Post 1000

Every 100 posts or so, I stop to talk to my readers more personally, thank them for reading me, reflect on where we have been, and where we might be headed.

From my heart, I thank you for reading me.  You have many things to do with your time, and you deign to read me.  Thanks.  In some ways, my blog is an acquired taste.  I cover many areas thinly, because I have a broad range of interests in finance, business and economics.  I’m sure that the average reader has to endure (or ignore) 50% of what I write, and that’s fine.

Where have we been

I am reminded of Psalm 66, verse 12 in the era we have been through: Thou hast caused men to ride over our heads; we went through fire and through water: but thou broughtest us out into a wealthy place. [KJV]  The wealthy place is not yet here.  This has been a chaotic time.  We have seen markets destroyed, and come back to life in more limited ways.  There has been a bounce-back from panic, but options are reduced compared to where we were when I started writing this blog.  Areas of over-leverage have been revealed, even in seemingly safe areas.  There is nothing certain in such an environment.  All of the old certainties get questioned, even if they survive.

Where we are now

Though I am a value investor, and a quantitative investor, I don’t write much about my stock picks, mainly because you don’t get much praise for it, and you get a lot of complaints when you are wrong.  I wrote a piece at RealMoney that reflected my frustration in writing there about my investments.  It was called: Investing Is About the Whole Portfolio.  Too many people are looking for stock picks, when they should be looking to learn thought processes.  With a stock pick, you don’t know what to do as markets change.  Learning the thought processes is more complex, but it prepares you in how to understand the market as it changes, albeit imperfectly.

I spend a lot of time on macroeconomic and fixed income issues.  Why?  The bond market is bigger than the stock market, and has a big effect on the stock market.  I keep toying with an idea that would replace Modern Portfolio Theory, with something that would use contingent claims theory to develop a consistent cost of capital model for enterprises.  Essentially, it says that in ordinary circumstances, the more risk one takes in the capital structure of a company, the higher the return required to invest.  Estimate the implied volatility of the assets, and then apply that to the liabilities and equity.

Another way of saying it is that we can learn more from the shape of the yield curve and credit spreads than by looking at backward-looking estimates of asset class returns.  I continue to be amazed at those that use historical averages for asset allocation.  Start with the yield curve.  That will give you a good estimate on bond returns.  When credit spreads are high, typically it is better to be in corporate bonds rather than stocks, but it does imply that stocks might be cheap relative to Treasury bonds.

Most of the time the markets as a group tell the same story.  It gets interesting where one is out of line from the others.  My current example is banks exposed to commercial real estate versus REIT stocks and bonds, and CMBS.  The banks are not reflecting the future losses, but the REITs and CMBS are reflecting the losses.  Chalk it up to accounting rules for the banks.

Where are we going?

Demographics is destiny, to some degree.  Countries that shrink, or have large pension/healthcare promises will have a hard time of it.

Defaults are rising in both the corporate and consumer sectors.  Anyone who thinks the financials are out of the woods is wrong.  Even as new housing sales rise, there are many defaulting on their mortgages because they can’t afford their mortgages, or think that they are stuck with too much payment for too little house.  Add onto that continuing problems with commercial mortgage defaults and corporate defaults.

The Dollar is a problem in search of a solution.  None of the solutions are any good, so changes get delayed until the pain can’t be stood anymore.  This could be decades or years — but the Dollar is in decline.

The world has more laborers, the same amount of capital, and declining resources.  Relatively, the price of labor should go down, and the price of resources up.  The value of capital will fluctuate in-between.

Where is this blog headed?

We are going in my own idiosyncratic direction.  That means when crises hit, I will be there.  Aside from that, I will talk about the issues that affect the markets more generally.  There will be book reviews.  The next two are from Justin Fox, and James Grant.

I have more models that I will trot out.  For example, I have a short-term investment model that I am developing, and I hope it will come out in the next six months.  I might also roll out my alternative to Modern Portfolio Theory, if I work it out (I am dubious that I will get there).  I also have a review of the people on the FOMC coming out.  There’s more… I always have a list of articles that I want to get to, but time is short.

Time is short.  My apologies to all who have written to me, but I have not responded to.  I can’t answer all of my e-mails.  I do read all of them, and I appreciate that you write to me.  I don’t read comments on other sites that repulish my works, so I urge you to write to me here if you want to bring something to my attention.

One last bit of thanks

I could have stayed behind the pay wall at RealMoney, but I wanted to interact with a broader audience.  Amid some criticism, the investment blogosphere is a very intelligent place, and more attuned to the real situation than most of the mainstream news media.  Give the New York Times, the Wall Street Journal, Bloomberg, and Reuters their due, but the world needs investment bloggers — we point out truths that are missed by many.  I am not speaking for me, but for the many that I respect in blogging.

And as for readers, I thank the following selection of institutions where I have readers:

  • Alexander & Alexander
  • AllianceBernstein L.P. (US)
  • American International Group
  • Bank of America (GB)
  • Banque Paribas (US)
  • Barclays Capital (GB)
  • Bharti Broadband (IN)
  • Bridgewater Associates
  • Cambridge MAN Customers (GB)
  • Charles Schwab & Co. (US)
  • CIBC World Markets (CA)
  • Citadel Investment Group
  • Citicorp Global Information
  • Credit Suisse Group
  • Dean Witter Financial Services
  • Dow Jones-Telerate (US)
  • Dresdner Kleinwort Wasserstein
  • Federal Home Loan Mortgage
  • Federal Reserve Board (US)
  • Fidelity Investments (US)
  • Google (US)
  • H&R Block (US)
  • Harvard University (US)
  • Hewlett-Packard Company (US)
  • HSBC Bank plc, UK (GB)
  • Intel Corporation (US)
  • Jefferies & Company (US)
  • Johns Hopkins University
  • JPMorgan Chase & Co. (US)
  • Knight Capital Group (US)
  • MAN Financial (US)
  • Merrill Lynch and Company (US)
  • Michigan State Government (US)
  • Microsoft Corp (US)
  • Moody’s Investors Service (US)
  • Morgan Stanley Group (US)
  • Morningstar (US)
  • Mutual of Omaha Insurance
  • Nat West Bank Group (GB)
  • Nesbitt Burns (CA)
  • Nomura International plc
  • Northern Trust Company (US)
  • Repubblica e Cantone Ticino
  • Royal Bank of Canada (CA)
  • Salomon (US)
  • Societe Generale (FR)
  • Speakeasy (US)
  • Stanford University (US)
  • The St. Paul Travelers Companies
  • The Vanguard Group (US)
  • Thomson Financial Services (US)
  • UBS AG (US)
  • Union Bank of California (US)
  • United States Senate (US)
  • University of Chicago (US)
  • University of Virginia (US)
  • US Department of the Treasury
  • Watson Wyatt
  • Yale University (US)

What a group.  I am honored.  Again, thanks for reading me, whoever you are, and whoever you work for.

Final note

I am still looking for a lead institutional investor for my equity fund, which is available in both a long only, and market-neutral form.  (I’ve beaten the S&P 500 8 out of the last 9 years.)  If any of my readers have a lead on any institutional investor who might want to invest $1 million or more in my fund, please e-mail me, and I will send you my pitchbook.  Whoever gets me my first institutional investor gets my undying gratitude.  Help me if you can.