26 October 2012 – The Aleph Blog

Sorted Weekly Tweets

Posted on 26 October 2012 by David Merkel

Insurance

Insurers Must Boost Reserves for Residential Mortgage Bonds http://t.co/z1Plcc9z Pretty trivial; change small, not worth making $$ Oct 26, 2012
The Randian and the Bailout http://t.co/45wGJSo2 Without a tax gift from the US Tsy, $AIG couldn’t pay off the bailout http://t.co/2O4k7vpA Oct 25, 2012
For that last tweet, full disclosure, long $AIZ for clients and me Oct 24, 2012
Assurant Reports 3rd Quarter 2012 Financial Results http://t.co/pTbHUunV Over 8.75 yrs $AIZ has shrunk its share count from 142M to 78M $$ Oct 24, 2012
Weschler Rise From Grace Leads to Role Advising Buffett http://t.co/uUlYUPVK Interesting tale of a guy who can deal4 & value companies $$ Oct 22, 2012
Goldman Sachs Creates a Dividend+Buybacks Measure, & 4 Insurer Stocks Shine http://t.co/myQ8Ga1e I own 2 of them 4 clients. Which 2? $$ Oct 22, 2012

Central Banking

Here Comes the Dollar Wave Again http://t.co/5EO5Ejve Defend exports, import inflation, asset bubbles “Our currency, but your problem.” Oct 25, 2012
Approach risks ?distorting? decisions & ?it might be economically inefficient 2try2 push prices up so much,? Shiller http://t.co/Bs5GJPGX Oct 24, 2012
Redacted Version of the October 2012 FOMC Statement http://t.co/2jOMkLje Note: CPI inflation is at 2%, also inflation expectations rising $$ Oct 24, 2012
FOMC Statement: http://t.co/E2BOFdrr Oct 24, 2012
“We fail 2c the direct link, or even an indirect link, btw the size of the Fed’s balance sheet & the unemp rate” http://t.co/bM149U5Z $$ Oct 24, 2012
Buffett: ‘”I get a little worried about continuously expanding” the Fed’s balance sheet, he said on CNBC.’ http://t.co/KWIVYBIS $$ Oct 24, 2012
Traders Calling Singer?s Bluff on Intervention as Koruna Gains http://t.co/Y1ml4EZ4 Czech National Bank playing with fire, will burn $$ Oct 22, 2012
Would mean that the external effect of loose monetary policy have been played out, & the next big move is coming (but from where)? $$ Oct 22, 2012
Worst Carry Trades Show Central Banks at Stimulus Limit http://t.co/IDxi6uVq Interesting thought: if carrytraders can’t make money… $$ Oct 22, 2012

Fiscal Cliff

Firms Hit Brakes Before Fiscal Cliff http://t.co/z1Plcc9z Tap brakes is more like it. Most think we won’t go over the cliff #gridlock $$ Oct 26, 2012
Aha! Here’s The REAL Reason Corporate Executives Are Freaking Out About The Fiscal Cliff http://t.co/oS8VZpsi Favors initiatives of Dems $$ Oct 22, 2012

Other

How Supap Kirtsaeng?s Textbooks Idea Led to Supreme Court http://t.co/h1CDWk1q What rights exist to re-sell something that you bought? $$ Oct 26, 2012
The Plot to Destroy America’s Beer http://t.co/3ElPpvvx A tale of cost-cutting, quality reductions. Light beers ascendant. $$ Oct 26, 2012
Sandy Nears Jamaica, Forecasters Weigh New England Threat http://t.co/R1HNSDm8 High Incidence, Low Power 4 Tropical Storms in 2012 $$ Oct 24, 2012
Calling All Germs http://t.co/BkfuReQq Cellphones Are Great for Sharing Photos?and Bacteria; Cleaning May Harm Screens $$ Oct 23, 2012
Romney?s Air Force Comparison Misses U.S. Edge in Jets http://t.co/3lFkg4KL There r some situations where more lower tech jets would help Oct 24, 2012
Dean, Marathon Split-Offs on Tap http://t.co/m5OLbAuI Post-split $DF looks interesting, if boring. More room 2 focus $$ Oct 22, 2012

Energy

Shale Glut Becomes $2 Diesel Using Gas-to-Liquids Plants http://t.co/sjUDsrVK This is the Holy Grail, because gasoline is tough2produce $$ Oct 26, 2012
The internal combustion engine is far from dead http://t.co/Ewa60lrw Most real improvements in energy efficiency deal w/fossil fuels $$ Oct 22, 2012
Americans Buying Fewer New Cars in Lifetime http://t.co/viB6dIlU long-term probably not a good sign; autos drive a lot of the economy $$ Oct 22, 2012
The Myth of Affordable Energy – Interview with Ed Dolan http://t.co/8jWI1faC Energy efficiency is increasing. Full cost pricing desirable $$ Oct 20, 2012

Demographics

Russian Funds Band Together to Repel Government Cash Grab http://t.co/72KWo3Bg Gotta b careful on pension funds cuz govts like 2 raid them Oct 26, 2012
More Americans delaying retirement until their 80s http://t.co/dZM4Tmqm This is the way it should be. Retirement s/b 4-5 years at most Oct 25, 2012
Can Japan?s Elderly Become Its Growth Engine? http://t.co/eqhsu54i This seems like wishful thinking to me. Spending from savings <> wages $$ Oct 24, 2012

Financials

U.S. securities regulator questions need for new broker standard http://t.co/iNUVJKIp Extending fiduciary standards 2 brokers in question Oct 24, 2012
Forcing frequent failures http://t.co/OL6WSfOM @interfluidity hits a home run in dealing with bank failures, & how to regulate Oct 24, 2012
Low Rates Pummel Banks http://t.co/577Fsc1i Borrowers Benefit, but Industry Lending Profits Hit Lowest Level in Three Years $$ Oct 23, 2012
Marsico: When Going Private Goes Wrong http://t.co/Vxyc40u7 June 2007 was the wrong time 2 LBO, then performance lags $$ My sympathies2them Oct 23, 2012
3 key money topics Romney-Obama debates ignored http://t.co/7j79IQ4V Housing prices, Investor protections & Retirement Savings $$ Oct 23, 2012
The end of stock market crashes? http://t.co/VjIALNEm I’m sorry, but the conclusion is bogus. Even if its works, only some could escape $$ Oct 23, 2012
Mortgage risks underestimated, economists conclude http://t.co/TFDpqz70 FHA uses a model that leads it to underestimate delinquency risk $$ Oct 22, 2012
Annaly Says Michael Farrell Dies After Cancer Diagnosed http://t.co/n5VNgi8m He was kind2me ~2000; willing2share ideas w/little me $$ $NLY Oct 22, 2012
Mortgage REITs: Not Just Yet http://t.co/20kPVBs2 I would be careful here & reduce exposure… they are always unstable vehicles $$ Oct 21, 2012
The Winner for Investors Is… http://t.co/eBQM5Ws4 @jasonzweigwsj points out the connection between returns & politics is tenuous $$ Oct 21, 2012

Economy

Firings Highest Since 2010 as Ford to Dow Face Slump http://t.co/9q87q63I This is the US economy. We can’t support workers relative2profit Oct 26, 2012
Weak Tea at Unilever Persists Amid Innovation at Rivals http://t.co/ryqjkEof Did not even know that Lipton was a Unilever brand $$ $UL $UN Oct 24, 2012
Doom Heralded at Hayman by Widening Trade Deficit: Japan Credit http://t.co/CZS09whs Japan?s debt is the ?cleanest dirty shirt.? Not. $$ Oct 23, 2012
Hunger Stalks My Father?s India Long After Starvation End http://t.co/dkVTXxaO Long article, makes me grateful that I can feed my kids $$ Oct 23, 2012
Electrolux, Philips Warn Of US Slowdown http://t.co/6k5hxTe2 Another soggy data point; less demand 4 bigger-ticket consumer items $$ Oct 22, 2012

Retweets

Ya, true RT @glenntyrpa: @barnejek @AlephBlog @sikorskiradek Yea. When did Japan invade China? Was that 1930? 🙂 we Americans forget. Oct 26, 2012
RT @PragCapitalist: Today’s financial tip: don’t ever buy a boat. Instead, find a friend with a boat. If necessary, buy the friend. … Oct 24, 2012
Clever RT @BradErvin1: @AlephBlog @PragCapitalist This is Buffett, courtesy legacy @kevindepew articles @Minyanville http://t.co/dGTNG9kl $$ Oct 24, 2012
Stinks, just stinks RT @ritholtz: THE SELLSIDE: SAME AS IT EVER WAS Courthouse News Service http://t.co/K9LDmj5m via @CourthouseNews $$ Oct 24, 2012
RT @KathrynTully: The last of Sarah Thornton’s top reasons for quitting art market surely belongs in top 10 reasons not to be a journo. … Oct 24, 2012
RT @emckean: LOVE THIS RT @aniajakubek: There’s a Polish saying that means “Not my problem” & literally translates to “Not my circus … Oct 24, 2012
SIFMA gets an infamous big name to speak to them RT @LaurenLaCapra: #greenspan http://t.co/rjVlCfV5 Oct 23, 2012
At my house too RT @retheauditors: Halloween is dead to me. Oct 22, 2012

Replies

#FF @NickTimiraos @carney @grossdm @annsaphir @ritholtz @ToddSullivan @PlanMaestro @RolfeWinkler @LaurenLaCapra @davidgaffen @jennablan $$ Oct 27, 2012
@TraderNewsFeed No, I don’t think that. I think we should enjoy our work, and enjoy it for as long as we can, until we can no longer work $$ Oct 26, 2012
@rjwile True, but that’s the price of not saving enough. There is no right to a retirement. Someone send the EU the memo. $$ Oct 26, 2012
@OVVOFinancial I largely agree. Reducing the real value of debts would help. My only fear is that nominal incomes might not grow much $$ Oct 25, 2012
@OVVOFinancial Missed that, thanks. Still, the Chain-weighted PCE deflator is 1.5% yoy at present. Oct 25, 2012
@barnejek oops Oct 24, 2012
@PragCapitalist A boat is a hole in the water into which you pour money $$ That said, the recession created a lot of used boats 4 sale Oct 24, 2012
@tebaho I am not a Romney backer Oct 24, 2012
@EddyElfenbein lifted the stake above 50% by 1995. Oct 24, 2012
@EddyElfenbein In 1977, GEICO was ~6% of his public investments, before $BRK.B acquired 33% of the company by 1980, and buybacks + Oct 24, 2012
@EddyElfenbein In 1981, GEICO was ~30% of his public investments — no data on how big his private investments were then $BRK.B $$ Oct 24, 2012
@EddyElfenbein 1996-7 around 16% of pretax income. Prior to that, it was not wholly owned, and so Buffett acctd 4 it as an investment $$ Oct 24, 2012
@EddyElfenbein $BRK.B would not want to live without GEICO, but in my opinion, it could live without it Oct 24, 2012
@EddyElfenbein It’s about 5% of BRK’s pretax profits. The float it generates is very short and is only 5% of liabilities. Oct 24, 2012
@PragCapitalist It’s a conglomerate fueled by a set of huge insurance companies, where assets r sourced privately & publicly $$ $BRK.B Oct 24, 2012
@PlanMaestro @aarontask @TheStalwart I think it is spurious correlation b/c I c many other variable that r weak. US economy is flat. $$ Oct 24, 2012
@felixsalmon In the NT Greek, there r2 words for God’s will, &1 tells u God ordains everything, the other, he doesn’t approve everything Oct 24, 2012
@CflGator I would ask the question, how is $TGT going to deploy the capital? The answer probably lies there. Oct 24, 2012
@LDrogen America’s politicians have always made appeals based on religion, & then abandoned the religious voters that support them (not new) Oct 24, 2012
@joshuademasi I realize with Japan, it is unlikely 4 there 2b an external default, until the external debt gets big enough Oct 24, 2012
@aarontask This is a stock versus flow issue. The banks reap capital gains now, but it will reduce their future interest margins/income $$ Oct 24, 2012
@CflGator Think they are trying to free up capital for alternative uses. Oct 24, 2012
@LDrogen But all people have unprovable a priori opinions, and many will affect their views on public policy, whether “religious” or not Oct 24, 2012
@LDrogen It becomes the same paradox that philosophers go through with respect to the concept of free will vs determinism Oct 24, 2012
@LDrogen Even 2a Christian like me, God’s will is a highly nuanced, b/c there r 2 words in NT Greek 4 “will” & they mean different things Oct 24, 2012
@LDrogen One of my close friends came into existence as a result of a rape. Two good people adopted him; biological mother was courageous Oct 24, 2012
. @aarontask will look for it — if anyone has a link 2 it, pass it 2 me Oct 24, 2012
@joshuademasi Nations with their own currencies don’t have to default on debts. I think some will choose to default for political reasons $$ Oct 23, 2012
“This brings up something @ritholtz would say ~ blog traffic goes up during a crisis?” ? David_Merkel http://t.co/9U0OxjLe $$ Oct 23, 2012
@joshuademasi Not sure he will lose; he has a decent chance of being correct. Japan has preceded the global economy for past 20 years $$ Oct 23, 2012
“5. Tadas, as you have said before, investment/finance blogging is hard. And many of the best of us?” $$ David_Merkel http://t.co/EuaE0hmB Oct 23, 2012
@StephenShiflett I distrust polls generally. I am not a Romney supporter. Most statistical comments in the media r not well-founded $$ Oct 23, 2012
@StephenShiflett Stratification matters more. The size was smaller than most polls I c, & instant senses of who 1r often not correct Oct 23, 2012
@DUNNER2 @CBSNews Now there was a poll that no one asked for, the sample size was far too small, but actually had a real impact. Sad. Oct 23, 2012
@Shwaver should be more like 5% if the poll is well stratified, and most polls aren’t Oct 23, 2012
@thejudge1082 @cbsnews I would criticize that as well. Most polls are too small and not well stratified Oct 23, 2012
@nmariecrumbie @DJDougMadrid @cbsnews I am *not* a backer of Romney. I am voting for the Constitution Party. I am a statistician, are you? Oct 23, 2012
@Justsaying1104 @CBSNews size *always* matters. I am a statisticiam by training. The hyper-short news cycle forced out a poll Oct 23, 2012
@Justsaying1104 @cbsnews of course size matters — what I object to is trying to get instant answers to what people are thinking $$ Oct 23, 2012
@ituzzip On a 500 person poll the error bounds are wider +/- 5%. But Rs answer polls less often than Ds. Oct 23, 2012
@JW28 Sorry, I am not a Romney backer Oct 23, 2012
@DJDougMadrid I don’t believe in instant, & I am voting 3rd party. Oct 23, 2012
@StephenShiflett Most polls I see are double that, it was still small, given the short time after the debate. Oct 23, 2012
@CBSNews Small sample size Oct 23, 2012
@TheStalwart I think you are fair and balanced, because A third of the time I agree, a third I disagree, and a third I an in-between. $$ Oct 23, 2012
@wallstCS FD: long $SFG — You do realize that revenue is not a useful valuation metric for insurers, right? Earnings & Book r relevant $$ Oct 22, 2012
@groditi @GaelicTorus it drives a lot of technology development, materials science, design (or lack thereof), advertising, energy efficiency Oct 22, 2012
@BradErvin1 No, the point is that corrupt governments tend to spawn corruption in society Oct 20, 2012

On the Virtue of Hard Questions for Young Analysts

Posted on 26 October 20122 November 2012 by David Merkel

Yesterday I represented the Baltimore CFA Society at the kickoff meeting for the 2013 CFA Institute Research Challenge.? As is the norm, the Washington, DC CFA Society (which is 2.5x larger than us) and Baltimore choose a local company for the students to analyze.? Last year, it was Under Armour [UA].? This year, it is Marriott [MAR].

One quick aside.? Last year, the more bearish you were on Under Armour, the better a team scored.? But guess what?? Under Armour rose 15% in the last 7+ months — the team that finished last had the result that was the best, and the winner did the worst.? I know many of my readers don’t like Jim Cramer, but one thing that he said shines through here: “The bear case always sounds more intelligent.”? The same is true in academic competitions.? That’s one reason it is good to have a mix of temperaments in an investment firm.? Personally, I believe that bulls and bears do better together than separately — they need to round each other out.

Personally, I would prefer to analyze a growth stock like Under Armour, to the “asset light” hotelier Marriott.? That said, Marriott’s? Investor Relations team was out in force for the six (maybe seven) colleges who showed up, and gave what I thought were credible answers to the students who asked them questions.? Near the end of the presentation, the senior Investor Relations person walked them through each line of the income statement — I thought that was a nice touch, but wondered what Marriott used as an internal measure of profitability.

(Note to any students reading me: take a look at what Moody’s, S&P, and Fitch use as their metrics on Marriott.? The rating agencies are not dumb, and they get more data than stock analysts do. They are inside the wall.? They get material nonpublic information, and disclose the portion of it that is relevant to bond investors.? At the presentation, the Marriott IR folks stressed repeatedly that they want to maintain an investment grade credit rating.? That is a large constraint on what Marriott does, and should be considered in any good analysis.)

This will be an interesting competition, and five months from now, it will be fun to be a judge in the local version of the Investment Challenge.

-=-=-=-=-=-=-=-=-=-

Two weeks ago, I was a judge in a competition among finance students for four colleges that met a McDaniel College.? I was the only judge that did not graduate from McDaniel, which was formerly Western Maryland College, named after the Western Maryland Railroad which funded the school in its early years.

The question at hand was whether the Texas Rangers should have acquired A-Rod in 2000.? This is a tough question, because it is a binary decision, and it faces the winner’s curse.? So, you hired A-Rod.? How badly did you overpay to get him?

I don’t think I am overstating the problem.? Anytime there are multiple bidders for a unique asset, the winning buyer tends to overpay.

The case study (from Harvard) had its own issues.? It overestimated how fast average player salaries would grow, and the econometrics behind the estimation of wins as a function of player salaries was decidedly poor.? More than the Harvard Business School case study would admit, it was a lousy decision to hire A-Rod.? Add in the social effect on other players when A-Rod is paid a huge amount relative to them, and even if he is a nice guy, you wonder if you are truly valuable to the franchise.

But when you are a judge in such a competition, your mind works this way: the first team sets the tone, and has an advantage until a team eclipses them.? Then that team sets the tone.

The judges were pretty neutral on whether A-Rod should be hired or not.? The vote depended more on the process they undertook.? How much research did they do?? How do they back up their assertions?? Did they believe the data in the case study blindly?

–==-=–==-=-=-=-=-=-=–==-=-=-=-

Face it, the business world is unclear/dirty, and those that analyze it have to take account of what they don’t know, and make the best decision that they can.? This is the virtue of hard questions for young security analysts, and why we hold such competitions.

Toss them a hard problem.? Make them think outside the box.? Life is tough, and investment decisions are often unclear.? This is life.

Investment competitions are a far better way to train students than the raw academics.? Modern Portfolio Theory is garbage.? Most academic approaches to investing don’t work.? But try to understand a business like Marriott.? They make money off of selling their name.? They make money managing hotels.? How can they be sure to make money as they do so?? Those are the tough questions to analyze.

It’s a good thing to make young analysts face a hard question.? Whether they win or lose, they had to work hard, plan, compromise with team members, and come to a decision that would face criticism.? When we invest money, we don’t get criticism vocally, but we do see the gains and losses.? Thus the investment competitions are a very good way to prepare students for the eventual gains and losses they will face when they are making business decisions on their own.