July 2013 – Page 2 – The Aleph Blog

Sorted Weekly Tweets

Posted on 19 July 2013 by David Merkel

Energy

US fuel export surge gives refiners surprise summer blockbuster http://t.co/8d3WbY7xZg We need free trade in energy & end corn ethanol $$ Jul 19, 2013
US approval of Enbridge pipeline plan irks some oil shippers http://t.co/4YYisxzgFH Limited pipeline capacity versus supply raises rates $$ Jul 19, 2013
Deadly derailment won’t stop oil on trains http://t.co/gb7u6riA6S Rail allows 4 flexibility at a higher cost and lower safety $$ Jul 19, 2013
The danger of too much ethanol http://t.co/huUzLpgvDX We would b a lot smarter 2 buy ethanol from Brazil, or drop ethanol in entire $$ Jul 17, 2013
Surging Gasoline Prices Push CPI Inflation Higher, But Weak Core Fuels Taper Uncertainty http://t.co/0Z5zXMjvlJ Inflation rising, note it $$ Jul 17, 2013
Senators Grill Refiners Over High Prices Amid Oil Boom http://t.co/j0jhNhkXSF There is cheap crude in the center of the US, not at coasts $$ Jul 17, 2013
US ethanol credits soar to fresh high http://t.co/1gUVMm5O3u Perhaps allow the importing of Brazilian ethanol; that would improve matters $$ Jul 16, 2013

China

China Loosens a Key Control Over Banks http://t.co/AS6hzeD9vY Not sure this is big; eliminating floor interest rate allows 4 lower rates $$ Jul 19, 2013
China’s Zhu Changhong Helps Steer Nation’s Currency Reserves http://t.co/WcjpJD4YiC Aligns China’s interests more tightly w/the US $$ Jul 17, 2013
China Keeps On Gobbling Up Treasurys http://t.co/4gOipjltfJ Meet the Fed’s competitor 4 acquiring Treasury bonds; forced buyers both $$ Jul 17, 2013
Wealth Products Threaten China Banks on Ponzi-Scheme Risk http://t.co/BB8162405P Chinese banks will b threatened by runs in a few years $$ Jul 17, 2013
Police Say Sexual Favors Spur $1.5 Billion Glaxo China Sales http://t.co/hrPhrJjGkb China sells itself cheap if this is true $$ #SAD Jul 17, 2013

Central Banking

Curse of the front-runner a bad omen for Fed contender Yellen? http://t.co/CabkT1vGRV We need someone other than a neoclassical economist $$ Jul 19, 2013
The Summers or Geithner nightmare http://t.co/oltKKRvRMC They benefit from not being Yellen. Otherwise, no reason to consider them. $$ Jul 19, 2013
Bernanke Says Unwinding of Risky Bets Boosts Borrowing Costs http://t.co/QVVmtUPUnq Interesting argument, given his prior encouragement $$ Jul 19, 2013
Bernanke: Three Reasons Interest Rates Have Risen http://t.co/AJ7fVb2Csp Stronger economy, ‘fraidy cat markets, & leverage unwind $$ Jul 19, 2013
Hilsenrath: What Bernanke Means http://t.co/riIsNWgsCq When you have a poor communications strategy, a lot of people r needed to explain $$ Jul 18, 2013
Four Factors the Fed Faces on Bond-Buying Exit http://t.co/nDpYsdDKef Fed does not get labor market, inflation, & fiscal concerns $$ Jul 17, 2013
3 reasons why Larry Summers should not b next Fed chairman http://t.co/kS6d0VcThG Many reasons y da conceited fool should not b Fed chair $$ Jul 17, 2013
Bernanke Boom Signaled by Yield Surge as Market Recalculates http://t.co/H7miGoHpoI Watch rates fall again on economic weakness $$ Jul 16, 2013

Rest of the World

Female Footballers Covered Head to Toe Inflame Islamists http://t.co/WWTPU4EIqu No matter how hard u try, some people won’t b happy $$ Jul 19, 2013
Honda?s Fujino Readies ?Flying Acura? to Challenge Cessna http://t.co/fAaOQ7Oq3v Honda pours lotsa $$ into a long-shot small plane venture Jul 19, 2013
Honda Builds ?World?s Fastest Lawn Mower? http://t.co/WpCe7DciTf Can go 130MPH, or 15MPH when it is cutting grass. All bragging 4 rights $$ Jul 19, 2013
Rudd Home Sale Thwarted as Canberra Market Slows Pre-Vote http://t.co/uts4KwqXru Housing prices fall as economy slows & govt shrinks $$ Jul 18, 2013
Abe Unleashed After Vote Seen in Biggest Risk Drop http://t.co/mKuANJSeKL Social-security costs r already 31% of government budget $$ Jul 18, 2013
Payday Looms on Dictator?s Defaulted Bonds in Peru http://t.co/0gDmQGzGu5 Expropriation in the 70s demands repayment 4 those that lost $$ Jul 18, 2013
Ahmadinejad Departure in Iran Means Moving Desk Down Hall http://t.co/Iiv0lTr3nI Never underestimate the staying power of a bad idea. $$ Jul 17, 2013
International Paper’s Big Pulp Bet Hits a Frosty Siberia http://t.co/zOv3fPyKC9 Cheap Timber & transport stymied by Russian bureaucracy $$ Jul 17, 2013
Merkel?s Unseen Power Beate Baumann Misses No Chancellor Details http://t.co/G23npBa7qF Baumann works behind scenes on policy & politics $$ Jul 16, 2013
In Egypt, the ‘Deep State’ Rises Again http://t.co/GEXtZ1kR63 Collusion between Army & Opposition parties against Muslim Brotherhood $$ Jul 13, 2013

Market Impact

A portfolio for all seasons? http://t.co/GZle4jAj2U If Harry Browne’s idea were more widely adopted, the price of gold would fly. $$ Jul 19, 2013
The 100 Best Finance Blogs: All The Internet?s a Stage http://t.co/6nUipa6mbv Aleph Blog is pleased to make the list @ # 48. Great blogs $$ Jul 19, 2013
Red Bull-Fueled All-Nighters Put Fortress Fund on Top http://t.co/VhA7FTlNNJ Diminishing marginal returns 2 scale; time spent late poor $$ Jul 18, 2013
Excellence Hurts Returns in US Stock Study http://t.co/IgN41lyuUA Stock performance mimics bond performance; junk stocks & bonds do well $$ Jul 18, 2013
Judge Slams S&P’s Defense in US Lawsuit http://t.co/PP9FNRlGGj Puffery: lousy argument 4a rating agency 2make b/c ur supposed 2b honest $$ Jul 18, 2013
Meet the Man Who Has Worked at Goldman for 80 Years http://t.co/JsQTRY20Vl Alfred Feld is still plugging away for clients @ $GS at age 98 $$ Jul 18, 2013
Eminent Domain Plan Decried by DoubleLine Sees New Life http://t.co/h78U7z5i5i Myth: ordinary people were innocent in housing bubble $$ Jul 17, 2013

Biggest Muni Sale of 2013 Set to Price for Texas Roadway http://t.co/VYTI7TAqH2 There is demand 4 muni deals; this is a prime example $$ Jul 17, 2013
Should You Invest in the New Wave of IPOs? http://t.co/CSBOFQYpIa When IPOs r many, often the quality is lower. B careful w/IPOs here $$ Jul 13, 2013
Senators Introduce Bill to Separate Trading Activities From Big Banks http://t.co/2ig1nWw4hH There r better reforms that need 2b made $$ Jul 13, 2013
The Yankees parking lots that went bankrupt, skipped city payments and took city land http://t.co/aIylgsyrmf Read; fascinating tale $$ Jul 13, 2013

Other

Three Ways to Unlock Great Insights http://t.co/wNpdgGcwp5 Consider anomalies, new perspectives,& desperation $$ Jul 19, 2013
South Carolina Psychiatric Patient Stuck 38 Days in ER http://t.co/ublh93VwXe Eats up a lot of hospital resources, but what to do? $$ Jul 18, 2013
For His Next Trick, the Cronut Maker Reinvents the S?more http://t.co/dyMYB1V6BO I am into cooking, but this sort of stuff makes me blink $$ Jul 18, 2013
The Cronut Maker Reinvents the S’more http://t.co/AqIfdAtEyo If you add enough calories to any recipe, it will be delicious. $$ Jul 18, 2013
Smartphone Upgrades Slow as ‘Wow’ Factor Fades http://t.co/G1dKzoe1Zm Every trend fades. Exponential goes linear, linear goes logarithmic $$ Jul 17, 2013
Health Insurance Shoppers Put Low Price Above Other Options http://t.co/qBBuCCvHXV People want basic coverage 4a moderate price $$ Jul 16, 2013

Wrong

Wrong: China’s Flying Propaganda Weapon Will Blow Your Mind http://t.co/OtBvBMFKle Will b an ez target, given RF signature & 4 turboprops $$ Jul 19, 2013
Wrong: Consumers Most Penny-Wise in Almost 50 Years http://t.co/LTuUGB3eEW A high correlation doesn’t mean a beta of one $$ #studystatistics Jul 19, 2013

The Rules, Part XLIV

Posted on 19 July 2013 by David Merkel

Expectations are a part of the game.

As expectations change, so do the markets.? What could be simpler?? Markets are discounting mechanisms, so why aren’t expectations the whole game?

Expectations are the whole game for widely traded assets that are analyzed by many.? But there are complex assets and smaller assets for which expectations, should they exist, are not well-defined.? A large example would be Berkshire Hathaway.? When the stock of Berkshire Hathaway begins to care about making/missing earnings estimates, that will be a real change in the way the stock is viewed.

I have a number of other stocks in my portfolio that have no analyst coverage, so whatever expectation their is for the company is ill-defined.? Earnings shrink?? Stay flat? Rise a little, lot, or more?? Often the reactions are muted, because expectations are ill-defined.

With cheap stocks, I often view results in two ways:

Expectations mode: are they beating earnings expectations or not?
Book value mode: are they earning enough to justify the current market price?? (And are the earnings real?)

It’s hard to lose money on companies that trade below book and have a single-digit P/E.? The value accretes and eventually market prices follow.? You just have to be happy with firms that are boring, but profitable.

Cheap stocks with good balance sheets do not get killed when there are earnings disappointments.? With those stocks, we can sit back and wait for a better day.

All that said, earnings estimates provide a feedback mechanism for those stocks that have an adequate number of analysts following them.? Imperfect as it is, it guides the way we react to quarterly releases of adjusted earnings.? And when companies attempt to show adjusted earnings that are liberal, it is no surprise when the market rejects their presentation, and the stock goes down.

But this rule applies to policymakers as well.? Over the last 27 years, the Federal Reserve has placed a greater emphasis on communications.? I think that was a mistake, but the Fed made it a goal to shape the expectations of the market.? And they did so.

But once you sharpen the focus of the market to your promises, should it surprise you that when you give the least bit of equivocation, that the market reacts badly?? Hey, you made your bed, now sleep in it.? You trusted in your ability to communicate, and now you reap the result.

Even with no current change in policy, a change in expectations can have a huge effect on markets, particularly when novel policy tools are being used.? Ben Bernanke should not have been surprised by the reaction of the market to his comments to the press after the last FOMC meeting.? All of the efforts since that time to take it back have bolstered the stock market, but have not affected the bond market much.? Remember that the bond market is usually smarter than the stock market, thus I remain bearish.

Full disclosure: Long BRK/B

The Problem of Small Accounts

Posted on 17 July 201319 July 2013 by David Merkel

We all want financial advice.? Good advice.? And we want it for free.? That’s why we come to the Aleph Blog, where advice is regularly dispensed, and at no cost.

But… I can’t be personal, and give you advice that is tailored to your situation.? And in my writing here, much as I try to be highly honest, I am not acting as a fiduciary, even though I still make my writings hold to such a standard.

Ugh.? Here’s the problem.? Good advice costs money.? Really good advice costs a lot of money, and is worth it, if you have enough money to spread the cost over.

But when you have a small account, you have a problem in getting advice.? There is no way for someone who is fiduciary (like me) to make money addressing your concerns.? That is why I have a high minimum for investing: $100,000.? With that, I can spend time on clients, even helping them with assets from which I make no money.

How can you get advice to those who will not actively seek it??? From those who are commissioned to sell to them.? It may not be the best advice, but it *is* advice.? For the lazy, investment advice is sold not bought.

And so, I give you the following articles, most of which disagree with me:

First, on financial advice, you should always be skeptical, even with me.? There is no one who is truly disinterested who has smarts, and so “ya pays yer money and ya takes yer chances.”? If you don’t pay money, your odds are worse.? I write this as one who only makes money off of assets under management.? Most people are better off hiring a CFP, and getting tax savings.? They might not be great on investing, but they may make up for it by lowering your tax rate.

I’m a CFA Charterholder, and an old-style? RIA.? I make money by finding undervalued stocks and buying them.? I focus on value.? That is my sole focus.? I am out to beat the? market regularly, and I do it over market cycles.

It is expensive to be? a fiduciary.? It takes time and effort, and there are many who will pay you to push products.? If we require all investment professionals to be fiduciaries, those who are less well off will not be served.

And, as an aside, this is why you should study the economics of any policy question.? It will tell you what will naturally happen.

Much as I want all people to get good investment advice, there are no incentives to make that take place.? If we try to force it by law, then few will get quality advice.? It will go into hiding.

Distinguishing Alpha from Noise

Posted on 17 July 2013 by David Merkel

I read a paper today that I thought was pretty interesting — A Consultant?s Perspective on Distinguishing Alpha from Noise. [8 pages PDF]? I have been on both sides of the table in my life.? I have hired managers, and I have tried to sell my equity management services.

In general, managers that thought would offer value would venture off the beaten path.? They might own some well-known names, but they would own far more that would make me say, “Who is that?”? The companies would be less known because they are smaller, foreign, have a control investor, etc.

Those portfolios would look a lot different than an index fund.? They would be more concentrated by sector, industry and company.? They would have a process that analyzes what the market is misvaluing, whether by sector, industry, or company.? They would stick to their discipline through thick and thin, realizing that all anomalies in the market go in and out of favor.

The process would specify what anomalies of the market, or what information advantages the fund would attempt to exploit.? But once you specify that, you stick to that as your strategy.? There is no room for tossing an asset in “because it looks good.”

There is a balance in good strategies that allows for minor modifications around core principles.? All good strategies have to adapt, but there has to be a strategic core from which the strategy will never vary.? Absent that core, the strategy will give in to fear and greed — buying high and selling low.

Quoting from the paper:

I am amazed at all the managers that make an assertion of the type “In the long run X always wins”, where X could be dividend yield, earnings growth, quality of management, a quantitative factor or mix of factors, etc., yet are unable cite a reason why X should be systematically under-priced by the market.

My view is twofold.? There are some ugly situations involving financial stress that most investors don’t want to take on.? There are also less glamorous companies that few want to buy.? Those can be excellent investments.? My second point is tougher to make, but industries go in and out of favor.? So do market factors.? Buy that which is safe, and out-of-favor.

Now, for managers, I would recommend keeping a trading journal, where you record why you think your investment hypothesis will succeed.? If your investments succeed for reasons that you specified in advance, that is an indication of skill.? There is a lot of what is called “luck” in investing.? If you are beating the market, and it is not for reasons that you specified in advance, you do not have skill, you have luck, and luck strongly tends to mean revert.

My view comes down to this: I like to see a long track record of outperformance, an unusual portfolio, and a strategy that convinces me that you have discipline, and a constructive way of finding undervalued assets. ? Absent that, I will probably think that you are a pretender than an outperformer.? There are always some that outperform for a short time, and then underperform as the underlying economics shift.? Markets are volatile enough that there are always some with three-year track records that are stunning, and very lucky.

Separating luck from skill — that is the toughest aspect of investing.? But it is needed because there are so many investment managers touting skill, and what do they really offer?

The Rules, Part XLIII

Posted on 16 July 2013 by David Merkel

Modify Purchasing Power Parity by adding in stocks and bonds

An optimal currency board price basket would contain both assets and goods.

In one sense, assets are future goods.? Assets throw off an uncertain stream of future benefits, which can be used to purchase goods at that time.? Based on the demographics of an economy, if marginal dollars tend to be saved versus spent, stimulus would affect the economy differently:

Spent: we get goods/services price inflation.
Saved/Invested: we get asset price inflation.

Asset price inflation is different.? It is difficult to transfer resources from the present to the future.? Even a zero coupon bond relies on the solvency of the issuer, and the realized goods/services inflation.? Hoarding gold/commodities relies on the idea that they will be more scarce in the future, which is unlikely as prices rise to encourage more supply.

Cash rarely earns more than the CPI.? Bonds have long cycles where they are alternatively “certificates of confiscation” or “beneficiaries of deflation.”

Asset prices rising is not always a good thing.? The rise in prices may reflect additional productivity or they may reflect a higher price for transferring goods to the future.

When I was a bond manager for an insurance company that had long-dated promises to pay, I bought a variety of fixed-rate bonds that that appreciated dramatically in value in a falling interest rate environment.? What did that do to my expected cash flow stream?? Nothing.? If anything, it meant we would earn less because we would reinvest excess cash flows at rates lower than the market yield of the bonds.

This is a reason why QE from the Fed is questionable.? Their asset purchases push up the price of assets, but the cash flows don’t change.? Maybe a few more entities decide to issue debt in the process, but that doesn’t mean the debt gets used for expansion.? It may well replace equity, given its cheapness.

Maybe the answer here is to look at inflation as a credit phenomenon, whether the credit is used to purchase assets or goods/services.? At present, assets are inflating more than goods/services, and that has been true for some time.? I suspect that relationship will reverse, but when that will come I can’t predict.

Book Review: Poverty and Progress

Posted on 13 July 201314 July 2013 by David Merkel

I appreciated this book.? In my early 20s, I wanted to do development work in developing countries, but I ran into a problem.? All of the interventionist solutions didn’t work, and countries that ignored the advice of development economists tended to do better.? That has continued to be true since then.? Among academic economists, the battle goes on between the socialists and free marketers.? The battle goes on in many arenas:

It is easy to do cross-sectional time-series regressions across countries, and twist the data to your bias.? In general, more flexible the econometric technique, the lower the probability that it tells an accurate story.? Noise gets interpreted as signal. [The Ph. D.s at the Fed are experts at this.]
How much of poverty is due to culture, recalcitrant governments denying property rights to their people, etc?
How much different was it for the now developed nations to develop during their era?? Do the same principles apply?
Are there really “poverty traps” in development?
Are there structural problems in development that naturally occur, or does it stem from government interference?

This book takes an optimistic view on development, against the crowd that creates complex models in order to allege market imperfections, rather than government imperfections.? The truth is that poverty in the world is in retreat, and abject poverty may not exist in another generation, aside from nations that sabotage themselves.? Nations that are growing can follow the same path of freedom as the developed nations did.

This book will open your eyes on global poverty, and make you realize that we are close to success, aside from self-inflicted wounds.? It will also make you think through the metaphysics and ethics of global warming, and explain to you why it is unfair for the developed nations to constrain the developing nations regarding use of hydrocarbons.? [For those that are rabid bigots on global warming, this book argues that global cooling is happening.? Is your mind open enough to consider the argument?]

I recommend this book highly.? Well written, and not afraid to take some non-consensus views in favor of freedom.

Quibbles

None.

Who would benefit from this book: You have to be interested in development economics to enjoy this book.? If you want to, you can buy it here: Poverty and Progress: Realities and Myths about Global Poverty.

Full disclosure: The publisher sent me a copy of the book for free.

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.

Temporary Prosperity at the Cost of Longer-term Prosperity

Posted on 13 July 2013 by David Merkel

Apologies for last night’s post on Bernanke.? I have deleted it.? It was not one of my finer efforts (it was late), and I went down some rabbit-trails that overshadowed my main, and valid point.? Bernanke has no business criticizing Congress for running a less accommodative policy, when he is signaling a less accommodative policy.? Congress does not have a communications strategy that investors rely on.? The Fed does, and Bernanke has made a lot out of transparent communications, which I believe is a harmful concept that is bearing bad fruit now.? So when he signals that policy accommodation will be less, and sooner than you think, why should he be surprised at the carnage in the bond market?? Markets are discounting mechanisms, they anticipate.? Why can’t the Fed Chairman recognize that, rather than saying the market misunderstood him?

That was a good thing with the Fed, pre-Greenspan.? It was much easier to understand the Fed when they said nothing.? Onto tonight’s piece:

Borrowing from the Future to Take Care of the Present

I am a fan of balanced budgets.? Why?? Balanced budgets are sustainable.? This is particularly true if budgets are balanced on an accrual basis.

Politicians like to promise more than they deliver.? They are like J. Wellington Wimpy, who said, “I would gladly pay you Tuesday for a hamburger today.”? Goods and services today, payment later.

This happens in a lot of ways, large and small:

Federal Pension Plans are unfunded, supported by the taxation authority of the Federal Government.
Running large deficits that don’t do much good for the economy as a whole, while racking up debts that will have to be paid by future generations.
Running monetary policies that improve conditions today, but will worsen future conditions as a result.? Far better to let recessions bite, eliminating bad debt & projects, and leave behind a less indebted society, ready to grow.
Social Security & Medicare are unsustainable programs created by our grandparents, sustained by our parents.? These programs will kill the rest of us with their costs.? Our forebears ate sour grapes, and our teeth are set on edge.? And with each generation it gets worse, as the demographic crisis makes it harder to sustain.
Obamacare front-end loaded taxes, and back-end loaded benefits.? We are now faced with the costs, and the taxes have been spent on other matters.? Aside from that, the estimates when the bill was passed were dishonest.
States & municipalities played with their pension assumptions for years, offering generous benefits that could not be afforded under intelligent assumptions.? It becomes benefits today, taxes tomorrow.
Tax policy encourages debt rather than equity, creating industries that over-borrow.

Things could have been better at this point had the Fed done its job and let recessions bite, eliminating bad debts.? Congress could have run balanced budgets, constraining spending on all departments.? The Social Security surplus could have been walled off from the government, and invested in index funds.? States & municipalities could have funded their pension plans fully, and not used the flexibility to fund other spending.? We could have had a tax code that did not tax dividends, but offered no deduction for interest.? We could have constrained the Fed’s ability to act.

We have a mess now as a result of politicians promising, with funding to some later.? In the 1840s over-indebted governments defaulted, and there were many revolutions in Europe.? What will be the price in the modern era, with our over-indebted governments?

I don’t know.? But I suspect it will be ugly.

Sorted Weekly Tweets

Posted on 12 July 2013 by David Merkel

Monetary Policy

Fed stops short of the clarity global markets crave http://t.co/fdQUJlHDX3 Fed has shown that it does not understand global debt markets $$ Jul 12, 2013
Unintended consequences made the PBOC?s strategy fail to work http://t.co/iQGNVFelw3 Highlights lack of liquidity in Chinese banking $$ Jul 12, 2013
Bernanke Supports Continuing Stimulus Amid Debate Over QE http://t.co/oPhi1HGF40 Bernanke really doesn’t know, but he is afraid 2 tell u $$ Jul 11, 2013
Bernanke reduces future policy accommodation &sez Fed is stimulating, then criticizes fiscal policy as tight for running smaller deficits $$ Jul 11, 2013
Fed Affirms Easy-Money Tilt http://t.co/62OXSxaCNu Transparent communications requires many words & misunderstandings to get msg right $$ 🙁 Jul 11, 2013

Michael Pettis

Pettis: An analysis that points to an unsustainable trend is always right if the trend turned out indeed to be unsustainable. $$ Jul 11, 2013
Pettis: That it took many years before the limits were reached is not an indication the model was wrong. It’s how the economy works. $$ Jul 11, 2013
Pettis does not like those who criticize those who pointed to unsustainable debt trends as “Stopped clocks that are right twice a day.” $$ Jul 11, 2013
It’s impossible to precisely time leverage unwinds, merely seeing it in advance qualifies as a win, whether US Housing, Eurozone, China $$ Jul 11, 2013

PPACA [Obamacare]

Obamacare called ‘The fiasco for the ages’ http://t.co/ZHFA72sIGe Call it an unforced error; stupid policy that destroys better policy $$ Jul 09, 2013
Decision to Delay Employer Mandate Will Cause More Employers to Drop Coverage http://t.co/02lqVlAdxN Obamacare the dumbest idea out there $$ Jul 09, 2013
Part-Time America http://t.co/ikzsOSOeaG There r more people “employed” but many have several part-time jobs, b/c of Obamacare [PPACA] $$ Jul 07, 2013

Rest of the World

Haredim Harassing Women Prompt Ultra-Orthodox Backlash http://t.co/tj4aXNM7IU Q: has wailing wall become an idol 2 some Jews? $$ Jul 11, 2013
After all, u can pray anywhere. God is everywhere, so he will hear u. Whether he will favor u is another matter. Jul 11, 2013
Greek outlook bleaker than lenders think, local think tank calculates http://t.co/Ktuc9JMRUS Austerity should not increase from here $$ Jul 11, 2013
Value of the Syrian Pound Hits an All-Time Low http://t.co/wz8t1hkqZP Unsound currency is a common casualty of any war, especially civil $$ Jul 10, 2013
Pimco Shuns Korea to Turkey Covered Debt on Liquidity http://t.co/HN0wdw7xqo Liquidity is not free: requires quality, size & simplicity $$ Jul 10, 2013
The Muslim Brotherhood?s Legacy: Controls, Shortages and Inflation http://t.co/GaTU9LBp16 Brotherhood wanted power for Islamic reasons $$ Jul 09, 2013
Japan in a Bind on Planned Tax: Fears Are It Will Hurt Rebound http://t.co/43NQV3EXFd Far better to cut government spending; much wasted $$ Jul 07, 2013

Market Impact

Hedge Funds Are for Suckers http://t.co/RBpyL1c84z There are limits to leverage, arbitrage, good ideas, no limits 2 high costs, though $$ Jul 12, 2013
Property Crushes Hedge Funds in Alternative Markets http://t.co/SDCFgPHxxE Fell hard 2007-9, has come back hard since, but so have stocks $$ Jul 12, 2013
US Banks Seen Freezing Payouts Under Harsh Leverage Rule http://t.co/ZRMqXy2Z2k This will eventually be gamed, as capital is squishy $$ Jul 11, 2013
Corporate Insiders Shift From ‘Buy’ to ‘Sell’ as Bankruptcy Nears http://t.co/uk2QIagvIz Now u tell us. Really? Potent Inside information $$ Jul 11, 2013
REITs Deepening Bond Losses as Leverage Forces Sales http://t.co/3fQ15I9ITC Is it possible we get another self-reinforcing selloff? $$ $NLY Jul 11, 2013
SEC Lifts Ban on Hedge Fund Ads http://t.co/2jcKBcpDaS Probably a mistake, but let the big guys take their lumps w/survivor bias $$ Jul 11, 2013
Senator Hatch says insurance firms can ease US pension crisis http://t.co/yAJMEf43zs Cute idea, but life insurance industry is 2 small $$ Jul 11, 2013
U.S. Boosts Bank Capital Demands Above Global Standards http://t.co/J8jHFQ3Qdk Big banks will squeal, but their size poses systemic risks $$ Jul 10, 2013
Kevyn Orrs’ plan for paying bondholders could cost Michigan cities http://t.co/vSLW5f8h2d 2nd-order effects r neglected by the desperate $$ Jul 09, 2013
S&P Raises Puffery Defense Against US Ratings Case http://t.co/V0HGTyPjeV Reasonable. Wise investors know to ignore rating, read review $$ Jul 09, 2013
The New Breed of Income Fund http://t.co/ryMg2SN47u Risks r higher on these funds b/c stocks r not as safe as bonds, they can fall more $$ Jul 07, 2013

Companies & Industries

Fracking Firms Face New Crop of Competitors http://t.co/iVhNbNkQkw High profit margins drive competition; benefit goes 2 E&P firms $$ Jul 10, 2013
Tanker Cars in Fatal Quebec Rail Crash Had Drawn Scrutiny http://t.co/O3i6GCVKEh Relative safety of pipelines becomes apparent post-fire $$ Jul 10, 2013
Deadly Train Derailment Fuels Crude-by-Rail Concerns http://t.co/V3CPfaTGMP This was a case of operator error; it does not generalize $$ Jul 09, 2013
Alcoa Facing ?Hard Decisions? on Aluminum Plants http://t.co/wuZO515yrS Plant shutdowns teach investors where good opportunities may be $$ Jul 09, 2013
At 88, Former AIG Boss Is Building a New Empire http://t.co/I8x1siazJn He did not deserve to be thrown out of AIG; now he builds anew $$ Jul 07, 2013

Other

Oregon Tuition Plan Punishes Graduates? Success http://t.co/Li3tr4X95J Will attract the less successful, paying 3% of earnings 4 25 years $$ Jul 13, 2013
Math, Science Popular Until Students Realize They?re Hard http://t.co/UXA00o0Sqc Yes, math & science r hard & not squishy, but rewarding $$ Jul 12, 2013
Gangs Ruled Prison as For-Profit Model Put Blood on Floor http://t.co/8HxXWEZ5sR Long article describing lousy control at some prisons $$ Jul 12, 2013
Father Cancels Tiramisu to Cable Under Pentagon Furloughs http://t.co/kNdLn2PuEm Watch 4 the impact of the next round of base closings $$ Jul 12, 2013
Can Spider Web Be Replicated? A Japanese Startup Thinks So. http://t.co/N4B0yKprnU Something 2watch, many uses 4 light ultrastrong fabric $$ Jul 10, 2013
Non-Farm Payrolls Revisited – Strong Weaknesses http://t.co/JsMeYetfNh Part-time work grew, full-time work fell. Does this look healthy? $$ Jul 09, 2013
Show Me the Jobs That Immigrants Steal http://t.co/mwfUqVVEUj Immigrants do things that the native-born won’t do. Who wants 2 pick fruit? $$ Jul 07, 2013

Wrong

Dumb: Fed?s risky codependency with the markets http://t.co/KxfOrHxD9j Increased communication yields more losses than gains, duh $$ Jul 12, 2013
Wrong: ?Middle-class revolution? fuels Pentagon war plan – MarketWatch http://t.co/CNxA1AO9JJ What a dope, Marketwatch should be ashamed $$ Jul 12, 2013
Dumb: 8 Things Really Successful People Do http://t.co/EvhKoxfpWK Points 6 & 7: Religion necessary for Spirituality & Ethics $$ Jul 11, 2013
Wrong: The Second Great Depression http://t.co/5WUd24YZlk If u don’t c the problem as 2 much private debt creating a boom, u don’t get it $$ Jul 10, 2013
The Fed facilitated that boom, & when excess liquidity was gone, a scad of broken balance sheets resulted; leverage still 2 high now $$ Jul 10, 2013

Replies, Retweets, and Comments

@auaurelija Not sure I would have analyzed it that way. That piece only highlights increases, and many cos in the table still have low debt Jul 12, 2013
@felixsalmon Yes, & the dual mandate led to providing too much stimulus 1987-2007, leading to the mess we r in now. Single mandate better Jul 12, 2013
@auaurelija So where do you see the increase in leverage? Most companies seem not to be doing that, as far as I see. Jul 12, 2013
RT @pdacosta: The Fed’s message to the markets is clear: the path of rates will depend on stuff happening or not happening. Jul 12, 2013
A great time w/ @japhychron as we discussed math, computing, economics, security, secuities, equities, bonds, FX, banking, & work. Jul 11, 2013
“I disagree; there is emotionless investing. It depends on realizing that you have a long time?” ? David_Merkel http://t.co/qoT1BrMgIt $$ Jul 11, 2013
RT @ggreenwald: Don’t worry: a court that meets in total secrecy, housed inside the DOJ, with only the Govt allowed to be present, is reall? Jul 08, 2013

Bandaging Wounds from Another Promoted Stock Scam

Posted on 11 July 2013 by David Merkel

Okay, time for the promoted stock scoreboard:

Ticker	Date of Article	Price @ Article	Price @ 7/11/13	Decline	Annualized	Splits
GTXO	5/27/2008	2.45	0.012	-99.5%	-64.6%
BONZ	10/22/2009	0.35	0.003	-99.3%	-73.2%
BONU	10/22/2009	0.89	0.003	-99.7%	-78.6%
UTOG	3/30/2011	1.55	0.005	-99.7%	-91.9%
OBJE	4/29/2011	116.00	0.305	-99.7%	-93.3%	1:40
LSTG	10/5/2011	1.12	0.031	-97.2%	-86.9%
AERN	10/5/2011	0.0770	0.0003	-99.6%	-95.7%
IRYS	3/15/2012	0.261	0.003	-98.9%	-96.7%
NVMN	3/22/2012	1.47	0.300	-79.6%	-70.5%
STVF	3/28/2012	3.24	0.330	-89.8%	-83.1%
CRCL	5/1/2012	2.22	0.031	-98.6%	-97.2%
ORYN	5/30/2012	0.93	0.154	-83.4%	-80.1%
BRFH	5/30/2012	1.16	0.458	-60.5%	-56.6%
LUXR	6/12/2012	1.59	0.017	-98.9%	-98.5%
IMSC	7/9/2012	1.5	1.260	-16.0%	-15.9%
DIDG	7/18/2012	0.65	0.058	-91.1%	-91.5%
GRPH	11/30/2012	0.8715	0.141	-83.8%	-94.9%
IMNG	12/4/2012	0.76	0.150	-80.3%	-93.3%
ECAU	1/24/2013	1.42	0.360	-74.6%	-94.9%
DPHS	6/3/2013	0.59	0.040	-93.2%	-100.0%
POLR	6/10/2013	5.75	0.600	-89.6%	-100.0%
NORX	6/11/2013	0.91	0.440	-51.6%	-100.0%

	7/11/2013		Median	-92.1%	-92.6%

They are predictably bad.? If anything, the last few promoted stocks have been exceptionally bad.? It makes me wonder whether players play the pump of the pump and dump are getting too numerous.? Maybe after a few more losses like POLR & NORX, there will be fewer players willing to speculate on companies with price momentum that are obviously bogus.

Tonight’s loss-to-be is Arch Therapeutics.? It was a distributor of auto parts that never made a dime of revenue called Almah, Inc., until four months ago.? It did the following:

On April 19, 2013, the Company entered into a Binding Letter of Intent (the ?LOI?) with Arch Therapeutics, Inc., a Massachusetts company (?Arch?), in connection with a proposed reverse acquisition transaction between the Company and Arch pursuant to which the Company would enter into a reverse triangular merger with Arch (the ?Merger?) and the Company would acquire all of the issued and outstanding capital stock and convertible notes and warrants of Arch in exchange for the issuance of 20,000,000 shares of the Company?s common stock to the shareholders of Arch. Arch operates as a life science company developing polymers containing peptides intended to form gel-like barriers over wounds to stop or control bleeding.

On April 19, 2013, subsequent to the Company?s fiscal quarter ended March 31, 2013, Mr. Powers resigned as the Company?s sole officer and director and Mr. Norchi was appointed as the Company?s director and sole officer, and Mr. Avtar Dhillon was appointed as a director.

On May 10, 2013, pursuant to the terms of the LOI, the Company entered into an Agreement and Plan of Merger (the ?Merger Agreement?) with Arch and Arch Acquisition Corporation, a Massachusetts corporation and the Company?s wholly-owned subsidiary (?Merger Sub?). In accordance with the Merger Agreement, Merger Sub will merge with and into Arch (the ?Merger?), with Arch surviving the Merger upon the terms and subject to the conditions set forth in the Merger Agreement.

As set forth in the Merger Agreement, the Company will acquire all of the issued and outstanding capital stock and convertible notes and warrants of Arch (through a reverse acquisition transaction) in exchange for the issuance to the holders thereof of 20,000,000 shares of the Company?s common stock. The stockholders of Arch will receive two and one-half shares of the Company?s common stock for each share of common stock of Arch held by them immediately prior to the effective time of the Merger.

Almah, no revenues, no earnings, negative net worth. Arch, a “promising” technology company that decides to buy a stock listing buying Almah in a reverse merger.? If the technology were so good, why not remain private and work with private equity, or enter into joint ventures with large medical technology companies that have incredible reach?

It beggars belief that one would merge with a virtually defunct company to build a strong medical technology company.? Leave aside all of the scam language in the promotion.? But here are some examples from the disclaimers:

Facts stated in this article were supplied to endorser from third-party sources.
XXX has been compensated $10,000 by YYY for endorsing this product, and ZZZ has been paid a $25,000 by YYY for sending out this advertisement.
YYY, the third party advertiser, has paid $390,000 USD and is expected to pay an additional $400,000 to WWW as of June 20, 2013 for this advertising effort in an effort to build investor awareness.
YYY. represents that it does not own any shares of Arch Therapeutics, Inc. (except for 2,500,000 shares of restricted stock) which YYY. will not sell, pledge or hypothecate or otherwise agree to dispose of for 90 days following the initial dissemination of this advertisement.

If I had a new way of treating wounds that was really effective, I would do it myself privately, or work with private equity.? As it is, this stock promotion is garbage, and not worthy of investment.

The only thing I can’t find is any connection between the promotion and the company.? The promotion doesn’t mention the past, and the company is seemingly not involved in the promotion.? Maybe an owner could be pushing it; they are the only ones that could profit from the promotion.

In Defense of Concentrated Portfolios

Posted on 10 July 201310 July 2013 by David Merkel

I was traveling most of yesterday on an odd bit of Church business, but I am back home now, late as it is.? I listen to the radio as I travel to meeting like this, and much of it reminds me of why I don’t like many aspects of talk radio.

Arguments that don’t take into account the complexity of the issues
Advertising that may cheat your hearers
Arguments that assume the worst of your adversaries
Callers that are sycophants
Views that are too cynical.? Don’t assume a conspiracy when mere incompetence will do it.

Today, I heard a lot of odd things, but one hit me hard because it is what I do.? I caught a small part of Dave Ramsey’s show, where he was ignorantly criticizing stock-pickers like me, that we can’t outperform the S&P 500 or a growth stock index fund (which is easier).? He further criticized concentrated portfolios, saying that they were far too risky, saying that you had to have at least 100 stocks in a portfolio to achieve diversification.

Now, fellow Christians often ask me what I think of Dave Ramsey, and I often say to them that his emphasis on paying down and avoid debt is a good one, but that he doesn’t have much to say beyond that.? Now, that’s my perspective from listening? to snippets over the years.? I don’t claim to understand him fully, but after listening to him, I can’t get what the thrill is — it is all rather basic.

But then, basic is what most people need, and that is why cash & debt management is the first priority for most people.? Many of my personal finance articles deal with that.

Ramsey is out of his league when trying to opine on whether concentrated portfolios offer value of not.? There are two philosophies here:

Don’t put all of your eggs in one basket
Put all of your eggs in one basket, and watch that basket like a hawk.

These two philosophies show the tradeoff of diversification for knowledge.? From an interview with Marty Whitman in Barron’s:

Why do you prefer to run funds that are concentrated, rather than diversified? And how do you protect against risk when you do this?

We get protection by being price-conscious and by being extremely knowledgeable about our holdings. And diversification is a surrogate?and a [very] poor surrogate?for knowledge, elements of control [of a company] and price-consciousness. If you are really a value investor and do deep research, how many investments can you be involved in at the same time? If you are a high-frequency trader, you could trade 100 securities today. The real value investors are lucky if they can do 10 investments at a time.

The idea is that value investors gain detailed knowledge of companies that they invest in.? That takes time and effort, so they limit the number of companies that they invest in.? The idea is to do so much research, that you have an information advantage over 99% of the market.? It pays off.

Buffett himself wrote an article called, “The Superinvestors of Graham and Doddsville [PDF],” which was published in Hermes [Columbia Business School], and republished as a forward to later versions of “The Intelligent Investor.”? Most of the “Superinvestors” ran concentrated portfolios by today’s standards.? Some were highly concentrated — the one common thing among them is a value style that focuses on a margin of safety to avoid large losses, and purchasing shares of companies whose assets are out of favor, where a bargain price can be obtained.

Now not everyone is cut out to be dispassionate about investing, treating it like a business where you are trying to buy safe assets cheap, and sell them dearly when they come back into favor.? You often look wrong before you are right.

I myself run a concentrated stock portfolio, 36 stocks at present with significant industry concentrations in energy, insurance, and technology, and have done well versus the S&P 500 over the last 13 years.? I think this is considerably less risky than buying an S&P 500 index fund, much less a growth stock index fund.? The value stock index fund?? That’s a good option for those wanting passive equity exposure.? On the whole, I like what I do better.? My portfolio never looks like the index.

If you own actively managed funds, though, particularly large cap funds, take a look through them, and see if they look like an index fund to you (but with much higher fees).? The term is called “active share.”?? How different are they from an index fund? Look for funds that do it differently, and have succeeded in the process.? That’s what I do for friends when I look over their actively-managed mutual funds.

All for now.