Month: February 2013

Seven Notes on Blogging and the Markets

Seven Notes on Blogging and the Markets

Posted on by David Merkel

I need to catch up on a few things, so bear with me.? This might ramble.

1) Should I live and continue to write until mid-October of 2013, I will reach 10 years of investment writing.? I started writing for RealMoney in October 2003, and that changed my life.? Thanks to Cramer, because he created an organization that revolutionized financial media.? Former TST news writers occupy a wide number of top spots in many places in the financial press — it is astounding how much better financial news is today.? I am grateful to know many of them, some of whom would call me for help on occasion.

2) In a few more weeks, Aleph Blog will hit its sixth blogoversary.? Seems like minutes to me, but I have a lot more grey to prove that the time has passed.? I do want to note that much as I wrote at RealMoney, I have written far more here.? I have a problem though.? It seems that RealMoney has lost its ability to recover old posts pre-2008.? I would love to get copies of my old posts that are listed here.? If any of you know how to do that, please let me know.

3) Saturday night’s second article was hate me or love me in terms of responses.? There are no other writers at this site; the same flawed man writes them all.? My main point is that you need someone who acts like a fiduciary (whether they are a fiduciary or not) to tend to your assets.? Investment banks do use retail to lay off exposures that they do not want.

In any significant transaction, you want to know who is with you and who is not.? (This was true in the housing bubble, where many parties teamed up against buyers.)? For my clients, they know that over 50% of my net worth is on the line in the same portfolio that they have. (At present, over 70%.)? I have a lot of confidence in my ideas.? I eat my own cooking.

You want to invest in situations where there is alignment of incentives.? Are there brokers who are noble?? Yes.? But to use one, he needs to jump through extra hoops, because he is not under obligation to be a fiduciary.

4) 4+ years ago I wrote a piece called: Inflation for Goods Prices, Attempted Inflation for Housing-Related Assets, but Sorry, No Inflation for Wages.? Probably one of my longest titles… but that still seems to be the case today.? Fed policy inflates housing-related assets, gives some price inflation, but because labor is not scarce globally, wages are flattish.

5) I wrote this piece summarizing my views on the rating agencies.? I stand by it.? The rating agencies are not the problem.? Regulators are the problem.? They create the conditions where ratings are needed.? Ratings by their nature are opinions, they are not guarantees.? They can’t be otherwise, or else the rating agencies will have to become financial guaranty insurers, and charge far higher fees that will destroy financing for so many.

That’s why I think the lawsuits against the rating agencies will fail, again.? This is not to say the rating agencies were blameless, but it is very difficult to estimate future losses on any class of securities that has not ever gone though a failure cycle.

6) I believe in the conservation of liquidity: it can’t be created or destroyed, but it can be shifted.? My first example is stock price increments.? I think that the tick size is arbitrary, and a small tick size will favor small investors who are looking to buy small positions.? A large tick size will favor larger institutions that wait patiently to buy and sell.

7)? I believe in the conservation of liquidity in bigger ways also.? The Fed does not create liquidity, at least not in the sterilized? way that they do it presently.? But they can shift liquidity; who do the QE programs help?? The US Government and the GSE-backed mortgage market.? Liquidity has been shifted there, and away from everyone else.

That’s all for now.

Wall Street Hates You

Wall Street Hates You

Posted on by David Merkel

I have a saying, “Don’t buy what someone wants to sell you. Buy what you have researched.”

And so I would tell everyone: don’t give brokers discretion over you accounts, and don’t let them convince you to buy unusual bonds, or obscure securities of any sort.? By unusual bonds, I mean structured notes, and eminent men like Joshua Brown and Larry Swedroe encourage the same thing: Don’t buy them.

To the extent that it can, Wall street tries to sell retail investors the exposures that they don’t want.? They offer a higher yield, but take it away and then some if the things that they want to hedge go wrong.? They sell you their problems, and if things go well you are unharmed, but woe betide your capital if things go wrong.

Trust is not owed to financial advisers or brokers.? You need to treat them skeptically; if possible, you need to understand? how they are compensated.? They tend to earn more from securities that are less in the interest of buyers.? (It is not much different from insurance salesmen.)

Wall Street exists to sell promises.? That can take several forms, two of which are:

1) Buy an ownership interest in this promising company.? It’s the wave of the future.

2) Buy a promise to pay from this company under these conditions, and we will pay you an above average yield.

Wall Street knows more than you.? They may make occasional mistakes, some of them big, but compared to retail investors, they know far more.? They profit off of retail investors.? You are the natural resources that they mine.

So why play with them?? If you are using a broker, it is time to end your relationship there, and work with someone who has to put your interests first.? Look for someone who is required to put your interests first.

It’s not as if investment advisors like me always succeed; we don’t.? But the best of us do avoid greed and fear, and so protect investors from their worst instincts — selling low, and buying high.

Take control of your investing, and if you can’t do it yourself, find a talented person with self control who can.

Four Sources of Buy Ideas

Four Sources of Buy Ideas

Posted on by David Merkel

Presently, I have four ways of sourcing buy ideas in the stock market.? Here they are:

1) I read widely, and when I see something interesting, I either jot it down, or hit the “print” button.? I put it in the pile for the quarterly portfolio reshaping.

2) Preston Athey gave me this idea.? I set up a bunch of Googlebots to let me know when a CEO leaves a firm.? For companies with a lot of underused assets, that can be an incredible catalyst to unlock value.? Print, add to pile.

3) My industry studies produce a list of out of favor companies with better prospects than most — the challenge is to separate out the “buggy whip” industries, from those that are genuinely cheap.

4) Finally, I study 13Fs, and try to understand what bright investors are holding and buying.

After I assemble all of the companies that might be worthy investments, I try to forget where I got the idea from.? That forces me to analyze the company my own way, and not merely trust someone or some method that I think is bright.

After that, I engage Portfolio Rule Eight, and make my current portfolio holdings compete against the new ideas.? This is a much better way, a more businesslike way to choose companies to buy.? It forces managers to make explicit decisions that improve the characteristics of the portfolio, improving the probability of winning.

Do you have better ways of sourcing ideas?? If so, leave them in the comments.

On Investing Games & Contests

On Investing Games & Contests

Posted on by David Merkel

I am not a fan of investing games and contests.? Here are my reasons:

  • They are too fast.? Investing is a slow process; games make money far more quickly than markets do.
  • They are biased toward winning.? Many games have a positive bias built into them, returns are far higher than are commonly attainable.
  • Contests encourage undiversified portfolios.? The only contest I have seen that did not do that was the Value Line Contest in 1984, where everyone had to pick ten stocks from ten buckets going form low to high price volatility.? Great contest — I was in the top 1%, but did not win.
  • Good investing is boring.? It is work.? Most of it is not a game, though I will admit there is some game in buying and selling — gotta beat the algorithms at their game.
  • Games are not as robust as the markets.? The markets serve up all manner of surprises, while games typically mimic the past.

Here’s what I can endorse, if done fairly: paper-trading.? As with any sort of self study, if you want it to be valuable, you have to be a strict cop on yourself.? I papertraded a number of times in the 80s, and I always did well vs the market.? My porfolios typically had 40-60 companies, but they always did well.? As a TA in Corporate Financial Management, I would share my ideas with students, who liked my enthusiasm.? The professor was a EMH devotee, who when he heard that my paper portfolio was up 40% while the broad market was up 20%, said, “Oh, you pick stocks that have a beta of two.”? I tried to show him that was not the case, but “you can’t teach a Sneech.”

Paper-trading moves at the speed of the market.? It is close to real.? It shows you how difficult it is to make money.? I recommend it to all of my readers.

 

Sorted Weekly Tweets

Sorted Weekly Tweets

Posted on by David Merkel
  • God gave proverbs to the Jews; Epigrams were of the Romans. Now we do the same through tweets, why do I sense bad omens? #badpoetry Feb 02, 2013

 

Credit

 

  • One of Warren Buffett’s Greatest Trades http://t.co/wnU2g1z4 Comparing Buffett winding up his partnership to lack of distressed opps now $$ Feb 01, 2013
  • Be Very Afraid When Fear Disappears From Markets http://t.co/t8wKalsQ Low implied vols, low yields, High Q-ratio & CAPE10 $$ Feb 01, 2013
  • How a $91 million loan on the Marlins ballpark will cost Miami-Dade $1.2B http://t.co/F2u2rZbP Poway-style debt in Florida $$ cc @munilass Jan 31, 2013
  • Big, Rich, and Wobbly: Wall Street Banks Are Still Sicker Than You Think http://t.co/irKmQqLy Mohamed A. El-Erian explains the problems $$ Jan 30, 2013
  • In US Debt We Trust- The Transfer from Private to Public Debt http://t.co/2nq1pGCn Total debt hasn’t declined much from peak, gov debt up $$ Jan 30, 2013
  • Chavez?s 681% Returns Mean Socialism Buoys Goldman http://t.co/IYPD6fEJ Give Chavez credit, at least his country paid what they owed $$ Jan 30, 2013
  • 4 Reasons the Junk Bond Rally Will Continue in 2013 http://t.co/r7SF05NJ Check my comments. I like this site, but disagree w/the thesis $$ Jan 30, 2013
  • Pimco to DoubleLine Leveraging as Yields Retreat http://t.co/LBUsmfQ6 Here comes leverage; PIMCO and Doubleline gear up to get returns $$ Jan 30, 2013
  • US Not So High Yield Bonds : “It’s Starting To Feel A Lot Like 2007” http://t.co/PZ0dOyzC More like 2005-6, we need more leverage 4 2007 $$ Jan 30, 2013
  • The US High-Yield Corporate Bond Conundrum http://t.co/w0wlsn7s & this leads to buybacks & M&A. It all depends on how aggressive it gets $$ Jan 30, 2013
  • Investors Pivot Back to Banks http://t.co/ixvSSGf8 Bank bonds are likely safe, the stocks r another matter $$ Jan 30, 2013
  • Too Soon to Celebrate for Europe’s Banks http://t.co/cKT6OXli Let them deal with the mountains of bad debt & restructure them $$ Jan 30, 2013
  • Can anyone tell me why HY loan defaults are up, while HY bond defaults are down? http://t.co/gxfVA5za Usually they move in tandem $$ Jan 29, 2013
  • And very few LP CEFs at discounts, which is also true for HY bond CEFs. Preferred funds look a little more promising, but still pricey $$ Jan 29, 2013
  • Looking at bank floating rate closed end funds, a few r at high prems 2 NAV, such that if u bot the trust 2 liquidate would get 0% return $$ Jan 29, 2013

 

Companies

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  • Newell Rubbermaid Goes After $127B Health Market http://t.co/lcarSSmS Interesting 2c consumer prods comps go after the healthcare mkt $$ Feb 01, 2013
  • Chevron Realigns Its Gas and Midstream Organization http://t.co/u1WoIl2Y Sort of thing u do, prior to splitting co into 2 | FD: + $CVX $$ Jan 31, 2013
  • Good 4 refiners $$ http://t.co/q3lVpoI5 US crude oil inventories are well above the upper limit of the average range for this time of year Jan 31, 2013
  • Container Shipping Faces Merger Urge as Money Dries Up http://t.co/7Kur08t6 Capital-intensive biz is tough when financing not plentiful $$ Jan 31, 2013
  • Oh, Full disclosure two tweets ago, I am long Valero, $VLO Jan 30, 2013
  • $ACE ?s Greenberg Asks ?Why R We Doing Guidance?? http://t.co/dKtvopDX Evan has impressed me after leaving $AIG | Chip off the ol block $$ Jan 30, 2013
  • Valero Looking at Rail, Barges to Ship Canadian Crude to Gulf http://t.co/diLQGBZC Cheap oil in middle of N. America wants2get2the Gulf $$ Jan 30, 2013
  • Singer Chases Icahn With Stake in Cheapest Oil Company Hess http://t.co/Hk4ynp6q Worth reading 2 understand activist investors $$ Jan 30, 2013
  • Fund Outflows? Blame the ‘Cliff’ http://t.co/QOq13Jn8 $TROW is a good firm. If anyone should not get fund outflows, they would b one $$ Jan 30, 2013
  • Fannie To Allow Walkaways by On-Time Borrowers http://t.co/Nnx00VfR & so taxpayers will pick up the losses for walkaways on FNMA mtges $$ Jan 30, 2013
  • Software Firms Find Tax Advantages http://t.co/5G2QXmmD A good transfer-pricing accountant is worth his weight in gold. $$ Jan 30, 2013
  • Apple Reverse Convertibles: How Brokerage Firms Pervert Everything http://t.co/4ugTpgTe Don’t buy structured notes. Listen2 @reformedbroker Jan 29, 2013
  • How Apple’s Fall Bit Bondholders, Too http://t.co/60fmfhle Structured notes: Wall St. gives u a small increase in yield & lots more risk $$ Jan 27, 2013

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Central Banking

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  • Japan’s lessons for America’s budget warriors http://t.co/ftUKEJPa Think this might be the start of unsterilized monetary policy globally $$ Feb 01, 2013
  • What finally convinced me to sell my long bonds 30 bps lower than now was market’s reaction to the Fed in December. http://t.co/vQONtgBC $$ Feb 01, 2013
  • The Fed?s Actions Are Counterproductive http://t.co/THDwyijc If printing $$ or issuing credit could bring prosperity, it would be here now Jan 31, 2013
  • 2 early to celebrate ECB’s balance sheet reduction http://t.co/srQiQJ4Q @soberlook right again: off-Bal Sheet gtees dwarf BS improvement $$ Jan 31, 2013
  • Fed Policy Is a Drag on the Economy http://t.co/T3Wx0ezh I have argued the same here: http://t.co/l7MyjNLM John Taylor 4 Fed Chairman $$ Jan 30, 2013
  • Anyone else notice that all FOMC meetings are now 2 days long? Gives them more time to come up with creative errors in monetary policy $$ Jan 30, 2013
  • The Ghosts of 1994 http://t.co/Hdf2UFLi 2 things are different now: Fed was hawkish in ’94, few expected prepays 2 decrease so much then $$ Jan 30, 2013
  • What Happened To Markets The Last 15 Times The Fed Tightened… http://t.co/zq4TRGxg Long article, but instructive on tightenings $$ Jan 30, 2013
  • With Each Central Bank Move, Nations Are Impoverished More http://t.co/70lBSDeQ Combined actions of Central banks create global infation $$ Jan 30, 2013
  • USD-JPY: Short Term Reversal? – Hara-kiri http://t.co/K9N3Viom Japan leads the race to the bottom. Will they stop sterilizing asset buys? $$ Jan 30, 2013
  • There are two things lacking that were present in 1994: a hawkish Fed, and expectations that RMBS prepays… http://t.co/DHekaqIN Jan 29, 2013
  • The Unintended Consequences Of The Greatest Economic Experiment http://t.co/0hEH3VS1 The Fed won’t admit it, but it is flying blind $$ Jan 28, 2013

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Rest of the World

 

  • Greek Companies Test Bond Waters as Exit Risks Fade http://t.co/fOgUn41S I guess every dog has its day. Sleep w/dogs, wake up w/fleas $$ Feb 01, 2013
  • Best Stock Pickers Trawl Frontier Markets as US Funds Lose http://t.co/yfAKqI7t When mgrs seek unusual venues 4 investing, risk is up $$ Feb 01, 2013
  • Deutsche Bank Improved Its Capital Ratio By Changing Risk Measures http://t.co/jWTc73pR Risk mgmt is easy when you can alter standards $$ Feb 01, 2013
  • Spain’s crisis strategy under fire as economy buckles again http://t.co/Qeaeotx0 The ECB?s Mario Draghi is ?itching? 2buy Club Med bonds $$ Jan 31, 2013
  • Japan?s Government Proposes First Spending Cut in 7 Years http://t.co/DHpOH3II The journey to fiscal sanity begins w/a single cut $$ Jan 30, 2013
  • Canadian Mega Housing Bubble http://t.co/GwbpWMGs Quietly, the average Canadian HH has accumulated more debt than US & UK HHs. Who knew? $$ Jan 30, 2013
  • Chinese currency 2 loosen exchange rate: business chief http://t.co/q6zNLSGh Easier said than done; is China willing 2 absorb volatility $$ Jan 30, 2013
  • Scandal of Italy’s Monte Paschi means questions for Draghi http://t.co/mufcYFkI Had some reg oversight over Monte dei Paschi solvency $$ Jan 30, 2013
  • The Super Bowl, Chicken Wings and the FED – a Risky Mix ? http://t.co/EDCV958k The Fed has no idea what it is doing, the same as in 2007 $$ Jan 30, 2013
  • Why We?re at the End of Cheap China http://t.co/kSW2tbWG Argues there is more consumption going on in China, hidden in coprporate perks $$ Jan 26, 2013
  • The Biggest Housing Bubble in the World Is in … Canada? http://t.co/GgUfyM74 Interesting 2c France, Sweden, HK, & Singapore on the list $$ Jan 26, 2013

 

Speculation

 

  • Forget the ‘Rotation’, Here’s the Source of the Money Pouring Into Stocks http://t.co/tn4Dxs39 ~$30B of special dividends get reinvested $$ Feb 01, 2013
  • ML Fund Managers Survey – Jan 2013 http://t.co/GR19wML6 Professionals r hedging less equity risk, flexible capital increasingly committed $$ Feb 01, 2013
  • Bill Gross: Be very afraid of the markets http://t.co/k7Ouhax3 Favors: Currencies of creditworthy countries, short bonds, gold, HQ debts $$ Jan 31, 2013
  • Whan financial institutions start buying gold as an inflation hedge, only 2 possibilities remain: a top in gold prices, or hyperinflation $$ Jan 30, 2013
  • SP500 Earnings Optimisim : But let’s revise them lower! http://t.co/bPXqFSos We should expect actual earnings 2 come in below projections $$ Jan 30, 2013
  • Upside Risks http://t.co/AuT58IEC @reformedbroker gives us the bull’s case; I’m agnostic on market direction; think long yields will rise $$ Jan 29, 2013

 

Market Dynamics

 

  • Goodwill Is Bad News for US Assets http://t.co/8ctt5UeQ Not all goodwill is bad; if it produces extra cash deserves 2b treated as asset $$ Feb 01, 2013
  • It’s the Stocks You Don’t Own That Matter http://t.co/M3pDaeFl @herbgreenberg talks about new Forensic Accounting ETF $FLAG | Good idea $$ Jan 31, 2013
  • Your ETF Owns Too Little Amazon, &Other Index Quirks http://t.co/UOZINiEc Float-weighting underweights ?owner-operators? which do better $$ Jan 31, 2013
  • Asset Allocation & Rebalancing: (Still) Competitive Together http://t.co/FrLCygAY Rebalancing global value-weighted index: good strategy $$ Jan 31, 2013

 

US Economics

 

  • US GDP Q4 2012 Weaker with a Strong Mix http://t.co/ZmVlZZ52 In Q3, few talked about the weak mix, but yes, result better than headline # $$ Jan 31, 2013
  • U.S. Economy Unexpectedly Contracts in Fourth Quarter http://t.co/dmKSsHlf After getting upside surprises, shouldn’t we get one down? $$ Jan 30, 2013

 

US Politics

 

  • US government warns of hack threat 2 network gear http://t.co/lZvMgyOe Disable feature known as Universal Plug & Play on your network $$ Jan 30, 2013
  • How President Obama Lost His Shirt to John Boehner http://t.co/VZwfxqiw Interesting argument; not sure it’s correct. Seemed like a tie $$ Jan 28, 2013
  • Women?s Path to Ground Combat Strewn With Obstacles http://t.co/DkVG9UDM Only the strongest ~5% of women will be able 2b in combat $$ Jan 28, 2013
  • Bipartisan Immigration Plan Counters Republican Orthodoxy http://t.co/nL9Q8RFp Has some chance of passing 4 the 1st time in 6 years $$ Jan 28, 2013

 

Other

 

  • Psst…This Is What Your Co-Worker Is Paid http://t.co/3lUOLmT9 I’m not sure this is a good idea. What someone is paid is personal $$ Jan 31, 2013
  • Bombarded by Ads, Few Drivers Switch Car Insurer http://t.co/LsyjydyM Average ppl have an agent they trust until they get burned $$ Jan 30, 2013
  • Backyard Farming Gets Fancy http://t.co/0FqwgxRr High-End ‘Homesteaders’ Want Pricey, Stylish Tools; The $1,300 Chicken Coop $$ #noway Jan 30, 2013
  • 15-Year-Old Creates Test for Pancreatic Cancer http://t.co/qrRalNtv This fellow beat the child of a friend of mine who came in third $$ Jan 30, 2013
  • Derivatives trader: ‘The trouble is, regulators are idiots’ http://t.co/PTJpQe9G In general, true. This is why dumb regulation is better $$ Jan 30, 2013
  • Liability Issues Create Potholes on the Road to Driverless Cars http://t.co/VDVux7vV If a driverless car has an accident who pays? $$ Jan 28, 2013

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Wrong

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  • Wrong:Piracy and Fraud Propelled the US Industrial Revolution http://t.co/JONyDRPd Doubt that explains more than 3% of American Success $$ Feb 01, 2013
  • Wrong: Alan Blinder:Everything You Think You Know About the Crisis Is Wrong http://t.co/gTVjTm4t TARP a failure; encourages moral hazard $$ Jan 31, 2013
  • Wrong: Morgan Stanley Buys Argentine Stocks as YPF Deal Lures BlackRock http://t.co/MdXXq1uu Until expropriation ends, avoid Argentina $$ Jan 31, 2013
  • Wrong: Bitcoin?s Gains May Fuel Central Bank Concerns http://t.co/bXNdgp9c Chart here: http://t.co/Xaz8cxbh Thin speculative market $$ Jan 28, 2013

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Comments & Retweets

 

  • RT @japhychron: The Real, and Simple, Equation That Killed Wall Street | Guest Blog, Scientific American Blog Network http://t.co/9YDmZu … Feb 02, 2013
  • RT @BankersUmbrella: @AlephBlog …buying on margin at 5y high in NYSE, fund inflows higher than just before techbubble burst, net sales … Feb 01, 2013
  • You can say that again $$ RT @paulnovell: @AlephBlog unless you own an east coast refinery. Mid continent refiners are killing it Jan 31, 2013
  • @GlennBusch I almost moved to Poway to work for the last remaining large life insurer in San Diego; Offer fell through, company failed later Jan 31, 2013
  • @steve13smith So how are you doing at Minyanville & otherwise? Jan 31, 2013
  • @steve13smith Are you my friend from RealMoney days? Good to hear from you. Yes, I signed up on a Wednesday. It’s a useful summary to me. Jan 31, 2013
  • You can say that again RT @credittrader: $SPY vs $VIX – oops – http://t.co/ARvpNfRP Jan 30, 2013
  • Feels like it to me. RT @StockTwits: Has Value Turned a Corner? http://t.co/GQnUMCcw via @eddyelfenbein $$ Jan 30, 2013
  • @RossJaklik I don’t market. People ask me to manage their money. They get a clone of how I invest my own money. If that is not legitimate… Jan 30, 2013
  • @RossJaklik @faithmight @abnormalreturns In order to receive fees for investing OPM, you must pass the regulatory hurdles Jan 30, 2013
  • @RossJaklik @faithmight @abnormalreturns And to manage OPM legitimately, u have to start a firm like $TROW $LM $JNS $BEN $$ Jan 30, 2013
  • @wesbury @cabaum1 I want to get rid of the neoclassical economics monoculture at the Fed, & replace w/Actuaries & Value Investors $$ #dreams Jan 30, 2013
  • @prchovanec Enjoy it, friend. I have 8 kids, 5 adopted. Every age is fun, & has sorrows. Enjoy your kids while u can; they grow up fast $$ Jan 30, 2013
  • Little kids r so cute $$ RT @prchovanec: 3-year-old son William on new twin baby sisters: “Can they talk? What did they say?” Jan 30, 2013
  • Thanks, have ~3 more to go $$ RT @BarbarianCap: Great “101-level” series in the last few days on insurance investing over on @AlephBlog #ff Jan 30, 2013
  • +2 RT @niubi: ?@prchovanec: Twin baby girls Alice and Rachel Chovanec born at Amcare hospital in Beijing at 6:45am this morning!? Congrats Jan 30, 2013
  • premiums r so migh my nose is bleeding! $$ The RT @groditi: HY and Levered Loan CEF discount snapshot http://t.co/HH8tyX7x Jan 29, 2013
  • “You are not going to get as much from me, then. Not going 2 use Stocktwits as my Twitter client.” ? David_Merkel http://t.co/78eWsIVF $$ Jan 29, 2013
  • +1 RT @allstarcharts: Here is one chart that bothers me: $IWM vs $DJIA spread peaked weeks ago as $SPY makes new highs http://t.co/Bt9c6mlB Jan 29, 2013
  • @aenbrnood @GuldbergPeter I think both of your ideas have merit, thanks Jan 29, 2013
  • “”As for the part of the budget that won’t take care of itself, President Obama fought an ugly and?” ? David_Merkel http://t.co/ueQBGOkp $$ Jan 29, 2013
  • @prchovanec Leverage at each point in the chain of lending amplifies the impact of dodgy nonbank lending, esp when loans r short-dated Jan 29, 2013
  • A weakness in investment grade bonds RT @Convertbond: $DELL 5 Year CDS, Lesson on what an LBO can do to a credit.. http://t.co/foe7W2gf $$ Jan 28, 2013
  • @Danny_5079 That covenant is only common with junk bonds, though a few BBB bonds have it. That’s all. Jan 28, 2013
  • @Danny_5079 via arbitrage. Should have no effect on the deal, unless the bonds had a covenant requiring buying the bonds @ 101% in a buyout Jan 28, 2013
  • @Danny_5079 of the company & its pre-existing debt, thus leading to a decline in the value of debt, raising yield spreads. CDS reacts to it Jan 28, 2013
  • @Danny_5079 In a buyout debt is issued to finance the purchase that is equal or senior in terms of claim priority, reducing creditworthiness Jan 28, 2013
  • “They have to lure retail back in before the next bear?” ? David_Merkel http://t.co/lCQ1ex1c Jan 27, 2013
  • “If the risk parity players r still levered long credit, then they r the CDO equity of this cycle. End will b ugly” http://t.co/uR8ji9Ty $$ Jan 26, 2013
  • My problem is this: we have a dysfunctional credit market where yields are too low, and protections are… http://t.co/7mYgP0VQ Jan 26, 2013

FWIW

  • My week on twitter: 46 retweets received, 7 new listings, 87 new followers, 32 mentions. Via: http://t.co/SPrAWil0 Jan 31, 2013

 

 

Industry Ranks February 2013

Industry Ranks February 2013

Posted on by David Merkel

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, 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.

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.

That said, dull is hard to find these days. Where will demand remain strong, or where will demand rebound are tough questions.

The Red Zone has a Lot of Noncyclicals

What I find fascinating about the red momentum zone now, is that it is laden with noncyclical companies. That said, it has been recently noted in a few places how cyclicals are trading at a discount to noncyclicals at present.

So, as I considered the green and red zones, I chose areas that I thought would be interesting. In the red zone, I picked IT services and beverages. Stable industries.

In the green zone, I picked most of the industries. If the companies are sufficiently well-capitalized, and the valuation is low, it can still be an rewarding place to do due diligence.

That said, it is tough when noncyclical companies are relatively expensive to cyclicals in a weak economy. Choose your poison: high valuations, or growth that may disappoint.

But what would the model suggest?

Ah, there I have something for you, and so long as Value Line does not object, I will provide that for you. I looked for companies in the industries listed, but in the top 4 of 9 financial strength categories, an with returns estimated over 15%/year over the next 3-5 years. The latter category does the value/growth tradeoff automatically. I don?t care if returns come from mean reversion or growth.

But anyway, as a bonus here are the names that are candidates for purchase given this screen. Remember, this is a launching pad for due diligence.

Full disclosure: long SPLS, TOT, INTC, VOD

The Product that Never saw the Light of Day, Redux

The Product that Never saw the Light of Day, Redux

Posted on by David Merkel

I love my readers.? How many Variable Annuity [VA] products got mentioned to me as a result of yesterday’s article? Four, out of 2 emails, 3 comments, and one clever guy who figured out my phone number (no, I don’t keep it secret).

  1. Vanguard’s VA offerings
  2. Fidelity’s VA offerings
  3. Symetra’s VA offerings
  4. Jefferson National’s VA offerings

In my opinion these are some of the better VA options out there.? It’s not quite what I proposed in my article, where every major mutual fund would offer T-shares, but they are close.

My main differences with these products is that:

  • the expense charges going from taxable to annuity should be smaller.
  • there should be more choices, aside from Jefferson National.
  • it would be better if the mutual fund companies took the lead in these matters.

As an aside, I pushed for products like this from 1996-2006.? By the time I gave up, I concluded that there was no one willing to offer variable annuity products that were truly cost-efficient.? Now we have at least four contenders, though I think my product idea would be better still.

But incremental improvement is a good thing.? Thanks to those who commented, emailed, and called.

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