April 2012 – Page 2 – The Aleph Blog

Sorted Recent Tweets

Posted on 14 April 201215 April 2012 by David Merkel

Miscellaneous

“When women stay home and they raise their kids & maintain the household, it is a job. It’s a job of love.” http://t.co/NV1JddlL #wellsaid Apr 13, 2012
@historysquared Have not seen anything definitive on that, but production from fracking decays faster than conventional production. $$ Apr 13, 2012
10 Things I Hate About Tax Day http://t.co/SvezPoPV “There is absolutely no defense for it – none – & yet it persists, year after year.” Apr 11, 2012
@TimABRussell It varies. Most of the books I review are within a year of (re)publication. Some are as old as the 1960s. >95% last 10 yrs $$ Apr 09, 2012
So, you did an article ghostwritten by Robert Berman, Cinium’s CEO? Lovely. He gets around. But what does Smartmo… http://t.co/usg0buic Apr 09, 2012
Voices: Phil Cioppa, On Hiring Advisers http://t.co/zNN92rP4 Most sales positions have high turnover, particularly w/intangible products Apr 11, 2012
McDonald?s Pursuit of Perfect Fries Risks Overpromising http://t.co/DWDuesyG Harder 2 assure consistent quality if $MCD locally sources $$ Apr 09, 2012

China

Agree that America declines, but China also RT @historysquared: Historian warns of sudden collapse of American ?empire? http://t.co/Z4hVtKkk Apr 13, 2012
Shadow Banks on Trial as China?s Rich Sister Faces Death http://t.co/dJfEanEw It is morally wrong to put someone 2 death 4a property crime Apr 11, 2012
Is China slowing down? http://t.co/IJA8jobS From the AEI, very clueless piece: China should raise its exchange rate & lower the central rate Apr 11, 2012
Hong Kong?s Tsang ?Highly Concerned? About Property Price Bubble http://t.co/XHRBLgY5 Devel Nations monetary policy fuels many bubbles $$ Apr 10, 2012
‘Jackie Kennedy of China’ at Center of Political Drama http://t.co/MvIPw1oy The politics of China r dirtier than the US & more secretive Apr 10, 2012
China Inflation Exceeds Forecast http://t.co/Z9hnKj1Y Too little attention paid here; too much confidence in Chinese central bankers $$ Apr 09, 2012
@valuewalk Yes, saw it and the followup bet. I owe a decent amount of my intl economics thinking to Pettis, but not my errors 😉 $$ Apr 09, 2012
The ways China can rebalance http://t.co/2ZtRG4F2 Michael Pettis on the constraints the China faces as it tries 2 rebalance its economy $$ Apr 09, 2012

Newspapers

+1 RT @The_Analyst: I feel like unless its a special situation, everyone who “gets” newspapers would never make a LT investment in them Apr 12, 2012
Buffett “didn’t get tech.” I don’t get newspapers. $$ RT @WSJDealJournal: Warren Buffett Building Newspaper Empire? http://t.co/jDx5goqw Apr 12, 2012
I don’t get the economics of the newspaper biz $$ RT @WSJDealJournal: Warren Buffett Building Newspaper Empire? http://t.co/jDx5goqw Apr 12, 2012

Electronic Bond Markets

BlackRock’s Street Shortcut http://t.co/JO4Wm5sY Would work better 4 stocks than bonds. Most bonds r held a long time & do not trade $$ Apr 12, 2012
If the buyside created their own internal stock exchange, they could reduce the effect of the HFTs on the market & make life harder 4 retail Apr 12, 2012
But an internal bond exchange as proposed by $BLK won’t do that much, institutional transaction costs aren’t that hi 4 commonly traded bonds Apr 12, 2012
When I was a bond mgr 1998-2003, aside from obscure & illiquid bonds my commissions were $1/32nd or $1/64th per $100 — 1-3 basis points $$ Apr 12, 2012
@TFMkts So I would ask you, have comm rates 4 bonds gone up since 2002? My normal trade size back then was $5-20Mil, comms 1-3 bps then $$ Apr 12, 2012
@TFMkts Most bonds don’t trade, though. When I was a bond mgr, I needed guys who could find bonds. Always paid them; never let them cross2me Apr 12, 2012

Delta Airlines

It is usually a bad sign when a company can’t manage its current business well, & it tries to enter a difficult unrelated business. $DAL $$ Apr 11, 2012
Best quote: “Edward Hirs…says he can think of one reason why Delta would try to get into the refining business: ‘because they?re stupid.'” Apr 11, 2012
Why Buying A Refinery Could Be A Disaster For Delta Air Lines (Even With JPMorgan’s Help) http://t.co/MDvs9D26 & http://t.co/gJ0G44Uo $$ Apr 11, 2012

Rest of the World

Qatari Bright Lights Prompt EU?s Hedegaard to Urge Climate Plan http://t.co/0zjAmGit Another reason why multilateralism doesn’t work. $$ Apr 12, 2012
Kenyans Almost Dead on Worst Roads Getting New Highways http://t.co/Szcs1Tcy Next time u r stuck in traffic b thankful u r not in Kenya $$ Apr 11, 2012
These Charts Point to Trouble for Australia http://t.co/F00FtbpW Housing bubble, co-dependent relationship w/China, & large pool of hot $$ Apr 10, 2012
It’s rich 2c Dilma Rousseff criticizing Obama. But Brazil is further down the line in the devel nations game of monetary crack-the-whip $$ Apr 10, 2012
Rousseff Tells Obama Rich Nations? Policies Harm Growth http://t.co/Akm14Ifs Devel nations force emerg nations 2 swallow loose $$ policy Apr 10, 2012
Bank of Canada stressed about housing http://t.co/4kC0JW3D Nothing like a debt financed housing bubble 2 make a central banker flinch $$ Apr 09, 2012

Economics

Good Jobs News: More People Are Quitting http://t.co/1BlIvqOj The job market is more healthy if people are quitting to take other jobs. Apr 12, 2012
Obama?s Fantasy Budget Suggests Tax Hike Surprise http://t.co/03tkRMjZ Obama would likely b more radical in a 2nd term #nothing2lose $$ Apr 11, 2012
Tax Breaks for Wealthy Should Be Cut, Paul Ryan Says http://t.co/QppnNGQz “focus our poverty-eradication policies on treating root causes” Apr 11, 2012
@DavidSchawel I don’t think the paper changes my main point, it will be very difficult for the Fed to remove “stimulus.” Apr 11, 2012
Bernanke Gives College Lecture Series High Marks http://t.co/hu0WNLXq H/L overstates: ?I was very happy with the lectures,? he said. $$ Apr 10, 2012
The Fed sold half its short-term notes via Operation Twist http://t.co/Lag2CYWs Will have no short assets if the pace continues 4 6 mos $$ Apr 10, 2012
Job Gains in US Trail Most-Pessimistic Forecasts http://t.co/ELesokyT People asked me y I was more pessimistic than most, well… $$ Apr 08, 2012

Asset Markets

Does ?Sell in May? Really Work? http://t.co/kBNPaslt Reality is more complex than adages. The rule should be sell September, buy November $$ Apr 12, 2012
Gunning for yield and “quality” leaves little room for error http://t.co/HW90vwkj High quality junk does not offer enough yield 4 risks $$ Apr 12, 2012
High-Yield Bond ETF Breaks March Low http://t.co/lLB2qX19 I sold a lot of my credit-sensitive bond investments today. Market feels weak $$ Apr 11, 2012
@munilass @carney High earned & discount rate assumptions did lower contributions by assuming investment earnings would carry the load $$ + Apr 10, 2012
@munilass @carney & many municipalities substituted benefit increases 4 salary increases, b/c no immed $$ effect; many factors in play here Apr 10, 2012
Flouting Risks, Investors Gorge on Fat Yields of Emerging Market Debt http://t.co/5zZV03Jb Will eventually end badly; Russia 1998 $$ Apr 10, 2012
Retweet after me. I HATE HFT TRADING BOTS 😉 RT @merrillmatter: Repeat after me. I HATE HFT TRADING BOTS $$ Apr 09, 2012
How to Improve the Potential of Less Volatile Stocks http://t.co/90gHiISj Adding a quality screen further improves returns & risk/vol $$ Apr 09, 2012
A Laugh http://t.co/IcFMDnbb @brucekrasting suggests that clearinghouses will concentrate risk rather than dissipating it. $$ #nomagic Apr 08, 2012
The Dividend-Fund Dilemma http://t.co/MYdoxPJh I buy dividend-paying stocks because they generate good cash flows, not for the dividend. Apr 08, 2012

M&A

Much $$ stuck overseas MT @ThemisSal: Just 5 companies, $AAPL, $MSFT, $CSCO, $GOOG and $PFE now hold nearly 25% of all corporate cash, $250B Apr 09, 2012
Yeh, like dat. 2 much $$ chasing 2 little value RT @The_Analyst: @AlephBlog another brilliant cerberus deal like chrysler, gmac? Apr 09, 2012
AT&T to Sell Majority of Yellow Pages Business to Cerberus http://t.co/RIAX6dwb Cigar butt industry; internet changes everything published Apr 09, 2012
Both MT @ktbenner: who’s overpaying now: The Zuck or Steve Feinberg… @Pfro: $T sells Yellow Pages 4 ~$1bn 2 Cerberus http://t.co/IGLXXUrp Apr 09, 2012
$AOL to Sell Patents to $MSFT 4 $1.1B http://t.co/upBaZBRo Too much $$ chases a legal arms race in Infotech Intellectual property #waste Apr 09, 2012
@ReformedBroker I didn’t know Instagram that well, but they don’t seem to have a revenue model. What could $FB do with it? $$ Apr 09, 2012

Insurance

RE: @marketfolly He compares AIG to P&C companies,? but the life companies are a valuation drag here.? Not a fair com? http://t.co/J4aCu4tf Apr 12, 2012
Property insurance rates rising worldwide – Marsh http://t.co/CZOHLGfG When surplus is reduced at (re)insurers, premium rates rise $$ Apr 11, 2012
Statutory Statements under Affiliated party transactions. Regulators would b annoyed if terms indicate transaction that’s not “arm’s-length” Apr 10, 2012
A Costly Toy Subsidized by Others http://t.co/iJea3rTt If Guggenheim is using its insurers 2 fund Dodgers purchase, will show up in + $$ Apr 10, 2012

Eurozone

Spain’s spreads breaking away from other risk indicators http://t.co/SulecZWv “we r in an uncharted territory with respect to this widening” Apr 11, 2012
Has bad implications for EZ sustainability $$ RT @pdacosta: Who’s peripheral now? French economy grinds to a halt http://t.co/VSsZtaWI Apr 10, 2012
Currency disunion http://t.co/ApXlpMXK Why Europe?s leaders should think the unthinkable; EZ can breakup on own terms, or unfavorable terms Apr 09, 2012
Eurozone’s banks cutting dollar businesses http://t.co/wX1kHu8G European banks will never again rely hard on US MMFs to finance their $$ ops Apr 09, 2012
Euro Was Flawed at Birth and Should Break Apart Now http://t.co/ZxPy0vId All the things that I predicted have come true & more. Bye, Euro. Apr 08, 2012

Politics

Wind Power Seen Surging as Custom Barges Cut Set-up Costs http://t.co/XA96RbEj Don’t see how this makes the cost of wind power economic $$ Apr 10, 2012
For Feds, ‘Lying’ Is a Handy Charge http://t.co/2tLcdyKQ Law in the US becomes more arbitrary; crimes can b dreamed up by bureaucrats $$ Apr 10, 2012
Complexity Is Bad for Your Health http://t.co/v9pLQi1V Antonin Scalia & Stephen Breyer agree (!): Obama’s health care law unreadable $$ Apr 09, 2012
High-Speed Rail Takes Californians 4 a Ride http://t.co/fZlC3MQx Rail makes sense in densely populated areas, won’t work in California $$ Apr 09, 2012

Book Review: The Most Important Thing Illuminated

Posted on 13 April 201213 April 2012 by David Merkel

I previously reviewed The Most Important Thing.? Great book, but can a great book be made better?? Yes, but only by a little bit.

The illumination of this book comes from comments from Christopher Davis, Joel Greenblatt, Paul Johnson and Seth Klarman, an estimable bunch of investors and investment thinkers.? Howard Marks offers a few more comments as well.

None of the comments are bad, but also, none of them disagree with Howard Marks.? Then again, I didn’t find anything to disagree with in the original book, so maybe that’s not a negative.

Many of the comments are brief, and most of them serve to intensify what Howard Marks wrote, e.g:

This is a really important point.
This is an excellent summary of the idea.

Relatively few of the comments really expand the discussion, so here is my advice for you: if you already own The Most Important Thing, you don’t need this.? Borrow it at your library if you must.? If you don’t own it, you will get a slightly richer experience with this book than the original.

I recommend this book to all who aspire after value investing.

Quibbles

Again none.

Who would benefit from this book: All value investors, and those who want to be value investors can benefit from this book.? Those that want to understand how the economy really works will benefit as well.? If you want to, you can buy it here: The Most Important Thing Illuminated.

Full disclosure: The publisher asked if I wanted to read the book electronically.? I said ?yes? and I downloaded it and read it.

If you enter Amazon through my site, and you buy anything, I get a small commission.? This is my main source of blog revenue.? I prefer this to a ?tip jar? because I want you to get something you want, rather than merely giving me a tip.? Book reviews take time, particularly with the reading, which most book reviewers don?t do in full, and I typically do. (When I don?t, I mention that I scanned the book.? Also, I never use the data that the PR flacks send out.)

Most people buying at Amazon do not enter via a referring website.? Thus Amazon builds an extra 1-3% into the prices to all buyers to compensate for the commissions given to the minority that come through referring sites.? Whether you buy at Amazon directly or enter via my site, your prices don?t change.

Book Review: Strategic Intuition

Posted on 12 April 2012 by David Merkel

We all know how to be logical; at least most of us do.? But logic only takes us so far.? Real progress comes through those who are willing to take old ideas, combine them, and use them to solve an unrelated existing problem.

Breakthroughs do not come from ordinary activity, but from those that are willing to look beyond, and consider new possibilities.? They take what is known from the past, and generalize it to a new situation.

Even in writing the closing, the author writes, “My opportunity to write this book arose from when I saw a gap in the field of strategy at the same time that I saw the existing elements that might combine to fill that gap. In all these chapters, not a single idea, not a single example, is my own.? I borrowed them all.? But the combination is new, and I am grateful for the opportunity to present it here to you.”

The author looked at many different areas of human endeavor, looking for commonalities for when leaps of progress were made.? The areas were science, war, entrepreneurship, the arts, and social work.

It’s not enough to be knowledgeable about the past, and to know the theories of the present.? Can you take them to come up with a solution to a current problem, by using ideas from one area of knowledge, and apply them to an area where they have not been previously applied?

What is ordinary is when you know a goal, and create a plan to achieve that goal.? If you have enough resources, and your plan is adequate you will succeed at an ordinary goal.

What is extraordinary is trying to achieve something that is totally new.? Those that do so achieve it by using what is already known (by some) in a totally new way.

Thus, rather than looking at the goal, consider that the goal might not be achievable, but something close to it might be.? Look at many goals and see whether there isn’t one that has greater impact that you could achieve.?? (I wish I could have revised my dissertation topic in mid-stream.)

I have experienced this in my own life.? My biggest successes came through using ideas from other fields and applying them to the insurance industry, which is a very stodgy place.

When you finish with the book, you will have a lot of new ideas for how to creatively attack hard problems.? That’s what makes this book compelling.? But it’s methods are not a panacea; they won’t solve every problem.

Quibbles

The trouble with a book like this is that it picks and chooses.? Much progress does come from the ordinary application of logic.? But many of the jumps of progress do not come from applying ideas from other fields, but by pure accident.? Something anomalous occurs, and no one has a good explanation for it.? At such a point, new theories are proposed and tested.? This is more like ordinary science, and less like what the author proposes.

Also, few of us have the luxury of being able to be flexible about what targets we aim for, or have knowledge of fields far from the target that have some influence on it.

Who would benefit from this book:?? If you have to solve a hard problem, and you don’t see a way to solve it, this book may help you do it.? If you want to, you can buy it here: Strategic Intuition: The Creative Spark in Human Achievement.

Full disclosure: The publisher asked me if I would like the book.? I said yes, and they sent me a copy.

A Brief Note on Earnings Yields (2)

Posted on 11 April 2012 by David Merkel

My last post on this focused on trailing earnings.? Trailing earnings have the advantage of being objective, but analysts try to estimate the future.? To some degree they succeed, and that becomes the bar by which we measure the progress of companies.

Now fewer companies have analysts following them, and the database that I use is not as reliable on earnings estimates for foreign companies trading on US exchanges.? The following table covers a huge percentage (98%+) of the market cap of domestic stocks trading in the US.

Definitions:

FE Yield: forward earnings yield for the next full 12 fiscal months.
E Yield: trailing earnings yield for the last twelve months.
D Yield: dividend yield given the current price.
F Payout %: what percentage of the next fiscal year’s earnings is comprised by dividends.
E Growth: how much do the estimated earnings of the next fiscal year increase over the earnings of the last 12 months.

Industry	FE Yield	E Yield	D Yield	F Payout %	E growth
0906 – Broadcasting & Cable TV	28.27%	5.85%	1.47%	5%	384%
0436 – Tires	21.00%	15.81%	0.72%	3%	33%
1106 – Airline	19.29%	1.80%	0.08%	0%	971%
0709 – Insurance (Life)	14.46%	13.36%	1.77%	12%	8%
0412 – Auto & Truck Manufacturers	14.11%	26.47%	0.57%	4%	-47%
0966 – Retail (Technology)	14.05%	-8.68%	2.33%	17%	-262%
0724 – Money Center Banks	12.42%	9.33%	1.41%	11%	33%
1027 – Office Equipment	12.30%	10.85%	2.55%	21%	13%
0124 – Metal Mining	12.02%	11.23%	4.18%	35%	7%
0606 – Oil & Gas – Integrated	11.22%	11.04%	2.39%	21%	2%
1015 – Computer Peripherals	11.10%	9.27%	0.21%	2%	20%
0706 – Insurance (Accident & Health)	11.06%	9.11%	1.22%	11%	21%
0509 – Crops	11.05%	9.06%	1.23%	11%	22%
0930 – Printing Services	11.04%	2.80%	4.37%	40%	295%
0121 – Iron & Steel	10.73%	3.33%	2.48%	23%	222%
0809 – Major Drugs	10.49%	5.80%	3.60%	34%	81%
0118 – Gold & Silver	10.46%	1.78%	1.53%	15%	487%
0518 – Office Supplies	10.40%	8.42%	2.51%	24%	24%
0133 – Paper & Paper Products	9.99%	8.15%	2.19%	22%	23%
0206 – Construction & Agricultural Machinery	9.70%	7.02%	1.56%	16%	38%
0730 – S&Ls/Savings Banks	9.57%	2.35%	1.18%	12%	308%
0106 – Chemicals – Plastics and Rubbers	9.51%	7.13%	2.04%	21%	33%
0727 – Regional Banks	9.46%	7.27%	1.57%	17%	30%
0415 – Auto & Truck Parts	9.45%	7.75%	1.38%	15%	22%
0603 – Coal	9.33%	8.55%	2.95%	32%	9%
0609 – Oil & Gas Operations	9.29%	6.98%	1.48%	16%	33%
1024 – Electronic Instruments & Controls	9.26%	7.48%	0.98%	11%	24%
0130 – Non-Metallic Mining	9.11%	8.66%	0.54%	6%	5%
1006 – Computer Hardware	8.92%	6.34%	0.14%	2%	41%
0203 – Aerospace and Defense	8.80%	8.37%	2.23%	25%	5%
0927 – Printing & Publishing	8.59%	3.34%	2.12%	25%	158%
1112 – Railroads	8.59%	6.78%	1.72%	20%	27%
1021 – Computer Storage Devices	8.57%	4.69%	0.00%	0%	83%
0109 – Containters & Packaging	8.50%	4.22%	1.57%	18%	102%
0612 – Oil Well Services & Equipment	8.40%	6.16%	1.62%	19%	36%
1033 – Semiconductors	8.28%	6.05%	1.70%	21%	37%
0409 – Audio & Video Equipment	8.22%	4.33%	0.30%	4%	90%
0969 – Schools	8.17%	10.21%	0.76%	9%	-20%
0951 – Retail (Department & Discount)	8.16%	5.72%	1.96%	24%	43%
0127 – Misc. Fabricated Products	8.08%	7.02%	1.00%	12%	15%
0703 – Consumer Financial Services	8.08%	6.05%	1.89%	23%	33%
0954 – Retail (Drugs)	8.08%	6.99%	1.52%	19%	16%
0218 – Misc. Capital Goods	7.99%	5.92%	1.12%	14%	35%
0715 – Insurance (Property & Casualty)	7.97%	8.27%	0.83%	10%	-4%
0921 – Motion Pictures	7.92%	7.80%	0.98%	12%	2%
0924 – Personal Services	7.81%	6.61%	1.98%	25%	18%
0718 – Investment Services	7.67%	4.89%	1.86%	24%	57%
0103 – Chemical Manufacturing	7.54%	5.92%	1.77%	23%	27%
0209 – Construction – Supplies and Fixtures	7.53%	4.47%	2.09%	28%	69%
0406 – Appliances & Tools	7.50%	5.34%	1.72%	23%	40%
0806 – Healthcare Facilities	7.49%	5.18%	0.10%	1%	45%
0503 – Beverages (Alcoholic)	7.45%	5.40%	1.52%	20%	38%
0512 – Fish/Livestock	7.45%	6.55%	2.17%	29%	14%
1018 – Computer Services	7.44%	4.48%	0.71%	10%	66%
1003 – Communications Equipment	7.39%	4.95%	1.06%	14%	49%
1103 – Air Courier	7.36%	5.54%	2.04%	28%	33%
0957 – Retail (Grocery)	7.35%	4.43%	1.85%	25%	66%
0221 – Mobile Homes & RVs	7.25%	5.78%	1.19%	16%	25%
0903 – Advertising	7.16%	6.26%	1.63%	23%	14%
1036 – Software & Programming	7.14%	5.24%	0.93%	13%	36%
0524 – Tobacco	7.08%	5.61%	3.90%	55%	26%
1030 – Scientific & Technical Instruments	7.04%	5.33%	1.35%	19%	32%
0433 – Textiles – Non-Apparel	7.00%	3.95%	0.09%	1%	77%
0812 – Medical Equipment & Supplies	6.98%	5.53%	1.02%	15%	26%
0430 – Recreational Products	6.97%	4.56%	1.49%	21%	53%
0803 – Biotechnology & Drugs	6.92%	4.31%	2.11%	30%	61%
1203 – Electric Utilities	6.85%	6.32%	3.89%	57%	8%
0515 – Food Processing	6.79%	4.26%	2.40%	35%	59%
0945 – Retail (Apparel)	6.76%	5.01%	1.23%	18%	35%
0421 – Furniture & Fixtures	6.72%	4.99%	1.73%	26%	35%
0963 – Retail (Specialty Non-Apparel)	6.61%	5.44%	0.75%	11%	21%
1115 – Trucking	6.56%	2.90%	0.61%	9%	126%
0960 – Retail (Home Improvement)	6.55%	4.81%	1.86%	28%	36%
0403 – Apparel/Accessories	6.55%	4.20%	0.77%	12%	56%
0939 – Rental & Leasing	6.55%	3.07%	0.53%	8%	113%
0112 – Fabricated Plastic & Rubber	6.53%	2.58%	0.74%	11%	153%
0712 – Insurance (Miscellaneous)	6.44%	5.00%	1.99%	31%	29%
0303 – Conglomerates	6.39%	1.87%	0.31%	5%	241%
0521 – Personal & Household Products	6.37%	5.03%	2.65%	42%	27%
0506 – Beverages (Non-Alcoholic)	6.32%	5.55%	2.61%	41%	14%
0909 – Business Services	6.29%	5.06%	1.13%	18%	24%
0936 – Recreational Activities	6.29%	4.56%	2.04%	32%	38%
0975 – Waste Management Services	6.22%	4.43%	2.15%	35%	40%
0972 – Security Systems & Services	6.19%	-1.48%	1.33%	21%	-519%
0942 – Restaurants	5.99%	4.98%	1.93%	32%	20%
0915 – Communications Services	5.98%	1.28%	4.73%	79%	368%
1209 – Water Utilities	5.86%	5.93%	3.19%	54%	-1%
0418 – Footwear	5.64%	4.51%	1.07%	19%	25%
1109 – Misc. Transportation	5.62%	4.04%	1.23%	22%	39%
0918 – Hotels & Motels	5.44%	3.77%	0.86%	16%	44%
0215 – Construction Services	5.08%	2.21%	1.10%	22%	130%
0424 – Jewelry & Silverware	5.01%	3.56%	0.04%	1%	41%
0427 – Photography	4.99%	1.72%	0.00%	0%	189%
1206 – Natural Gas Utilities	4.91%	3.56%	4.01%	82%	38%
1012 – Computer Networks	4.76%	0.87%	0.28%	6%	445%
1118 – Water Transportation	4.62%	-0.91%	0.75%	16%	-607%
0912 – Casinos & Gaming	4.57%	6.23%	1.14%	25%	-27%
0948 – Retail (Catalog & Mail Order)	3.91%	2.86%	0.01%	0%	37%
0933 – Real Estate Operations	3.03%	2.79%	4.01%	132%	9%
0115 – Forestry & Wood Products	2.14%	2.13%	2.60%	121%	1%
0212 – Construction – Raw Materials	2.11%	-1.93%	1.38%	65%	-209%

And here it is by sectors:

Sector	FE Yield	E Yield	D Yield	F Payout %	E growth
06 – Energy	9.94%	8.60%	1.93%	22%	16%
07 – Financial	9.44%	7.21%	1.48%	21%	31%
04 – Consumer Cyclical	9.15%	10.61%	1.06%	10%	-14%
09 – Services	8.85%	4.32%	2.18%	50%	105%
01 – Basic Materials	8.67%	6.43%	2.02%	31%	35%
11 – Transportation	8.60%	4.99%	1.49%	30%	72%
Grand Average	8.39%	5.97%	1.81%	30%	41%
02 – Capital Goods	7.98%	6.14%	1.72%	28%	30%
10 – Technology	7.89%	5.53%	0.84%	15%	43%
08 – Health Care	7.38%	4.79%	1.88%	39%	54%
05 – Consumer Non-Cyclical	6.72%	5.15%	2.79%	54%	30%
03 – Conglomerates	6.39%	1.87%	0.31%	16%	241%
12 – Utilities	6.13%	5.30%	3.93%	74%	16%

Some of the percentages for earnings growth are inflated because the last 12 months include writeoffs, disappointments, etc., but forecasted earnings are typically optimistic, and anticipate no errors.

I would encourage you to view this where you look down the list, and say, “Wait. That doesn’t look right. That industry shouldn’t be that high/low relative to other industries.”? Then dig in and try to analyze for individual companies where there might be real advantage in the industries with good relative prospects.

Being forward-looking is an advantage if you have an ability to discern where industry trends are going to change; I may have that to some small degree, which is why when I invest, I look at trailing earnings and forward earnings.? Have one foot in reality, and the other foot in hope/analysis.? Things change less than expected, but things change.

As for me, I’m happy with my energy, insurance, and technology stocks, even if I haven’t been rewarded well over the last three months.? They are cheap, and have decent pricing power.? I stress patience, and so I hold after poor results, and I might increase the stakes.

On Book Reviewing, Part 2 (What not to write if you want a good review from me)

Posted on 10 April 201210 April 2012 by David Merkel

Most of the time, when a book is bad, I don’t write a review.? Sometimes it will inspire me write a screed against a certain topic that the book was about, and occasionally a negative review.? But most often I say nothing.

What to avoid if writing a finance/investments/economics book?

1) Don’t claim you are an expert when you have a thin resume.? If you are writing, you better have some real accomplishments behind it.? Particularly irritating are vigorous self-promoters and newsletter-writers that are facile writers — they say lots of clever things, but they are not subject to market discipline in the same way that a portfolio manager is, who manages real money, and has real results, good or bad.

2) If you are merely pushing the services of your firm, don’t write a book.? It is very annoying to read a book where the says, “This is the broad outline, but if you want the whole enchilada, buy my service.

3) Don’t advertise your book as popular if it is academic.? Please don’t raise the hopes of people if they find by the middle of the book that they can’t understand it.

4) Don’t write a book that has already been written unless you have a very, very special gift for teaching that makes the concepts far more accessible to the average person.

5) Just because it is a “little book” does not mean it deserves to see the light of day.

6) You may think you have boiled down the concept for dummies, idiots, whatever.? In investing, dimwits tend to lose — no amount of simplification will replace study.

7) Books that forecast total destruction get no play with me, because they assume that we can’t adjust.

8 ) Books that are a series of essays from “experts” don’t grab me.? Good books take a position and argue for it.

9) Books that do an extended series of stock screens in order to show the best one are just an exercise in torturing the data to make it confess.

10) Books that force you to study abstract philosophy that I can’t follow means that most people won’t follow it.? Useless.? (I have studied philosophy to a high degree.)

11) Books written by a group of academics rarely make for good reading, unless the editor forces them to interact with each other, which is rare.

12) If you write a book on a controversial area, and you don’t interact with the criticisms of the topic, you lose major credibility with me.

13) If you aren’t an expert, don’t write.? There are a lot of newsletter writers, or radio talk show hosts who know little about the areas they talk about.? Avoid them.? Okay, do research.? Do they really have talent, or are they just facile talkers?

14) Please don’t advertise the past as being the future.? History is not prologue, and by the time your book is published, it is time for those who believe you to lose.

15) Don’t write a book where you tell people that they ought to read your last book or books.? Make your book readable, so that you give a quick summary of the relevant information.? Every book should stand on its own; no one should have to buy another book to read your book.

16) If you are describing a bunch of quirky people who made money deploying small amounts of capital, do not declare them to be great investors, and don’t write about them.

17) Simulations off of past data have little relevance to the future, unless carefully done.? Most are not carefully done.

18) If you are writing a policy book, try to be fair.? If you are a liberal or conservative, that will win a lot of points with me, because it means you have really looked at the issue.? Few things are totally clear.

19) Please, please, don’t write another book on a basic topic where you have nothing new and good to say — asset allocation is a good example for me, and few books get a good review from me as a result.

20) Don’t write books saying that you only need one asset class in order to do well.

Beyond that, I would say, write something unique, and well-researched.? Create a good theme and follow it.? Even if academic, don’t settle for dull writing.? Find a way to make the topic live, and after that, explain the complexities.? Above all else, explain what could go wrong.? Most strategies fail at some point, so explain where failure can happen for the good of your readers; it will give you greater credibility.

There may be another part to this series, but at present, I think this could be all.

On Book Reviewing

Posted on 7 April 20128 April 2012 by David Merkel

Piles of books.? Many piles of books.? If you begin to do a lot of book reviews, you get a lot of books.

Let me describe the piles:

One foot to the left of me is a pile of 13 unread books.? After I finish reading a book, and put it into the “Write about,” or “Maybe write about” piles, I choose a book from the pile to read.? Whatever seems most interesting I read next.
Two feet to my right is the “Write about” pile.? You will see those written up here.? There are six books there.
Three feet to my left are two piles of about 25 books each of books that I have reviewed, or rejected.? Mostly, they have been reviewed.
Five feet to my left are 23 books that I have fully read but will not review.? I hand out unfavorable reviews rarely.? Roughly half of the books are okay, but they are nothing great.? The rest are harmful, boring, etc.
30 feet behind me, in my bedroom, I have a whole bookcase holding books that I have reviewed.

When I started writing at Aleph Blog, I had no intention of doing a lot of book reviews.? It has worked out to be 9% of all of my posts, which is pretty significant.? I never dreamed that I would be a highly-ranked reviewer at Amazon.com — I’m in the top 2000, and I appreciate what votes my readers give me.

I get books four ways:

They come unsolicited.
The publisher contacts me, and asks me if I want a given book.
I ask the publisher for a book, and they send it to me.
I add books to my Amazon wish list, and buy them when my kids have a small order, in order to get free shipping.

Which brings up pile six, two feet to the left of me, books that I have purchased, but I have not read.? This competes with pile one.? I try to read the most interesting book at my disposal so that I can write the most useful stuff for my readers.

If I think of more, I will write a second part to this post, but that is all for now.

Book Review: Currency Wars

Posted on 7 April 2012 by David Merkel

I sometimes call it “the race to the bottom.”? During a time where most nations are feeling economically weak, some decide to weaken their currency, so that their exporters can do better, which supposedly preserves jobs in export industries.

Producers have concentrated interests, and lobby well.? The interests of consumers are diffuse, and don’t gain favor from governments kowtowing to producers, who also find more effective ways of rewarding political friends.

If we were intelligent, we would know this is a loser of a battle, and we would realize that this simply leads to inflation globally.? Better to sit it out, ignore the debasement, and realize it will eventually burn out.? Unlike the current Federal Reserve, don’t add to the debasement, it just adds fuel to the global inflationary fire.

This book starts with a currency war-gaming scenario.? In the game, the author pursues a course where on one of the non-US teams decides to link their currency to gold.? Initially derided, they end up as one of the victors at the end of the game, even though no one else follows them.

The book continues with an examination of three eras where currencies were at war: 1) prior to the Great Depression until we leave the internal gold standard, 2) the inflationary guns and butter late ’60s to mid ’80s, encompassing the period where the US goes off the gold standard entirely, and global currencies float.? We go through a period of high inflation after that, followed by an extreme rise in interest rates. 3) The book examines the present time, where every nation wants to devalue, so that it exporters are not harmed.

If we left the gold standard to get stability, we did not get it.? If we left the gold standard to benefit the global or US economies, the benefit has not appeared.

But, from chapters 7 through 10, the book muddles.? It talks about a wide variety of ideas loosely related to the main thesis, but proving little one way or another.? The book does not build toward its conclusion in chapter 11, where it suggests a return to a gold standard.

A gold standard exists to preserve purchasing power, and takes power out of the hands of governments that want to favor one set of parties over another, whether favoring savers or investors, producers or consumers.? It takes many questions out of the hands of the government, and reduces the need for an expensive central bank filled with PhDs in Economics who really have no idea how economies work, because they are mathematicians, and don’t get the broader societal ramifications of what their policies encourage.

I enjoyed this book, and would recommend it. The book isn’t linear to its goal, but you will learn a lot along the way, even if it is circuitous.

Quibbles

Already given.

Who would benefit from this book:?? This book is for those frustrated with the way that our government are handling monetary affairs, and are looking for a better way.? If you want to, you can buy it here: Currency Wars: The Making of the Next Global Crisis (Portfolio).

Full disclosure: The publisher asked me if I would like the book.? I said yes, and they sent me a copy.

Sorted Weekly Tweets

Posted on 6 April 2012 by David Merkel

Valuations

High Yield Closed End Funds 68% over NAV, 3% avg premium. Loan Participation CEFs 40% over NAV, -1% avg discount. Conditions r medium hot $$ Apr 07, 2012
Why Stocks Look Too Pricey http://t.co/TWqZzGg3 Various Indicators Suggest the Market Is No Longer a Bargain, at best fairly valued $$ Apr 07, 2012
Contra: The alarming fall in syndicated lending http://t.co/hiGK9UoK With the high yield mkt running hot why not avoid restrictive banks $$ Apr 06, 2012
Not so new… Eddy Elfenbein said something similar 4 months ago: http://www.crossingwallstreet… http://t.co/mhIxGGwt Apr 04, 2012?(on inflation expectations driving stock prices in the short run)
Time to take some risk off the table http://t.co/sCuYxc6u Trends breaking globally, US looks okay. Humble Student has made good calls lately Apr 04, 2012
The Dangers of an Interventionist Fed http://t.co/thKsHa8J QE Removal: what happens to banks if Fed does & 2 inflation if Fed doesn’t $$ Apr 03, 2012
Junk Bonds ? Getting Risky for a New Reason? http://t.co/7bJ08JxT Record pace of junk issuance bodes ill 4 performance… 3 yrs from now. $$ Apr 03, 2012
Two Pros Weigh In on U.S. Stocks: Ben Inker’s Bearish View http://t.co/iJ7742P5 Katie Nixon’s Bull View http://t.co/Zn9jj503 $$ Apr 02, 2012
Eichengreen on Credit Bubbles http://t.co/bSs0MHPA Leading indicator of finl stress in em mkts: loan growth > 2x GDP growth 2 yrs earlier $$ Apr 01, 2012
Taking the High Out of High Yield http://t.co/WYIvHb0n Nonprofessionals are the ones buying junk at the margin. This won’t end well. $$ Apr 01, 2012

Central Banking

The ECB has completely lost control over the monetary policy for Greece http://t.co/MHNTXLHo Massive liquidity drain; total credit failure Apr 07, 2012
Post-war financial repression is back http://t.co/JGLo9Aic If the post-war experience is any guide, savers face many years of suffering. Apr 06, 2012
Bernanke – I’m Slowing Down the Ship http://t.co/TJcJl20n Stocks don’t like less inflation coming and so they fall. But bonds rally. $$ Apr 06, 2012
Draghi Scotches ECB Exit Talk as Spain Keeps Crisis Alive http://t.co/rREDdqrW LTRO can only go so far; can solve liquidity, not solvency Apr 06, 2012
The Market?s Obsessive Fixation on The Fed & QE http://t.co/W6kg1n7k Runs through a Fed tightening scenario, thinks Fed won’t sell bonds $$ Apr 04, 2012
Oest.. Nationalbank follows Bundesbank in refusing some periphery collateral http://t.co/96xx0xg7 Not so big in itself; Tear in EZ fabric Apr 04, 2012
Draghi Tested as German Pay Deals Add to Euro Divergence http://t.co/glKumOZx Inflation rising @ core? May even labor productivity some $$ Apr 04, 2012
@federalreserve Tried using your Data Download Program today http://t.co/vRroRPMt I managed 2get the data I needed, but it was tough 2use Apr 03, 2012
Bernanke – ‘The Fed never makes mistakes’ http://t.co/JBgRHqx2 He goes, speaks to soft audiences, argues that no one could have known #dope Apr 01, 2012

China

Coup Rumors in China Have Deeper Meaning http://t.co/QaoDxKFF Small fissures appearing in the Communist Party’s hold on power $$ Apr 07, 2012
Australia?s Export Slump Intensifies Rate-Cut Pressure http://t.co/sIDzeteW China sneezes, Australia catches a cold, mate. $$ Apr 06, 2012
China doomsayer sees crash coming http://t.co/2QatU1ps Hardly a crash, but GDP shrinking. Wait, that *is* a crash for China? $$ Apr 06, 2012
The Revenge of Wen Jiabao http://t.co/nw5qvCNa Long read. Eye-opening. Formal system of Comm Party eclipsed by family coalitions that war $$ Apr 04, 2012
The informal aspects of how China is governed relies on rival coalitions of elite families over the long run. Short-run, Comm party rules $$ Apr 04, 2012
China Accelerates Markets Opening as QFII Quota Doubles http://t.co/yrXVDcdR May prove 2b significant due to unintended consequences $$ Apr 04, 2012
China Manufacturing Gain Masks Exporters? Woes http://t.co/VyeN9AWF Goods unneeded by the rest of the World build up in China $$ #glut Apr 03, 2012

United States

When safe assets return http://t.co/QLUPuj1j Long piece on the status of money-like instruments, public and private. Many questions. $$ Apr 07, 2012
Income Inequality Is Killing the Economy, Obama Says?Is He Wrong? http://t.co/xrA4pGu2 Going up in developed world, going down globally $$ Apr 07, 2012
And I don’t get it as well, Josh.? I’m as Libertarian as they come, but with financial services, I know that trickery? http://t.co/lIJDCr1Y Apr 05, 2012
More woes in Fedl subsidized solar power: http://t.co/83ch2YUM & http://t.co/6XaEjl10 ht: @zerohedge | Send bureaucrats 2study physics? $$ Apr 04, 2012
The return of the US manufacturer http://t.co/75WCMyPi Manufactured goods represented 61 per cent of all US exports during 2010 $$ Apr 04, 2012
+1 RT @ReformedBroker: ADP is the Diet Arizona Iced Tea of Employment gauges. Like, we’ll take it if it’s there but no one’s looking for it Apr 04, 2012
When does the US Treasury bubble burst? http://t.co/8agHomQH “Pomboy pointed out that Treasury yields are less than current CPI rates” $$ Apr 03, 2012
Why Are the Fed and SEC Keeping Wall Street?s Secrets? http://t.co/bZYF3LgV Fed & SEC view those they regulate as their clientele $$ Apr 02, 2012
US consumers dipping into savings http://t.co/757XDPuW Implies that the recovery is weaker than presently posited, demand comes from savings Apr 01, 2012
Obama Campus Fervor Losing 2 Apathy as Students Sour on 2012 http://t.co/kcyQbWKI Students thought they were getting change, got Bush-plus Apr 01, 2012
How Stockton, California Went Broke in Plain Sight http://t.co/ggOzSOmV If you hand out benefit increases like they are candy… $$ Apr 01, 2012

Finance

Quants: The Alchemists of Wall Street http://t.co/L0CzLQVN Recommend this video, features Paul Wilmott, Matthew Goldstein, & more $$ Apr 07, 2012
The 401(k): Americans ?just not prepared? 2 manage their own retirement funds http://t.co/8Tr0wggt Conclusions similar http://t.co/etCEp8BT Apr 06, 2012
Hedge Funds Accomplishing Very Little in the Aggregate? http://t.co/pxqjw2kk HFs tend 2b volatility-averse, weaker funding than long-only $$ Apr 04, 2012
Ackman SPAC a nice touch, no? RT @ReformedBroker: Private Equity-held Burger King coming public again. “Hooray!” said no one to no one else Apr 04, 2012
Performance persistence in hedge funds http://t.co/zORfjAts How do hedge funds differ v unlevered value investors? $$ gets pulled vals drop Apr 04, 2012
ETN Double Dipping With GAZ? http://t.co/Uo9y1T5p Interesting piece. An ETN issuer can make more $$ stopping creation & lending shares Apr 04, 2012
Loan classes “season” over 10-30% of the life of loan… defaults/prepays stabilize. Large cohorts 4 bond issuance go bad in the 3rd yr $$ Apr 03, 2012
Merrill, Morgan Stanley seen losing grip on rich http://t.co/44mW7ki0 Top 4 brokers mkt share 56% in 2007, 45% in 2011 & still falling $$ Apr 03, 2012
Low Vol Underperforming http://t.co/NYqjw2Fp Every valid strategy has times when it doesn’t work, to shake out the weak hands $$ Apr 03, 2012
Corporate pension funds break away from equities http://t.co/EMPaDGea Yes, when yields r low, DB plans move 2 bonds. Brilliant. $$ Apr 03, 2012
Does Danger Loom for Multiemployer Pension Plans? http://t.co/VpfDZ04m Plans that are <80% funded must take steps 2 nurse plans 2 health $$ Apr 01, 2012
Credit Suisse Opened Volatility Bets to Small Investors http://t.co/ZLMGANXh Wall Street produces products 2 benefit itself, not retail $$ Apr 01, 2012
Keynes: One Mean Money Manager http://t.co/WJ2jESFE “The board of King’s College gave him uncontested authority to invest as he wished.” Apr 01, 2012

Japan

Just a guess, but after Japan’s Current Account goes into deficit for ~2 years, the big adjustment down in the Yen will happen. $$ #ouch Apr 06, 2012
@valuewalk Probably because so many have lost money shorting the yen, & some have made $$ long the yen, that many just trust the momentum $$ Apr 06, 2012
@valuewalk long-dated yen currency puts have fairly low vol 😉 Not doing that either, but… someone will. Apr 06, 2012
Yen Forecast: Xie Sees 40% Drop, Japan Bubble Bursting http://t.co/EjI7hytt Wow. Thinks Japan near tipping point 4 internal financing fail Apr 06, 2012
Japan?s Strongest Storm Since 1959 Slams Into Tokyo Region http://t.co/CCOVz7C6 Very unusual 4 Tokyo 2 have such strong winds w/no typhoon Apr 03, 2012
Yen Losing Most Since ?95 Not Enough for Toyota http://t.co/IT0g84s8 Japanese Industry cheerleaders 4 “penny parity” $$ #race2thebottom Apr 02, 2012

Insurance

Advisers, B-Ds retreat from Hartford http://t.co/garB6Bwn Not offering new annuities means can’t roll to $HIG products when surr chg ends $$ Apr 03, 2012
Agents will try to get holders of $HIG annuities to roll elsewhere when surr charge ends (new commission $$ ), but be careful if you own an+ Apr 03, 2012
annuity from $HIG, b/c one reason they are getting out of the biz, I think, is that some of the secondary gtees were 2 generous + Apr 03, 2012
there is probably a business in analyzing secondary gtees, b/c some r quite valuable, &u wouldn’t want 2get tricked into rolling it by agent Apr 03, 2012
Contra: Rising equity markets to drive US life insurers-Barclays http://t.co/S6JtPun7 Catch my comment at the end, didn’t get new DAC issue Apr 02, 2012
Insurance Fees, Revealed http://t.co/mLzhpT6V NY State says agents must disclose how compensated & offer to provide full details #woohoo Apr 01, 2012

Personal

Sinkhole at the bottom of my street after a water main break. The water is more than 5′ deep & and hollowing out the road beneath. Apr 07, 2012
Street is one way, so I took my son who is a Police Explorer 2 talk to the policeman there. They knew each other. It’s a one-way street so + Apr 07, 2012
I asked the policeman (who was short handed) if he would like us 2 block street 2 traffic. Gratefully “yes.” We set up the safety gear. Apr 07, 2012
This is the opposite of last summer where we didn’t have power 4 6+ days, but we had water. We have power but no water. Hope it won’t b long Apr 07, 2012
Three Year Anniversary http://t.co/0HDD3iyD Congratulations, Hunter! @DDInvesting is our internet guide to all distressed debt $$ Apr 04, 2012
LinkedIn Events: Towson University Investment Group – Markets Summit http://t.co/kpgkDTto I’ll b participating on a panel. See you there! $$ Apr 04, 2012
@Frank_McG @volatilitysmile As I said to my wife today, “Take care of your wife, and she will take care of you.” Worked for the last 25 yrs Apr 02, 2012

Miscellaneous

Reprise: The Elfenbein Gold Model http://t.co/r3rHvZw3 @eddyelfenbein at his best, I fully subscribe to his model, reflecting cost of carry Apr 06, 2012
Matzo Ball Soup, Check. iPad, Check. For Passover, Jews Try Techie Seders http://t.co/xUW3izZl I dislike technology in religion. Yuck $$ Apr 06, 2012
Flying Auto Reviving Dreams of Chitty Chitty Bang Bang http://t.co/WixQb8AV Cheap @ $279K, this one might actually work $$ Apr 06, 2012
This discussion has problems because there is no agreed upon definition of what “free will” means.? As with all quest? http://t.co/NoMpZf0U Apr 04, 2012
Here Come Tablets. Here Come Problems. http://t.co/ezFK4Wfu Five common mistakes: a slow rollout is better to get the bugs out. $$ Apr 03, 2012
Gene Maps Are No Cure-All http://t.co/JOLTtWTK Study Warns That DNA Scanning to Predict Disease Can Mislead; ‘Not a Crystal Ball’ $$ Apr 03, 2012
Ten Claims in Support of IFRS Adoption by the SEC ? & Why They are False http://t.co/nj2PZ1pd & http://t.co/4YrMSvaH & http://t.co/7lLtioGo Apr 03, 2012
The Mighty Mathematician You?ve Never Heard Of http://t.co/9Qp1NqOB Never heard of her & her impact on physics was as great as that of math Apr 01, 2012
Mangled Horses, Maimed Jockeys http://t.co/6Dl1gEmJ Maybe there is a public policy reason to close down racetracks, & after that boxing $$ Apr 01, 2012

Energy

Australia LNG Boom Threatened by US Shale Exporters http://t.co/qleN6sVd Cheap US Hydrocarbons invert prior economic certainties $$ #shale Apr 04, 2012
Shale oil: from curse to cure for East Coast refiners? http://t.co/MdlXvjIb US Shale oil is high quality; challenge is delivery2refineries Apr 04, 2012
Repsol Worst Debt Swaps on YPF Seize Threat http://t.co/BewpJA4p Argentina not 2b trusted; would buy $REP bonds on weakness, stock a ?? $$ Apr 04, 2012
Encana in Play as Petronas Seeks Natural Gas http://t.co/SEx832F1 Petronas looking long-term, b/c prospects for natgas pricing r poor $$ Apr 04, 2012
Why high gas prices at the pump? The answer is BICS http://t.co/LopjaesG Brazil, India, China, & Saudi Arabia have increased gasoline demand Apr 03, 2012
The rapidly shifting supply fundamentals in US natural gas http://t.co/myofZrQD Injection cycle starting early w/supplies high already $$ Apr 03, 2012

Rest of the World

Contra: The Buck Stops Here: A BRIC Wall http://t.co/RYykjXXr The BRIC nations r2 statist 2 link 2 gold. Good idea, doesn’t fit the politics Apr 06, 2012
Germany Asked to Forgo $1.3 Billion Deutsche Telekom Payout http://t.co/b8cvOOlB Interesting how Capex constrains euro-telcos, not US $$ Apr 04, 2012
Europe?s Ratings Revenge Founders on Market Reality http://t.co/D3dNu7sF Eurocrats stumble in dark; will return 2 old system; it worked $$ Apr 04, 2012
How A Baby Bust Will Turn Asia’s Tigers Toothless http://t.co/VE78u9tu Economic growth is partially population growth; sterile societies $$ Apr 01, 2012
Swedish High Street Rebound Ends Bets for Riksbank Cuts http://t.co/jYioq0NN A relative bright spot in Europe; having the Knonor helps $$ Apr 01, 2012

Company News

RE: @emergingmoney Never been crazy about firms that perpetually run w/neg working capital. Interesting idea, though. http://t.co/Xx6yFf8v Apr 04, 2012
Optical Delusion? Fiber Booms Again, Despite Bust http://t.co/9QiAmZOH Whouda thunk it? I knew this was getting close, demand 4new fiber Apr 04, 2012
Scarred Avon Is Takeover Target http://t.co/f2T9E7V7 Don’t think $AVP is a good takeover target: toss dist syst or incompatible syst $$ Apr 03, 2012
Technology obsoletes too easily, particularly in hot sectors. Very difficult to get to $1T of?Market Cap. Bit-by-bit? http://t.co/XjGU9ouG Apr 03, 2012
$AAPL ‘s War on Android http://t.co/ILGQVAZD Long, fascinating article; perversely, attempts to enforce patent can invalidate patents $$ Apr 02, 2012
Dude, is There any Value Left in $DELL ? http://t.co/iG5q5iea U know your marketing is stale when people reference advertising >10yrs ago $$ Apr 02, 2012

Housing

The rebound is now http://t.co/l4coNvgt Worth watching, but I would wait until the foreclosures have been mostly cleared, b4 saying bottom Apr 07, 2012
Home Prices Seen Dropping 10% in US on Foreclosures http://t.co/BBjzxKiU Once f/cs clear out, the market will normalize maybe even rise $$ Apr 03, 2012
McClellan on Lumber?s tendency to leading housing stocks http://t.co/cevWyVTs If past is prologue, housing prices are set for another dip $$ Apr 01, 2012

Funds

I’ve owned this in the past, but not now.? It’s been around for 19 years as a CEF — just have to watch the premium/d? http://t.co/XMVs6RBS Apr 06, 2012
Why I Won?t Be Buying TAGS http://t.co/2S8bqcQJ Expense ratio does not include the expenses paid on underlying ETFs owned by $TAGS $$ Apr 04, 2012

Financial Distress

Reddy Ice Considers Filing for Bankruptcy http://t.co/IgpYjHue Is it just me, or are we seeing an uptick in insolvencies? $$ Apr 04, 2012
Hostess Serves Up New Batch of Cuts http://t.co/fHBXwHes Future failure as people don’t buy so many of the “sugar fat bombs” 4 kids $$ Apr 02, 2012
Failures: Pinnacle Airlines http://t.co/BXkJ8v9j AFA Foods http://t.co/xs4wsFEE Airlines & Meat renderers r born 2 fail $$ Apr 02, 2012

Gold does Nothing

Posted on 6 April 20129 April 2012 by David Merkel

Gold does nothing, and as Warren Buffett said in his recent annual report:

Today the world?s gold stock is about 170,000 metric tons. If all of this gold were melded together, it would form a cube of about 68 feet per side. (Picture it fitting comfortably within a baseball infield.) At $1,750 per ounce ? gold?s price as I write this ? its value would be $9.6 trillion. Call this cube pile A.

Let?s now create a pile B costing an equal amount. For that, we could buy all U.S. cropland (400 million acres with output of about $200 billion annually), plus 16 Exxon Mobils (the world?s most profitable company, one earning more than $40 billion annually). After these purchases, we would have about $1 trillion left over for walking-around money (no sense feeling strapped after this buying binge). Can you imagine an investor with $9.6 trillion selecting pile A over pile B?

Beyond the staggering valuation given the existing stock of gold, current prices make today?s annual production of gold command about $160 billion. Buyers ? whether jewelry and industrial users, frightened individuals, or speculators ? must continually absorb this additional supply to merely maintain an equilibrium at present prices.

A century from now the 400 million acres of farmland will have produced staggering amounts of corn, wheat, cotton, and other crops ? and will continue to produce that valuable bounty, whatever the currency may be. Exxon Mobil will probably have delivered trillions of dollars in dividends to its owners and will also hold assets worth many more trillions (and, remember, you get 16 Exxons). The 170,000 tons of gold will be unchanged in size and still incapable of producing anything. You can fondle the cube, but it will not respond.

Admittedly, when people a century from now are fearful, it?s likely many will still rush to gold. I?m confident, however, that the $9.6 trillion current valuation of pile A will compound over the century at a rate far inferior to that achieved by pile B.

Buffett misses the point on gold, something he doesn’t often do in economic matters.? Gold is valuable because it is beautiful, and it can’t be used for much aside from beauty.? Gold can only be used for things that are not necessary (with a few small exceptions), and is thus a luxury item.? Wait, doesn’t Buffett own a scad of jewelry stores, and he doesn’t get this?? Jewelry is not a necessity, but something to please those we love with something of beauty.

Beyond that, gold is divisible, easily melted down, and doesn’t weigh a lot relative to its value.? It is an ideal store of value.

Gold does nothing, and that’s good.? We need some things in this hectic world that do nothing.? What is the value of doing nothing?

Quietness.? Pause.? Repose.? Reflection.? Measurement Standard.

Fiat currencies change every day, and the price of gold relative to chose currencies changes similarly.? Gold doesn’t change; it’s like God in that way.? We don’t measure it.? Because it doesn’t change, it measures us, because we do change.

I’m not a gold bug.? I own no gold, aside from my small wedding ring and? few other odd bits of jewelry.? But there is a lot of value to a pretty commodity that has little usefulness aside from beauty.? Think of silver for a moment.? Whether in electronics or photography it has significant industrial value.? Though both are used as currencies, and stores of value, silver responds more to the economy, and gold just sits there.

Maybe that’s what Robert Zoellick meant when he talked about gold as a reference point for the global economy.? Unlike fiat currencies, which are manipulated by finance ministries and central banks, gold can’t easily be manipulated.? Gold is the measuring rod of economics, whether we like it or not.

That brings me to Eddy Elfenbein’s Gold model, and my refinement of it.? Gold reacts to real interest rates.? As real interest rates rise, gold falls, and vice versa.? Think of it this way: when real interest rates go down, there is less loss to holding gold, because fiat currencies suffer from financial repression.

Gold can’t easily be repressed; it is far less susceptible to government manipulation because it is something real and tangible — far harder to manipulate.

Some have suggested that gold could back the currencies of major emerging markets, and I think that would be a good idea, but I think none of the large emerging markets except Russia would dare or even want to do it.? Statists like fiat currency, because it gives them one more lever of control over those that they rule.? Gold-backed currencies are for limited governments, and in general, most emerging market governments don’t think that way.

With Mr. Buffett, I will agree, I would rather have the businesses and the farmland [pile B].? They will likely be more valuable in the long run than the gold.? But I might take the $1 trillion of “walking around money,” and use it to buy 10% of the cube of gold [pile A], leaving me with a piddling $40 billion of walking-around money.? I might look at the gold, and think how beautiful it is.

Fondle it?? Nah.? Just admire how unchangeable it is.? Businesses change; technologies obsolete whole industries as they create new ones.? Companies can be mismanaged, or outcompeted.? Very few last longer than a generation; they change a lot, and require constant management.

Farmland depletes unless you take the time to maintain it, and cheap potash supplies are getting scarce.? Besides, perhaps one of my great-grandchildren will note 100 years from now how the global economy has a hard time with the population shrinking globally.? At that point, with less pressure to increase yields, farmland might not be as valuable.? I’m not predicting this; it’s only possible — I’m only saying that arable land, another really scarce resource in the world could in some scenarios become less valuable in real terms.

The real value of the gold would be as a hedge against governments and central banks that financially repress their populations by holding interest rates, making it difficult for savers to preserve value.? And that’s what gold does best, preserving value, as it sits there, beautiful, doing nothing.

So, when governments and central banks debase their currencies, as in the ’70s, the 2000s, and create conditions where real interest rates are negative, gold flies in terms of the debased currencies, and then crashes back down if you get a Paul Volcker-type, and policy normalizes after a lot of pain, which this generation seems unwilling to take.? Until it does take the pain, there will be the tendency for gold to go higher, and more so, if real interest rates remain negative.

So, sit back and and watch the gold measure the policies of governments, central banks, even us.? Gold does nothing except sit there and look beautiful, and that’s what makes it so valuable.

Easy in, Hard out

Posted on 5 April 20125 April 2012 by David Merkel

My view is that there is no such thing as a free lunch, not even for governments or central banks.? Any action taken may have benefits, but also imposes costs, even if those costs are imposed upon others.? So it is for the Fed.? At the beginning of 2008, they had a small, clean, low duration balance sheet on assets.? Today the asset side of their balance sheet is much larger, long duration, and modestly dirty.? Let me give you a few graphs created from the H.4.1 data, obtained via the poorly designed and touchy Data Download Program at the Fed’s H.4.1 portion of their website.

The first graph gives the liabilities of the Fed over the last 4+ years.? The data is taken from table 1 in the H.4.1 release.? You can see the massive expansion of the liabilities, and the way the crisis unfolded.? Currency, and “Other Liabilities & Capital” build “slowly,” i.e. 6.9%/yr and 14.1%/yr, respectively.? The US Treasury steps in with the Supplementary Financing Account at a few points where the Fed could use money deposited there for further expansion of quantitative easing, and leaves when they are no longer needed.

But the real growth comes in the “Everything else” which grew at 33%/yr, and reserve balances with Federal Reserve Banks, which you can calculate an annualized rate of growth for, but a rate doesn’t do justice to the process, because it grew due the two events — QE1 & QE2.? The Fed bought assets from various parties, who now deposit at banks inside the Federal Reserve System.

The next two graphs come from Table 2 of the H.4.1 report.? These describe the assets that have a maturity, which comprise over 80% of the Fed’s assets over the time of the graph, and over 90% at present.? First, you can see the growth of the assets bought through QE, Treasuries, Agencies, and MBS.? Second, you see the crisis responses: 1) the loan programs in the US, which explode and trail away and 2) the Central Bank Liquidity Swaps, which explode, trail away, and have come back in what is presently a muted form today.

Perhaps the bigger change is that the Fed’s balance sheet has a lot more long-maturity assets than it used to.? This stems from the quantitative easing they have done, as well as their efforts to ~~play God~~ flatten the Treasury yield curve.

Now, almost all of the assets underlying everything 10 years and shorter pay out their principal all at the end, with no right of prepayment.? For 10 years and longer, at present 75% are Mortgage Backed Securities [MBS].? Those have average lives (weighted average time for payment of principal) considerably shorter than a bond that pays all of its principal at the end for three reasons:

Principal gets paid down slowly due to normal amortization.
Prepayments get made when it is advantageous to the borrower, which not only pays off principal today, but shortens the term of the loan, which accelerates the normal repayment of principal.
The final maturity of of the longest loan in the pool is the final maturity of the pool

So, in terms of actual interest rate sensitivity, the over 10 years bucket is probably only a little more sensitive to change in rates than the 5-10 year bucket.

In normal times, central banks buy only government debt, and keeps the assets relatively short, at longest attempting to mimic the existing supply of government debt.? Think of it this way, purchases/sales of longer debt injects/removes liquidity for longer periods of time.? Staying short maintains flexibility.

Yes, the Fed does not mark its securities or gold to market.? Under most scenarios, it is impossible for a central bank which can issue its own currency to go broke.? Rare exceptions — home soil wars that fail, orpolitical repudiation of the bank, where the government might create a new monetary standard, or closes the bank because of inflation.? (Hey, the central bank has been eliminated twice before.? It could happen again.)

The only real effect is on how much?seigniorage the Fed remits to the Treasury, or, if things go bad, how much the Treasury would have to lend/send to the central bank in order to avoid the bad optics of negative capital, perhaps via the Supplemental Financing Account.? This isn’t trivial; when people hear the central bank is “broke,” they will do weird things.? To avoid that, the Fed’s gold will be revalued to market at minimum; hey maybe the Fed at that time will be the vanguard of market value accounting, and revalue everything.? Can you imagine what the replacement cost of the NY Fed building is?? The temple in DC?

Or, maybe the bank would be recapitalized by its member banks, if they are capable of doing so, with the reward being the preferred dividend they receive.

Back to the main point.? What effect will this abnormal monetary policy have in the future?

Scenarios

1) Growth strengthens and inflation remains low.? In this unusual combo, it will be easy? for the Fed to collapse its balance sheet, and raise rates.? This is the dream scenario; and I don’t think it is likely.? Look at the global economy; there is a lot of slack capacity.

2) Growth strengthens and inflation rises.? The Fed will likely raise the interest on reserves rate, but not sell bonds.? If they do sell bonds, the market will back up, and their losses will be horrible.? If don’t take the losses,?seigniorage could be considerably reduced, or even vanish, as the Fed funds rate rises, but because of the long duration asset portfolio, asset income rises slowly.? This is where the asset-liability mismatch bites.

If the Fed doesn’t raise the interest on reserves rate, I suspect banks would be willing to lend more, leaving fewer excess reserves at the Fed, which could stimulate more inflation. Now, there are some aspects of inflation that remain a mystery — because sometimes inflationary conditions affect assets, rather than goods, I think depending on demographics.

3) Growth weakens and inflation remains low.? This would be the main scenario for QE3, QE4, etc.? We don’t care much about the Fed’s balance sheet until the Fed wants to raise rates, which is mainly a problem in Scenario 2.

4) Growth weakens and inflation rises, i.e. stagflation.? There’s no good set of policy options here. The Fed could engage in further financial repression, keeping short rates low, and let inflation reduce the nominal value of debts.? If it doesn’t run wild, it could play a role in reducing the indebtedness of the whole economy, though again, it will favor debtors over savers.? (As I’ve said before, in a situation like this, or like the Eurozone, all creditors want to be paid back at par on the bad loans that they have made, and it can’t be done.? The pains of bad debt has to go somewhere, where it goes is the argument.)

I’ve kept this deliberately simple, partially because with all of the flows going back and forth, and trying to think of the whole system, rather than effects on just one part, I know that I have glossed over a lot.? I accept that, and I could be dead wrong, as I sometimes am.? Comment as you like, with grace and dignity, and let us grow together in our knowledge.? I’ve been spending some time reading documents at the Fed, trying to understand their mechanisms, but I could always learn more.

Summary

During older times, the end of a Fed loosening cycle would end with the Fed funds rate rising.? In this cycle, it will end with interest of reserves rising, and/or, the sale of bonds, which I find less likely (they will probably be held to maturity, absent some crisis that we can’t imagine, or non-inflationary growth).? But when the tightening cycle comes, the Fed will find that its actions will be far harder to take than when they made the “policy accommodation.”? That has always been true, which is why the Fed during its better times limited the amount of stimulus that it would deliver, and would tighten sooner than it needed to.

But under Greenspan, and Bernanke to a lesser extent (though he persists in pushing the canard that the Fed was not too loose 2003-2004, ask John Taylor for more), there were many missed opportunities to stop the buildup of bad debts, but the promise of the “Great Moderation” beguiled so many.

Removing policy accommodation is always tougher than imagined, and carries new risks, particularly when new tools have been used.? Bernanke can go to his carefully chosen venues and speak to his carefully chosen audiences, and try to exonerate the Fed from well-deserved blame for their looseness in the late 80s, 90s, and 2000s.? Please, Mr. Bernanke, take some blame there on behalf of the Fed — the credit boom could never have happened without the Fed.? Painting the Fed as blameless is wrong; the “Greenspan put” landed us in an overleveraged bust.

I’m not primarily blaming the Fed for its current conduct; today, it is trying to deal with a lending bust — too much debt, and much of it is bad, with a government whose budget is out of balance.? (In the bust, there are no good solutions.)? I am blaming the Fed for loose policies 1984-2007, monetary policy should have been a lot tighter on average.? But now we live with the results of prior bad policy, and may the current Fed not compound it.