August 2013 – Page 3 – The Aleph Blog

Industry Ranks August 2013

Posted on 7 August 2013 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.?

You might notice that this time, I have no industries from the red zone.? That is because the market is so high.? I only want to play in cold industries.? They won?t get so badly hit in a decline, and they might have some positive surprises.

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.? I generally play in the green zone because I hold stocks for 3 years on average.

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 telecom related, some basic materials names, particularly those that are strongly capitalized.

I?m looking for undervalued 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, some dull companies are fetching some pricey valuations these days, particularly those with above average dividends.? This is an overbought area of the market, and it is just a matter of time before the flight to relative safety reverses.

The Red Zone has a Lot of Financials; be wary of those.? I?m considering paring back my insurers.

What I find fascinating about the red momentum zone now, is that it is loaded 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.

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 5 of 9 balance sheet safety 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, not hot names to buy.

I’ve loosened my criteria a little because the market is so high, but I figure I will toss out? lot when i do my quarterly evaluation of the companies that I hold for clients and me.

Book Review: Octopus

Posted on 7 August 2013 by David Merkel

This is not a normal book for me to review.? The claims made by the book are fantastic, and the subject of the book, Sam Israel, would have a strong motive for self-exoneration.? But with any book, unless you have direct insight into what the book talks about, you have to interpret the book consistently, assuming the author has told the truth.? That is what I will do.

I have a saying, “It is very difficult to cheat an honest man.” Why is that so?? An honest man knows that few things come easy in life, and so if something seems too good to be true, he will avoid someone peddling something that is likely to be a scam.

But someone who thinks the world is inherently crooked is much easier to cheat, because he thinks that he will be able to outfox others trying to cheat him.? He is more vulnerable to playing an inside game that few others know about.

Sam Israel drifted into a Ponzi scheme.? He may not have intended to do so, but once you report fake results that are too good, it is difficult to ever come back to true accounting, because the assets have to earn considerably more than average in order to break even.? New money helps a lot, and that is driven by great returns, so there is the incentive to keep reporting “too good” returns.

It’s a treadmill, which is why Ponzi schemes always blow up.? In Sam Israel’s case, it led to all manner of speculative investments that an ordinary investor would never touch.? In the second half of the book, it led to dealing with a smooth-talking guy who charmed and scammed Sam Israel, convincing him that there was a conspiracy that controlled Western governments with a rigged bond market that offered incredible deals to insiders.

Now, to me, anything that seems too complicated to justify the worldview is probably not true.? What reason would a conspiracy have to hand out risk-free profits to anyone?? Governments or conspirators would pocket the money themselves, and would not let anyone else in.? But to a crooked mind that needs an easy win in order to set all things right, this is a perfect setup to separate a fool and his money (or rather, the money of his clients).

As it was, Sam Israel ran out of money and his “hedge fund” collapsed, leaving many foolish investors to mourn their losses.

One more thing: a undercurrent of the book was how they managed to co-opt the auditors.? Beware trusting small no-name auditors.

Quibbles

The book is well-written, and if you take it as fiction, it is a real page-turner.? But as truth, you are reliant on a few voices, mostly Sam Israel and his friends, to tell you what happened.? I’m reluctant to sign onto that, but I can’t fully rule it out either.

Who would benefit from this book: If you like fiction, you will like this.? If you want to look into the pathology of a Ponzi Scheme, it is good there also.? If you like reading sordid tales of greed, foolishness, and lies, you will like it.? Otherwise, avoid.? If you want to, you can buy it here: Octopus: Sam Israel, the Secret Market, and Wall Street’s Wildest Con.

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.

On Missing Revenue Estimates

Posted on 6 August 2013 by David Merkel

I note that over the last few years that news reports regarding quarterly earnings have taken on another dimension — revenues get tracked as well as earnings.? I look at that and I shrug.? Not every sale is a good sale.? In overly competitive environments we should want to see companies making fewer sales, and perhaps shrink aspects of the company that can easily be rebuilt.

So when the companies that I own miss revenue estimates, I don’t care much.? I care far more about their discipline to obtain quality business that produces reliable profits.

This is a different story with growth companies, which I don’t generally invest in.? Growth companies should see reliable and large increases in sales.

Perhaps some analysts think that growing revenues supports growing earnings.? It would be far better to look at operating cash flow, or lack of growth in accrual items to validate earnings.? The less earnings coming from accounting accruals, the better the quality of earnings.

That’s all for now.? The quick summary: ignore revenue estimates, and check accounting quality.

Advice to Two Readers

Posted on 3 August 2013 by David Merkel

I get a lot of requests for advice.? Here are two of them.

David,

?I really appreciate you discussing your trading/haggling strategies in the Education of a Corporate Bond Manager. ?It’s definitely given me new ideas and helped me get better pricing in my purchases the last couple of years. ?I still refer to them every few months or so.

I have a question about changing jobs in the fixed income industry – I work in a treasury division, managing my company’s cash and short-term investments. ?I’ve done well, but we use yield-based benchmarks, as part of the portfolio is used to immunize short term liabilities. ?When I interview with asset management shops, they want previous total return portfolio management experience. ? ?

Do you know any particular types of firms or sub-industries that use yield-based benchmarks? ?Does managing to a yield benchmark stunt my learning growth compared to a total return mandate?

Yield-based benchmarks exist when:

The liability structure being invested against is short (We could need this cash at any moment for business use!)
The liability structure is long, but well-defined, such as a bank or insurer that wants predictable income versus their liabilities, and so the game becomes maximize spread net of default costs, subject to matching asset and liability durations (and maybe partial durations if the liability stream is long).

You are doing the first of these.? Truth, what you are doing could be measured on a total return basis, but it wouldn?t make a lot of difference.

The second one applies to banks and insurers, and can be done on either basis as well.? The difficulty comes with trying to calculate the total return of the liabilities. ??If that it too hard to do, they create a bond benchmark that they think represents when they think the liabilities may pay out.? If the liabilities possess some degree of optionality, like that of residential mortgage prepayment, the benchmark could include bond options (long or short).

The yield on the bond benchmark is easy to calculate, as is the total return.?? Thus relative performance can be calculated either way.? I had to do this for an insurance client once who insisted that our performance was poor when we had returned more than 0.70% year more than single-A corporate, which was quite good.

Thus, one place you could try working is for is an insurer, bank, or other financial intermediary.? But what of those that manage funds for retail.? What then?

Aside from unconstrained funds, even a mutual fund has a liability to invest against ? the expectations of the client.? In that sense, most mutual fund managers aren?t doing full total return either ? they have to stay within a certain range for interest rate sensitivity. They also could be evaluated on the basis of yield realized versus that of a generic portfolio meeting their interest rate sensitivity targets.? More commonly, they would be ranked against their competitors on a total return basis.

In closing, it you don?t want to manage money for a bank or insurer, you?ll have to try to wedge your way into work in a total return environment ? taking a junior level position, and showing competence.? Believe me, most firms would love to promote from inside, if possible.

Sincerely,

David

Dear Mr. David Merkel,

I really appreciate your hard work you are putting in your site and I am an avid reader of it. I would like to seek your advice regarding a decision I am facing. My goal is become a value investor and establish my own asset management firm to manage my own money and other people’s money. Right now, I have the opportunity to pursue partnership in my family business and be able to run it along with my father. I am 23 years old, and I am a freshman student at the _+_+_+_+_.? If I am to be a partner in my family business, I have to drop out from the university and travel to +_+_+_+_+_+_+_, where the business is. I am still a freshman student because when I was 19 years old, I dropped out to establish my own business in the same industry as my family in +_+_+_+_+_. I had an experience running a business and I had the opportunity to sell my business after two years of operation to my cousins, and, thankfully, it was a profitable venture.

My family business is somehow facing sales shrinkage and cash flow problem due to low capital (my family made terrible mistakes in managing it) and economic downturn. They are specialty contractors and manufacturers of fenestration products (windows, doors, kitchens, curtain walls, and rolling shutters). If I am to work with them, I can be able to help them in reorganizing the company. It might be risky for me, but if everything worked out well enough, I will have earnings that I believe is better than being an employee.

I am facing a decision that I need to make. You might not be able to advice me, but whatever advice you give me, I appreciate it. If my goal is to manage my own money and other people’s money by establishing my own asset management firm, is it helpful to have a university degree or the experience of having ran a business? Shall I drop out and pursue my family business opportunity? If I am to continue studying, I will incur student loan debt which I won’t prefer. But, alas, I will do it if it need be to accomplish my goal. Thank you a lot.

You have my sympathies on two fronts:

1) Choosing between family obligations and personal goals is never easy.? I have had to face that in deciding what jobs I could take while raising my family.? I was recruited for a managing director position in an investment bank in the mid-90s, but passed it up because I could not peel away that much time from my family and church.? It took a lot of time for me to become an institutional investor as a result.? I became an investment actuary at the age of 31, started working in an investment department at age 37, started work at a hedge fund at age 42, and started my own firm at age 49.? By 49, I had more than enough assets to care for my family if my business failed, at least to put the kids through college.?? After that, I could be stretched.

2) Good operational businessmen can be very good investors.? There are synergies between the ability to operate a business, and the ability to make good investment decisions.? Don?t think that building another business is a waste of your time.? It will sharpen you in ways that most institutional investors never grasp.? I benefited a great deal from building profitable business within insurance companies, and it sharpened my knowledge on how to invest.

Now, all that said, if you take time out to rebuild your family?s business, don?t neglect your education.? Read good books on value investing, and study those who have been great.? I?m not saying that college is useless, but I am saying that much of the knowledge that academics teach on economics is deficient.? In some ways, it is better to be a clever businessman than an academically trained man.? The latter will not gain much insight into how to invest.? The businessman has a better chance.

Perhaps a good compromise would be to study for the CFA credential in your spare time.? I did that.? Along with that, invest some of your money in ideas that you think are worthy.? I did that from 1992-2003, before I began investing in stocks professionally, and I did very well.

You need to find out whether you have significant insights versus the rest of the markets.? Academic learning will not help that.? Operational business experience *might* help that.

Don?t give up your goal of managing your own value investing firm, but realize that there are many paths to getting there, and the most important thing is trying to develop insight into the markets that others don?t have.? Typically, academic study does not develop that.

I hope things work out for you.? Let me know how you do.

Sincerely,

David

Sorted Weekly Tweets

Posted on 3 August 20133 August 2013 by David Merkel

US Politics & Policy

U.S. Declassifies Court Order Allowing Record Collection http://t.co/0AOMcCRsGi Perhaps some small step of transparency, we need better $$ Aug 03, 2013
Obama Urges Business Tax Rewrite to Help Spur New Jobs http://t.co/DmRwtwHS6r Lousy legislation that panders to power, it will pass $$ Aug 03, 2013
The Very Worst Part of Today’s Lousy Jobs Report http://t.co/Tvn2F6mWQ6 Job quality is low, growth is slow, & incomes don’t grow $$ Aug 03, 2013
Who Are Worse, Renters or Owners? http://t.co/cHKBfXp210 Govt meddling in housing leads 2 problems favoring old vs young, owners/renters $$ Aug 03, 2013
American Dream Slipping as Homeownership at 18-Year Low http://t.co/7b6sYVu8Q6 People need place 2 live, but houses r rarely good invtmts $$ Aug 02, 2013
Freshmen GOP Lawmakers Revel in Maverick Power http://t.co/iGaLIjt2qe We want idealistic politicians until we actually get them $$ #maverick Aug 02, 2013
Obama open to changes at NSA; intel officials fight to maintain secrecy http://t.co/rZaR9r2aKf Officials task-driven, Constitution blocks $$ Aug 02, 2013
Cities Grabbing Houses Won’t Fix the Market http://t.co/AXaCHwuIoP @asymmetricinfo on y using eminent domain on mtges is likely 2 fail $$ Aug 02, 2013
Coburn thinks defunding Obamacare is a horrible idea http://t.co/W2jK00gOgZ Truth-teller Tom Coburn aims to fix PPACA rather than destroy $$ Jul 28, 2013

Market Impact

Walsh?s Unconstrained Wins in Bond Rout: Riskless Return http://t.co/W8LNnWE5Kr Unconstrained strategies r easier when u don’t run lotsa $$ Aug 03, 2013
Blackstone, Deutsche Bank in Talks to Sell Bond Backed by Home Rentals http://t.co/m3cae6mljQ This would b better killed off when little $$ Aug 03, 2013
Search for Muni-Bond Guidepost Sputters http://t.co/zjQHXiWAqi Start w/illiquid collateral u can’t get a liquid benchmark, pricing issues $$ Aug 03, 2013
Big Question Hangs Over Small-Caps http://t.co/Ehzm5j9490 Valuations r stretched, but large cap mgrs need a way to beat their benchmarks $$ Aug 03, 2013
No, Earnings Have Not Been ‘Good’ http://t.co/kT7dfnbeUN Actual earnings growth has been anemic, which matters more in the long-run $$ Aug 02, 2013
Leveraged Loans Pass ?12 Level With Record Ahead http://t.co/Mf7OHWm5kB Quality & pricing r getting sacrificed 4 quantity; bad long-run $$ Aug 02, 2013
BlackRock Rolls Out Index 2 Make Inroads in Retirement Market http://t.co/uRpJ6qvfmj How much $$ do u need 4 a decent retirement income $BLK Aug 02, 2013
Bank commodity earnings are a mystery http://t.co/TjMkuWTnS9 Neglects financialization of commodities by pension plans & retail investors $$ Aug 02, 2013
This is the cost of sitting on cash in a bull market. Different when valuations are stretched, like now. http://t.co/WYC6bAReyt Aug 01, 2013
JPMorgan to quit physical commodity trade amid scrutiny http://t.co/VWmtIClYXk Business case: commodities require 2much capital&attention $$ Jul 28, 2013
Tourre Tells of Low Status at Goldman in Defense Preview http://t.co/uCc7GWK5LB “I didn’t have any significant authority at GS! I didn’t” $$ Jul 28, 2013

Rest of the World

How Venezuelan Used ?Scrape? to Make Six Times Her Salary http://t.co/L3rUmVK3vB When currencies r manipulated, clever people play games $$ Aug 03, 2013
Wheat Costs in Japan to Gain for 3rd Time as Abenomics Bites http://t.co/mPQxXBGAjc Devaluing the yen has negative side-effects $$ #duh Aug 03, 2013
Merkel?s Green Shift Backfires as German Pollution Jumps http://t.co/JAXdm53hiT Closing down nuclear plants was an unforced error ->coal $$ Aug 03, 2013
How Big Is China?s Debt? The Best Guesses http://t.co/BzY8f7Gzz3 This estimates total governmental debt at all levels, not total debt $$ Aug 02, 2013
The $7 Trillion Problem That Could Sink Asia http://t.co/A9y8QzOx54 In the short-run Asians would acquire $$, in long-run it would hurt $$ Aug 02, 2013
Japan’s Three-Year Fiscal Plan to Urge Sales Tax Rise http://t.co/jxsYhJc24E Will be difficult 2 execute, w/o a lot of political backlash $$ Aug 02, 2013
Ghana?s Dancing Pallbearers, Insurers Lead Funeral Boom http://t.co/GWd4V8xu3g $$ spent for status events is wasted, & keeps people poor. Aug 02, 2013

Companies & Industries

Tax Shelters, Nebraska Hurricanes And Other Captive Insurance Mistakes http://t.co/V7Xsp1tmek 10 rules 2 keep a captive insurer legit $$ Aug 03, 2013
7-Eleven Adds Bento Rigor to Slurpee Appeal in US Push http://t.co/www8ObGqhL 7-11 went from the US 2 Japan, then goes back w/Japan mgmt $$ Aug 02, 2013
Third Point Hedge Fund Targets CF Industries http://t.co/ioIzcPlFlu Thinks that $CF could free up more cash 4 shareholders $$ Aug 02, 2013
Uralkali Breaks Potash Accord to Grab Market Share http://t.co/EfyqzqZr8P Amazing the effect a large foreign player can have on US cos $$ Aug 02, 2013
Burger Costs Rising With Beef Supply at 21-Year Low http://t.co/nXfFXEECbd Should c higher prices, more births, less slaughter, etc. $$ Aug 02, 2013
SAP Invades Silicon Valley via Acquisitions http://t.co/vXOK0YmIb8 Creates room 4 new competitors as acquirers don’t integrate them well $$ Aug 02, 2013
Why Are Google Employees So Disloyal? http://t.co/Ye0ZBLADtk Calculate actuarial decrement tables 2 arrive at the truth $$ Avgs don’t work. Jul 30, 2013

Central Banking

When you?re rattled by collateral, do the Fed taper talk http://t.co/lImzjMdmT8 Taper talk forced on the Fed 4 market operational reasons $$ Aug 03, 2013
Near-Zero Interest Rate Trap http://t.co/hjoBF5acb6 If long-term rates rise 2 normal levels, banks holding bonds would b de-capitalized $$ Aug 03, 2013
Money shot from John Mauldin: “We are watching the Fed employ a trickle-down monetary policy.” Couldn’t have said it better. $$ Jul 28, 2013

Other

Afrikaners Reaping Colorado Wheat Threatened by Visa Cap http://t.co/Cj6pTKm5NG 2nd largest immigrant ag labor group might get restrained $$ Aug 03, 2013
Banker Saves 20,000 From Nepal to Uganda With Her Profits http://t.co/c0HURcg3wJ Rather than wait 4 death, pursues charity personally now $$ Aug 03, 2013
Pope Signals Openness to Gay Priests http://t.co/t5leZXst4D Jesus said that the sin was not only in the action, but in the thought $$ Matt 5 Aug 02, 2013
My Life & Past, as Seen Through Google’s Dashboard http://t.co/LPkviIKHGj Would u like 2 review your history? Would u like 2 delete it? $$ Aug 02, 2013
Famous Restaurant Chains That Have All But Disappeared http://t.co/i5yxIighw7 Remember Chi-Chis, Sambo’s, Bennigan’s, Steak & Ale, HoJo? $$ Aug 02, 2013

Replies, Retweets & Comments

Commented on StockTwits: Thanks, Howard. Coming from you, that is high praise that I hope to live up to. http://t.co/Q5ikvtjzHa Aug 03, 2013
@zingfinapp That’s part of the nature of the seasonal adjustment factor: when jobs over/undershoot in current month, they adjust prior same Aug 03, 2013
@Kevin_Holloway This is surfacey, but it looks good for all parties except other Japanese insurers… Aug 02, 2013
“The keys to merger are keep them small & integrate them well. Does anyone do this consistently?” ? David_Merkel http://t.co/cEGnuBXrYe $$ Aug 02, 2013
@ReformedBroker But it lowers volatility, I’m sure… and in a real equity market catastrophe, it will be a home run in relative terms. 😉 Jul 27, 2013

Less is More

Posted on 2 August 2013 by David Merkel

Before I start this morning, I would simply like to point out these five old articles of mine, because they will be relevant to my argument:

The Rules, Part XXXVIII (There is probably money to be made in analyzing the foibles of money managers, to create new strategies by taking on the opposite of what they are doing.)
The Portfolio Rules Work Together
“Do Half”
Risk Control Upfront & Risk Control Upfront, Redux

My contention is that most institutional investors are biased toward action, not inaction, and that is probably true of many “hands on” amateur investors as well.? In many cases they would be better off doing nothing, doing less, or at worst, doing half.? Quoting from that piece:

But the real benefit of doing half is the psychology of the situation.? Many investors suffer from fear, greed, and regret.? Doing half short-circuits those responses.? When the stock price moves in favor of profits, be glad of those profits.? When the stock price moves against profits, reanalyze and either a) go flat, recognizing your mistake, and being grateful that it was small, or b) increase the bet to a full position, and be grateful that you didn?t put a full position on initially.

But often an investor finds himself in a psychological “Zugzwang.” [That’s a? chess term for compulsion to move.]? One of your investments has been revealed to be a blunder, and now you deal with regret, or worse yet, a desire to catch up [envy, greed].? Let me suggest a solution.? Just as there are no good macroeconomic policies after a financial crisis — one must seek to stop the next crisis, not fix the current one, the same thing applies to the intelligent investor, where we go back to first principles:

Did I have an adequate margin of safety?
Did I buy it cheap relative to prospects?? Were my expectations too rosy relative to what could have been seen, given data known prior to the revelation of the error?? Did anyone else get it right?
Did I understand the industry prospects well enough, and how my company interacted there?
Did the management team surprise me by misusing free cash flow, borrowing capacity, etc?
Were there accounting problems that I should have seen?
Did I size the position right?
Did I reduce exposure and add exposure to the right companies via my normal portfolio management processes?

Now, these correspond to my portfolio rules, in a jumbled way.? If you have analyzed risk well on a forward-looking basis, when a small problem hits, the stock should be off a few percent.? When a big problem hits, maybe off 10%.? Having a strong margin of safety protects the downside, and keep you from being a forced seller.? Most investment ideas take time to work out.? A company may do well for years, and then all of a sudden it gets discovered and takes off.? On lesser-known companies, where internal value is growing, I don’t mind seeing a flat chart.? Eventually value will be discovered.

With an adequate margin of safety, a disaster can be a time to add, if long-term prospects are not unduly damaged.? The company with the disappointment must compete against the rest of your portfolio for capital, so after a disappointment, remeasure how you think it would rank as a new position in your portfolio.? If you didn’t own it, would you buy it?

The idea here is to do risk control upfront.? The reward to this is that you will make fewer decisions, and better decisions.? You won’t have to sweat as many ugly scenarios, and so you can spend more time knowing your companies better, so that you have an information advantage versus most of your competitors.? You will do less trading, but have better investment results.? This is a case where more is less, and many of the leading value investors (Buffett, Klarman, etc.) would concur.? I can see it now, “The Less is More Guide to Investing.”

It would certain help some institutional investors with their foibles.? High portfolio turnover does not usually produce great returns (there are notable exceptions).? Get out of the short-term performance business, and into the long-term, if you can.? Trade less; analyze and invest more.? Spend less time on day-to-day gyrations, and look for what is ignored by the market.? Start playing a game that you might have a chance of winning, and develop your own edge.? It’s a tough market, but you can make it tougher for everyone else by approaching it from a valid angle that few others do.

In the end you will make fewer decisions, but the decisions will be higher quality.? Less will be more, and what’s more, your clients will like it, and not mind that your life just got a lot easier.

Redacted Version of the July 2013 FOMC Statement

Posted on 1 August 2013 by David Merkel

Comments

This FOMC Statement was close to a nothing-burger.? They try to take the deflation boogeyman off of the table with words, and no proof.? All the same, they shaded down their views of housing and GDP.
Current proposed policy is an exercise in wishful thinking.? Monetary policy does not work in reducing unemployment, and I think we should end the charade.
In the past I have said, ?When [holding down longer-term rates on the highest-quality debt] doesn?t work, what will they do?? I have to imagine that they are wondering whether QE works at all, given the recent rise in long rates.? The Fed is playing with forces bigger than themselves, and it might just be dawning on them now.
The key variables on Fed Policy are capacity utilization, unemployment, inflation trends, and inflation expectations.? As a result, the FOMC ain?t moving rates up, absent increases in employment, or a US Dollar crisis.? Labor employment is the key metric.
GDP growth is not improving much if at all, and much of the unemployment rate improvement comes more from discouraged workers, and part-time workers.

June 2013	July 2013	Comments
Information received since the Federal Open Market Committee met in May suggests that economic activity has been expanding at a moderate pace.	Information received since the Federal Open Market Committee met in June suggests that economic activity expanded at a modest pace during the first half of the year.	Shades their view of past GDP down.
Labor market conditions have shown further improvement in recent months, on balance, but the unemployment rate remains elevated.	Labor market conditions have shown further improvement in recent months, on balance, but the unemployment rate remains elevated.	No change
Household spending and business fixed investment advanced, and the housing sector has strengthened further, but fiscal policy is restraining economic growth.	Household spending and business fixed investment advanced, and the housing sector has been strengthening, but mortgage rates have risen somewhat and fiscal policy is restraining economic growth.	Shades their view of housing down.? I?m sorry, but balanced budgets promote growth, because economic actors don?t fear their taxes rising in the future.? Also, in Keynesian terms, any deficit is stimulative.
Partly reflecting transitory influences, inflation has been running below the Committee’s longer-run objective, but longer-term inflation expectations have remained stable.	Partly reflecting transitory influences, inflation has been running below the Committee’s longer-run objective, but longer-term inflation expectations have remained stable.	No change, and not true.? TIPS are showing rising inflation expectations since the last meeting. 5y forward 5y inflation implied from TIPS is near 2.5%, up 0.25% from June.
Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability.	Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability.	No change. Any time they mention the ?statutory mandate,? it is to excuse bad policy.
The Committee expects that, with appropriate policy accommodation, economic growth will proceed at a moderate pace and the unemployment rate will gradually decline toward levels the Committee judges consistent with its dual mandate.	The Committee expects that, with appropriate policy accommodation, economic growth will pick up from its recent pace and the unemployment rate will gradually decline toward levels the Committee judges consistent with its dual mandate.	No change. Emphasizes that the FOMC will keep doing the same thing and expect a different result than before. Monetary policy is omnipotent on the asset side, right?
The Committee sees the downside risks to the outlook for the economy and the labor market as having diminished since the fall.	The Committee sees the downside risks to the outlook for the economy and the labor market as having diminished since the fall.	No change.
The Committee also anticipates that inflation over the medium term likely will run at or below its 2 percent objective.	The Committee recognizes that inflation persistently below its 2 percent objective could pose risks to economic performance, but it anticipates that inflation will move back toward its objective over the medium term.	CPI is at 1.8% now, yoy.? It may be closer than they think.
To support a stronger economic recovery and to help ensure that inflation, over time, is at the rate most consistent with its dual mandate, the Committee decided to continue purchasing additional agency mortgage-backed securities at a pace of $40 billion per month and longer-term Treasury securities at a pace of $45 billion per month. The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction.	To support a stronger economic recovery and to help ensure that inflation, over time, is at the rate most consistent with its dual mandate, the Committee decided to continue purchasing additional agency mortgage-backed securities at a pace of $40 billion per month and longer-term Treasury securities at a pace of $45 billion per month. The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction.	No change. Does not mention how the twist will affect those that have to fund long-dated liabilities. Wonder how long it will take them to saturate agency RMBS market? Operation Twist continues.? Additional absorption of long Treasuries commences.? Fed will make the empty ?monetary base? move from $3 to 4 Trillion by the end of 2013.
Taken together, these actions should maintain downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative.	Taken together, these actions should maintain downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative.	No change.
The Committee will closely monitor incoming information on economic and financial developments in coming months.	The Committee will closely monitor incoming information on economic and financial developments in coming months.	No change. Useless comment.
The Committee will continue its purchases of Treasury and agency mortgage-backed securities, and employ its other policy tools as appropriate, until the outlook for the labor market has improved substantially in a context of price stability.	The Committee will continue its purchases of Treasury and agency mortgage-backed securities, and employ its other policy tools as appropriate, until the outlook for the labor market has improved substantially in a context of price stability.	No change.
The Committee is prepared to increase or reduce the pace of its purchases to maintain appropriate policy accommodation as the outlook for the labor market or inflation changes.	The Committee is prepared to increase or reduce the pace of its purchases to maintain appropriate policy accommodation as the outlook for the labor market or inflation changes.	No change. Vacuous.
In determining the size, pace, and composition of its asset purchases, the Committee will continue to take appropriate account of the likely efficacy and costs of such purchases as well as the extent of progress toward its economic objectives.	In determining the size, pace, and composition of its asset purchases, the Committee will continue to take appropriate account of the likely efficacy and costs of such purchases as well as the extent of progress toward its economic objectives.	No change
To support continued progress toward maximum employment and price stability, the Committee expects that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the asset purchase program ends and the economic recovery strengthens.	To support continued progress toward maximum employment and price stability, the Committee today reaffirmed its view that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the asset purchase program ends and the economic recovery strengthens.	No change. Promises that they won?t change until the economy strengthens.? Good luck with that.
In particular, the Committee decided to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that this exceptionally low range for the federal funds rate will be appropriate at least as long as the unemployment rate remains above 6-1/2 percent, inflation between one and two years ahead is projected to be no more than a half percentage point above the Committee’s 2 percent longer-run goal, and longer-term inflation expectations continue to be well anchored.	In particular, the Committee decided to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that this exceptionally low range for the federal funds rate will be appropriate at least as long as the unemployment rate remains above 6-1/2 percent, inflation between one and two years ahead is projected to be no more than a half percentage point above the Committee’s 2 percent longer-run goal, and longer-term inflation expectations continue to be well anchored.	Not a time limit but economic limits from inflation and employment. Just ran the calculation ? TIPS implied forward inflation one year forward for one year ? i.e., a rough forecast for 2014, is currently 2.20%, unchanged from May.? Here?s the graph.? The FOMC has only 0.30% of margin in their calculation.
In determining how long to maintain a highly accommodative stance of monetary policy, the Committee will also consider other information, including additional measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial developments.	In determining how long to maintain a highly accommodative stance of monetary policy, the Committee will also consider other information, including additional measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial developments.	No change.
When the Committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2 percent.	When the Committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2 percent.	No change.
Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; Elizabeth A. Duke; Charles L. Evans; Jerome H. Powell; Sarah Bloom Raskin; Eric S. Rosengren; Jeremy C. Stein; Daniel K. Tarullo; and Janet L. Yellen.	Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; James Bullard; Elizabeth A. Duke; Charles L. Evans; Jerome H. Powell; Sarah Bloom Raskin; Eric S. Rosengren; Jeremy C. Stein; Daniel K. Tarullo; and Janet L. Yellen.	No change
Voting against the action was James Bullard, who believed that the Committee should signal more strongly its willingness to defend its inflation goal in light of recent low inflation readings, and Esther L. George, who was concerned that the continued high level of monetary accommodation increased the risks of future economic and financial imbalances and, over time, could cause an increase in long-term inflation expectations.	Voting against the action was Esther L. George, who was concerned that the continued high level of monetary accommodation increased the risks of future economic and financial imbalances and, over time, could cause an increase in long-term inflation expectations.	Bullard made his point last month, and sits back with the majority. George continues to make her point that is the same as mine in my piece Easy In, Hard Out; that the Fed may have greater problems as a result of its abnormal policies, whatever they do in the future.