Trying a new format here, I think readers will like it better.  Most things are better after additional effort.  Think of this as a news links by subject post.


  • If you look in the back, it seems that there were 58 respondents. From page 13: Methodology & Panel Selection Invi… Feb 06, 2012
  • Will the great interest rate gamble pay off? People want to believe that you can get something for nothing; ain’t true. Feb 05, 2012
  • Central Planning at the Federal Reserve Fed: we can create prosperity by holding interest rates down, right? $$ #wishes Feb 05, 2012
  • Labor Force Participation Rate: 28-year Low Everyone still happy about the lower unemployment rate? $$ Feb 05, 2012
  • Bill Gross: Free Money Ain’t Really Free It will lead to stagflation, IMO, depending on what fiscal policy does $$ Feb 05, 2012
  • Life & Death Proposition Where does credit go when it dies? Back where it came. It delevers, slows & inhibits ec growth Feb 02, 2012
  • US unemployment “progress” If you add back the discoraged workers, all of the improvement in U-3 goes away $$ Feb 02, 2012
  • The Perniciousness of ZIRP Gonzalo Lira on how ZIRP loses effectiveness b/c people think it’ll b there a long time $$ Feb 01, 2012
  • Why Neoclassical Economics Doesn’t Work In The Age Of Deleveraging Steve Keen explains y Krugman & others r wrong $$ Feb 01, 2012
  • Warning: Goat Rodeo Hussman makes his case that equities are overvalued and could pull back 25% $$ Feb 01, 2012
  • Who Owns World’s Financial Assets? & Why R US Households So Fascinated W/Stocks? American Exceptionalism in investing Feb 01, 2012
  • As an aside, that is one reason why the US net foreign debt hasn’t spiraled up. We own equities abroad & they own our debt. $$ declines + Feb 01, 2012
  • $$ declines reduce the value of our debts, but not the value of r foreign holdings. I think the US will come out of this crisis rel well $$ Feb 01, 2012



  • Home Prices Tumble No surprise here with all of the dark supply; houses come onto mkt when ppl can bear loss $$ Feb 01, 2012
  • Too lazy to be knowns I know many who understood what would happen if home RE prices fell, but none who got the size $$ Feb 01, 2012
  • Freddie Mac’s “inverse floater” allowed more loan origination Other side to the Propublica story Feb 01, 2012
  • I’m no fan of the GSEs; I think they should be abolished, but the GSEs have always made a variety of bets on prepayment over time. $$ Feb 01, 2012



  • On China, Henry Kissinger and Fareed Zakaria see Domestic Tension and Risk of Geopolitical Conflict Ferguson is wrong. Feb 05, 2012
  • Tightening lending standards vary materially across the Eurozone Conditions tight in Italy & France, but not Germany $$ Feb 02, 2012
  • Japan Auto Sales Notch Record Jump Another small bright spot. Of course, bouncing back from a low level $$ Feb 02, 2012
  • Socialist Hollande, Who Wants Full European Treaty Renegotiation, Increases Lead Over Sarkozy Eurozone Wild Card $$ Feb 01, 2012
  • Hong Kong Homes Face 25% Drop as Loans Fall in Year of Dragon And this is with wealthy mainlanders fleeing China. $$ Feb 01, 2012



  • RBC Takes On High Frequency Predators Where there is offense, there will b defense; nothing goes unanswered in the mkts Feb 05, 2012
  • Global Strategists Abandoning Bearish Views Makes me think we r getting close to a turning point. Feb 02, 2012
  • Dividend stocks: Buyer beware Makes the valid & missed point: high qual div paying stocks r stocks & can lose $$ #yeah Feb 01, 2012



  • 6 High-Yield Canaries-in-the-Coalmine 6 reasons y high yield is overheated & Feb 02, 2012
  • QOTD: Regulators Watching Aggressive Yield Chasing FINRA warns of undue risk in income seeking. Advisors take note $$ Feb 02, 2012
  • Contra: The Safest 7% Yield in America Poor analysis does not take into account the highish leverage on mtge repo $$ Feb 02, 2012
  • Shipping Loans Go Bad for European Banks Highly glutted area w/many dead firms walking; how far down will the losses go Feb 02, 2012




  • Group lists top stock investments by members of Congress Top 50 hldgs -> in top 100 cos by mkt cap. Hard2manipulate $$ Feb 05, 2012
  • Obama Re-Election Odds Versus the Stock Market Example of 2 variables that r correlated b/c they anticipate GDP changes Feb 05, 2012
  • RE: @abnormalreturns Gold is mostly political philosophy. How much control do you want the government to have over mo… Feb 03, 2012
  • Getting back to the gold standard Gingrich & Ron Paul have said they would like to appoint James Grant as Fed Chairman Feb 02, 2012



  • Carlyle’s proposed IPO disaster So there’s no board. Most boards don’t do much. Mgmt will have no board 2 shield them Feb 05, 2012
  • For These Fans, a Day With Buffett Offers Wealth of Photo Opportunities I think Buffett is enjoying life more now. Feb 05, 2012
  • Buffett Railroad Boosts Capital Plan to $3.9B Buffett changes; organic investment in capital-intensive biz $$ #olddog Feb 01, 2012
  • Pep Boys Seen Gaining 27% as Cheapest Value Lures Bids Could a bidding war start? Company is undermanaged $$ Feb 01, 2012
  • Jefferies Allows Bonus Recipients to Swap Stock 4 Cash With 25% Discount Fair way2 let employees disconnect from $JEF Feb 01, 2012


Financial Services

  • I’ve just started “Acts of God and Man,” by Michael Powers. In the intro, he goes through the various meanings of th… Feb 05, 2012
  • When evaluating Investment Funds, use Dollar-weighted Returns This is a neglcted concept that is enjoying a rebirth $$ Feb 02, 2012
  • After a Delay, MF Global’s Missing Money Is Traced Investigation moves to how to recover the $$ and who is at fault. Feb 01, 2012
  • FINRA Alert: Do you use complex products? What additional work do you do 2 assure that they are being used properly? $$ Feb 01, 2012
  • Banks Need Higher Interest Rates to Start Making Money Flat front end of yield curve squishes bank interest margins $$ Feb 01, 2012
  • 401(k) Plans Step Into the Sunshine But as with DB plans, as costs rise, companies will offer them less. $$ Jan 31, 2012


Value Investing

  • The SEC’s “90% Convergence” Fantasy US GAAP has many flaws, but we know them. IFRS will introduce abusable flexibility Feb 02, 2012
  • But on the bright side, value investors may do relatively better as financials become less trustworthy; the accruals anomaly will sing $$ Feb 02, 2012
  • Need to consider (Cost of goods sold)/user $$ RT @ErikSchatzker: Facebook gets $4.39/yr of revenue per user. ESPN gets $4.69/mo. Feb 02, 2012
  • Berkowitz: Fund Plunge ‘Makes Little Sense’ BB, appoint someone in your group 2 seek out opinions contrary 2 yours $$ Feb 01, 2012
  • @ADayforRabbit I have argued in the past that BB is not paying attention to the delevering, which is a real headwind for the banks. $$ Feb 02, 2012
  • New Fund Hopes to Prove Outspoken Analyst’s Thesis I bet @rcwhalen does well like my friends @ Hovde or M3 Partners $$ Feb 01, 2012


Hedge Funds

  • Are Hedge Funds Worthwhile Investments? Yet another “Hedge Fund Mirage” citation; the book is having a lot of influence Feb 02, 2012
  • Are the hedge fund and private equity boys pulling a fast one? Beginning 2c the args of “Hedge Fund Mirage” everywhere Feb 02, 2012
  • Did Hedge Funds Trigger the Financial Crisis? Secured asset classes can be overlevered; when they collapse, big mess $$ Feb 01, 2012



  • Do the Job You’re Meant to Do LIfe is too short to work with people you don’t respect, or tasks unfit for you $$ Feb 02, 2012
  • Millionaire adopts girlfriend as daughter Asset shelter. Does incest rely on consanguinity or on legal relationship? Feb 02, 2012
  • Charles Murray Reiterates Willpower Lack of self-control can destroy relationships, jobs, firms & lives $$ Feb 02, 2012
  • I ran into @twitalyzer today. Lots of interesting analytics for tweeting. Here are some for me: & Feb 01, 2012
  • At the first blogger summit at the UST, I recommended to the powers that be that they issue floaters. I also recommen… Feb 01, 2012
  • California Faces Cash Shortfall by March on Low Receipts, Controller Says Could be interesting given the elections $$ Feb 01, 2012

Many investment ideas are promising so long as few do them.  Yes, there is an opportunity, but it is limited.  “Shh, don’t tell everyone about it.”

Thus, the concept of “risk parity.”  Lever every asset class up until it has the same volatility as common stocks. Under theoretical conditions, one could make extra money doing this, and with less risk than just a common stock portfolio.

That makes sense when few are doing it, but not when many are doing it.  When I worked for Hovde Capital Advisors, I highlighted to the group how hedge funds were forcing every asset class to the same level of riskiness.  A Grants Interest Rate Observer article on Leveraged Non-prime Commercial Paper is etched on my mind as emblematic of that era.

Risk parity can work so long as the total riskiness of the system does not get too high, as it did in 2007-8.  But if it does get too high, the assets that are levered face disadvantages versus volatile unlevered assets.  Failures of leverage feed on themselves, and lead to a real washout.  Failures of growth stocks don’t do that to the economy.

Risk parity turns managers into bankers, or worse yet, asset managers that specialize in non-AAA investment grade portions of structured securities deals.  Most asset managers are not used to thinking like bankers, largely because they think in terms of total return, and because they don’t have a balance sheet.  Their capital can run at will, unlike banks that have deposit stickiness, savings accounts, CDs, ability to borrow from the FHLBs, etc.  The banks can hold the assets to maturity, they have a buffer against losses in their capital, and don’t have to mark to market in an assiduous manner (though they *should* have to do so).

Think of the mortgage REITs in the most recent crisis — the ones that did the best were the least levered and had the longest terms for their repo lines.  In the short run, that costs more than the vain idea that one can roll over their repo lines every night, and that repo haircuts won’t rise.  Crises lead to a failure of both ideas, together with a set of forced sellers driving down the price of assets being repo-ed, which sometimes leads to a cascade where repo terms get progressively tighter, and only those that were the most conservative at the start of the crisis survive.

There is a Wall Street aphorism, “The fool does at the end of a bull market what the wise man does at its beginning.”  Risk parity falls into that bucket.  Early adopters of new asset classes and liability structures typically do well, but when they become mainstream, the dynamics can be ugly, as we learned in 2007-present.

So ignore the idea of risk parity.  Risk managers are not bankers, they don’t have the capacity to play leveraged spread games to maturity.  Risk parity if practiced on a large scale will produce wipeouts akin to the recent crisis.



I’m working on my quarterly reshaping — where I choose new companies to enter my portfolio.  The first part of this is industry analysis.

My main industry model is illustrated in the graphic.  Green industries are cold.  Red industries are hot.  If you like to play momentum, look at the red zone, and ask the question, “Where are trends under-discounted?”  Price momentum tends to persist, but look for areas where it might be even better in the near term.

If you are a value player, look at the green zone, and ask where trends are over-discounted.  Yes, things are bad, but are they all that bad?  Perhaps the is room for mean reversion.

My candidates from both categories are in the column labeled “Dig through.”

If you use any of this, choose what you use off of your own trading style.  If you trade frequently, stay in the red zone.  Trading infrequently, play in the green zone — don’t look for momentum, look for mean reversion.

Whatever you do, be consistent in your methods regarding momentum/mean-reversion, and only change methods if your current method is working well.

Huh?  Why change if things are working well?  I’m not saying to change if things are working well.  I’m saying don’t change if things are working badly.  Price momentum and mean-reversion are cyclical, and we tend to make changes at the worst possible moments, just before the pattern changes.  Maximum pain drives changes for most people, which is why average investors don’t make much money.

Maximum pleasure when things are going right leaves investors fat, dumb, and happy — no one thinks of changing then.  This is why a disciplined approach that forces changes on a portfolio is useful, as I do 3-4 times a year.  It forces me to be bloodless and sell stocks with less potential for those with more potential over the next 1-5 years.

I like some technology names here, some energy some healthcare-related names, P&C Insurance and Reinsurance, particularly those that are strongly capitalized.  I’m not concerned about the healthcare bill; necessary services will be delivered, and healthcare companies will get paid.

A word on banks and REITs: the credit cycle has not been repealed, and there are still issues unresolved from the last cycle — I am not interested there even at present levels.  The modest unwind currently happening in the credit markets, if it expands, would imply significant issues for banks and their “regulators.”

I’m looking for undervalued and stable industries.  I’m not saying that there is always a bull market out there, and I will find it for you.  But there are places that are relatively better, and I have done relatively well in finding them.

At present, I am trying to be defensive.  I don’t have a lot of faith in the market as a whole, so I am biased toward the green zone, looking for mean-reversion, rather than momentum persisting.  The red zone is pretty cyclical at present.  I will be very happy hanging out in dull stocks for a while.

P&C Insurers and Reinsurers Look Cheap

After the heavy disaster year of 2011, P&C insurers and reinsurers look cheap.  Many trade below tangible book, and at single-digit P/Es, which has always been a strong area for me, if the companies are well-capitalized, which they are.

I already own a spread of well-run, inexpensive P&C insurers & reinsurers.  Would I increase the overweight here?  Yes, I might, because I view the group as absolutely cheap; it could make me money even in a down market.  Now, I would do my series of analyses such that I would be happy with the reserving and the investing policies of each insurer, but after that, I would be willing to add to my holdings.

Do your own due diligence on this, because I am often wrong.  One more note, I am still not tempted by banks or real estate related stocks.  I am beginning to wonder when the right time to buy them as a sector is.  As for that, I am open to advice.


So, given that the Industry Rank categories above come from Value Line, I went to their stock screener, selected the industries, and asked for all of the companies that:

  • are in their top 5 (of 9) categories for balance sheet strength, and
  • their horribly overworked analysts think can return at least 15%/yr over the next 3-5 years.

This combines safety, growth potential, valuation, and in my view, how promising industry prospects are.  Here are the results:


When I do my next portfolio reshaping for clients in the next week or so, these stocks (and a few others) will compete against the 35 existing portfolio names for the 34-36 slots in the portfolio.

Full disclosure: Long HCC, INTC, THG, VOD

Somebody notify the Bogleheads, they will like this one, or at least Jack will.  Yo, Jack, I met you over 15 years ago at a Philadelphia Financial Analysts Society meeting.

How bad are individual investors  at investing?  Bad, very bad.  But what if we limit it to a passive vehicle like the Grandaddy of all ETFs, the S&P 500 Spider [SPY]?  Should be better, right?

I remember a study done by Morningstar, where the difference between Time and Dollar-weighted returns was 3%/year on the S&P 500 open end fund for Vanguard, 1996-2006.

But here’s the result for the S&P 500 Spider, January 1993- September 2011.  Time-weighted return: 7.09%/year.  Dollar-weighted: 0.01%/yr.  Gap: 7%/yr+

Why so much worse than the open-end fund?  Easy.  Unlike the professional managers at Vanguard, and the relatively long term investors they attract, the retail short term traders of SPY trade badly; they arrive late, and leave late on average.

There is far more analysis to be done here, but to me, this confirms that Jack Bogle was right, and ETFs would be a net harm to retail investors.  The freedom to trade harms average investors, and maybe a lot of professionals as well.  It may also indicate that short-term trading as practiced by technicians may underperform in aggregate.  Not sure about that, but the conclusion is tempting.

One thing I will say: I am certain that profitable trading is not easy.  If you are tempted to trade for a living, the answer is probably don’t.

Anyway, here’s my spreadsheet on the topic:


Full disclosure: I have a few clients short SPY, hedged against my long positions.

A medium-sized publisher has approached me to write a book on value investing.  I might do it, or I might not.  I also might try to do it with another publisher, or I might do it through Amazon.  I solicit advice from my readers on the prospect.

Anyway, I thought about what the book might look like, and to do so, I went through the entirety of my Value Investing category, and my page called Major Article List,  which described my best articles from my RealMoney days.

What you will see after this is less than a first draft of chapters.  I plan on categorizing it and simplifying, but here it is for now:

  1. Bonds
  2. Use of cash – buybacks, dividends, strategic use, delay
  3. Valuation
  4. Cycles
  5. On being wrong – planning for failure
  6. On financial companies
  7. Growth expectations
  8. Following leaders vs surfacing your own ideas; who are you playing with/against?
  9. Weighing vs Voting
  10. Use of free cash by management
  11. Avoid buggy whips
  12. Industry analysis and economic sensitivity
  13. Embrace trends, resist trends
  14. Take prudent risks
  15. Three year horizon
  16. Understand balance sheets; quality, anomalies
  17. Management incentives
  18. Discipline: tie your hands, do something, but don’t react; you are you own worst enemy
  19. Risks, not risk
  20. Markets are mostly, but not entirely efficient
  21. Margin of safety
  22. Diversify, but not too much
  23. Safe assets and Risk assets
  24. Avoid complexity; embrace complexity
  25. Sum of the parts
  26. Realistic expectations
  27. On shorting
  28. Ask the opposite question
  29. Rank your ideas
  30. No, macroeconomics *does* matter

This could be one, two or three books depending on me and the goals of the publisher.  As I read through my blog, I realized that I wrote a lot more about value investing at the beginning of this blog.  I think the crisis caused me to shift.

But as I went through what the book could look like, I got more excited about it — there is a lot of potential here to explain value investing in a comprehensive  way to readers.

PS — Any publisher contacts that you want to share are appreciated.  Thanks to those who have given me advice so far.