analyst Ron Insana predict that a 10-20% correction could be close at hand. Of course I entirely agree: Meaning, for any one, or more, of uncountable reasons, a 10-20% correction could always be close at hand. The thing is, as I listened to Ron making his case, I was thinking about the sentiment numbers, which I had just grabbed yesterday (they were updated at AAII on 3/26), showing bullish sentiment had dropped from 41.3% all the way down to 31.2% over the course of two weeks. I guess I can say I'm more doubtful---in terms of the bottom end of his range (20%)---of a major decline occurring in the very near future than I would be if sentiment were on the rise.
If you're new to this blog, and not a student of markets, you might be wondering why high bullishness would be a negative indicator. You'd think that bullishness means folks are buying stocks, and if folks are buying stocks the stock market is going up. But the thing is, high bullishness readings actually suggest that folks have already bought, thus leaving fewer incremental buyers out there to keep the market moving higher. A little bad news in that environment can go a long way in terms of market declines.
All that said, could we see that way overdue correction (which [overdue] is Ron's main point) occur amid waning optimism? Absolutely. Like I suggested, uncountable are the factors that can move markets. It's just that, as I suggested the other day, if the inevitable big one (20%+) is to occur anytime soon, it will not have been preceded by exuberance (or euphoria). A correction, on the shallower end of Ron's range, would be, historically speaking, more likely in the cards given today's sentiment reading.
Of course things (uncountable things) can change in a hurry. Case in point: I just went back to the AAII survey and found that it's been updated since yesterday afternoon. Bullishness, over the past week, has moved up to 35%. Which is still below its 39% long-term average, but a bearish move up (in terms of what it implies) nonetheless...
Good thing you don't concern yourself with such minutia. Good thing 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…