Sorted Weekly Tweets

Posted on 7 December 2013 by David Merkel

Rest of the World

Ghana Farms Miss Out on Oil-Fueled Middle Class Food Demand http://t.co/IwEsoXVy20 Middle classes introduce changes into societies $$ $SPY Dec 07, 2013
Are the Baltic Dry Index Telling Us to Expect a Stronger Economic Activity? http://t.co/aqnFaUuGkg Could be, but only in exports $$ Dec 07, 2013
Yuan Passes Euro as 2nd-Most Used Trade-Finance Currency http://t.co/yeNQzNYLWD If China’s banks were exposed 2 market, would b impressed $$ Dec 07, 2013
Big Oil to Get Brazil-Like Terms in Plan to End Mexico Monopoly http://t.co/SWqSEyVnU0 Maybe Mexico can gain the technical help it needs $$ Dec 07, 2013
Panasonic in Deal Talks With Auto Parts Makers for Expansion http://t.co/vjECK9hnD5 Desperation drives the company 2 seek more markets $$ Dec 07, 2013
Pirates Wielding Grenades Spur Japan to Ease Samurai-Era Gun Ban http://t.co/jsOtaI0J7c Force must b opposed by force; no other way $$ $SPY Dec 07, 2013
Rich Kazakhs Revive Polygamy as Women Seek Poverty Escape http://t.co/vTn2h9eSZx Young Kazakh women would rather b second wives than poor $$ Dec 07, 2013
Iran Wants US Companies to Develop Oil Fields http://t.co/E1NUUEo5t4 The Great Satan is quite useful under the right conditions $$ $SPY $TLT Dec 07, 2013
China Cinda Attracts $65B in Orders for Up to $2.5B IPO http://t.co/6i5nvsWhSD Those are bubbly conditions; 2 much $$ 2 put 2 work $SPY $TLT Dec 07, 2013
Wrong: OECD Warns Riksbank Against Obsessing Over Record Debt http://t.co/fYu3CcY31M OECD should learn excessive debt harms $$ $TLT $SPY Dec 07, 2013
Banks in Safest Euro Nation See Credit Drought as Finns Save http://t.co/HZ6IDctQzk Many want to save; few want to borrow. Rational $$ Dec 07, 2013
Spain Credit Falls to ?05 Shadow After Price Collapse http://t.co/y9VUnLcszp Even that is too much credit. Wait 4 hard money buyers $$ Dec 06, 2013
China Bans Financial Companies From Bitcoin Transactions http://t.co/i8yhbAcKAW Wealthy Chinese want to get value out of China $$ $SPY $TLT Dec 06, 2013
“Wealthy Chinese could use it to funnel flight capital out of China” ? David_Merkel http://t.co/XRD6rOfsGg How Bitcoin functions in China $$ Dec 02, 2013
China?s Largest Bitcoin Exchange Seeks Recognition for Currency http://t.co/hNtBu9e2MU Communist Party will eventually ban Bitcoin $$ $SPY Dec 02, 2013

PPACA/Obamacare

Obamacare’s New Goal: Stay Alive Until 2015 http://t.co/tJpT20oW6K The idea is 2 survive until 2015, so the law can’t b destroyed in 2017 $$ Dec 07, 2013
How Much More Will Smokers Pay for Obamacare? http://t.co/Rd3eWeVynR Answer: not much more & no, it will have little effect on quitting $$ Dec 04, 2013
Obamacare Website Repair Goals Reached, Administration Says http://t.co/PfJ5tgLrSu Big Problem: the insurers are not getting the data $$ Dec 03, 2013
Deep Inside The Hot Mess Called Obamacare: It’s Time For Honesty http://t.co/uY6P8JnakO Sophomoric, doing a dumb thing, calling it wise $$ Dec 01, 2013
Obamacare Payment System to Insurers Changed in Setback http://t.co/0d26PCyQh6 Complex law, difficult to change w/o affecting other parts $$ Nov 30, 2013
Inside the Company That Bungled Obamacare http://t.co/EbcR6VQ3rs B wary of companies that grow 2 fast w/shaky revenue recognition $$ $GIB Nov 30, 2013

Pensions

Change Illinois’ pension benefits to match the Social Security system http://t.co/LuA3nkw50C The bill passed will harm Illinois long-run $$ Dec 07, 2013
The Best and Worst Run States in America: A Survey of All 50 ? http://t.co/Kq5ElC567u You might be surprised by the rankings $$ $SPY $TLT Dec 07, 2013
Pension Threats in Illinois, Detroit Rattle Government Workers http://t.co/t2rqvoK3cl If the local government can’t pay, it won’t $$ Dec 07, 2013
Pension Threats in Illinois, Detroit Rattle Government Workers http://t.co/Hd0Wr0TL0b Blame Union strategy of extracting pension gains $$ Dec 06, 2013
Illinois Passes Pension Overhaul http://t.co/8svwzeiTuK Fake overhaul that leaves Illinois taxpayers worse off, will go to court & die $$ Dec 05, 2013
Detroit Retirees Got Extra Interest After Guaranteed 7.9% http://t.co/WmvpH4PHWI What Detroit did w/”excess” pension earnings was evil $$ Dec 03, 2013
Illinois Legislative Leaders Try to Sell Pension Agreement http://t.co/vU1O1qKSO6 Dreamland vs Hard Choices. So far Dreamland is winning $$ Nov 30, 2013

US Politics & Policy

Gun Patents Set 35-Year Record as Limits on Sales Fail http://t.co/lZKuBqkheu When GOP has Presidency sales will fall $$ Dec 07, 2013
What You Don?t Know About Mortgages http://t.co/dmKPgFMAqL! Mortgage documents don’t reflect the full cost of getting the mortgage $$ $TLT Dec 07, 2013
Obama war chiefs widen drone death zones http://t.co/E47ZKFgBex If we want to make the US odious to the rest of the world, use drones $$ Dec 07, 2013
Paul Krugman Consigns To Hell An Economic Slump Of His Own Devise http://t.co/qgrKFSBG8W We have 2 turn the lights off near Krugman $$ Dec 07, 2013
The Fed Must Inflate http://t.co/nBKutizEDw I think this is the most likely conclusion, but not certain $$ Dec 07, 2013
Is the Fed increasingly monetizing government debt? http://t.co/1I3twSCfaY Yes, Fed is monetizing government debt, get ready 4 inflation $$ Dec 07, 2013
Angry Self-Insured Voters Dim Democratic Takeover Plans http://t.co/MMjVZi16LU Many feel robbed by the loss of choice in healthcare $$ $SPY Dec 06, 2013
Henninger: Obama’s Red-Line Presidency http://t.co/tOjc5UV88s What doe the US stand for? What will we defend? Who r our allies? Confusing $$ Dec 06, 2013
“You can’t regulate what you don’t understand. The SEC looked in on it several times, with more?” ? David_Merkel http://t.co/g9jqwD0En1 $$ Dec 03, 2013
Uninsured-Driver Dilemma http://t.co/DSBWcNLyMk Have Assurant track non-payment at the insurers, & inform the MVAs of lapsation $$ $AIZ Dec 03, 2013
Magic Johnson, Tom Hanks Join Obama on Cash-Grabbing Trip http://t.co/z2AOd9C8yC Cash works in the short run, voters decide the long run $$ Dec 03, 2013

Financial Sector

Why FDIC is Running Out of Time for Resolution Planning http://t.co/5PTdNU6LPb As w/all complex laws, things move slowly, no surprise. $$ Dec 07, 2013
Why Capital Is Key Battleground in GSE Reform Debate http://t.co/21pFcfRhfU Appropriate capital 4 new system:a political &technical issue $$ Dec 07, 2013
Penny Pricing for US Stocks Said to Get Scrutinized http://t.co/grStNTieJR I don’t think this is a big problem, helps small investors $$ Dec 07, 2013
Examiners-in-Residence Should Be Pulled Out of Megabanks: OCC Report http://t.co/QGyvc9RkDz Familiarity breeds acquiescence, not contempt $$ Dec 07, 2013
Buyers Give Up Their Names to Seal Merger Deals http://t.co/zmAgQ2J5Zo Who cares what a bank is named, so long as you have control? $$ $FXF Dec 07, 2013
Volcker Rule to Force Banks to Comply With Five Regimes http://t.co/7H0s7dhCnm Recipe 4 disaster. When many r responsible, no one is $$ Dec 07, 2013
Slate Writer Is Dead Wrong to Root Against Community Banks http://t.co/TAL566KB0n Getting banks is tough 4 neophytes like Matty Yglesias $$ Dec 06, 2013
Private equity firms brace for ?mafia? style scrutiny http://t.co/dRaXIvfztv This looks a lot more difficult than the article indicates $$ Dec 03, 2013
Fed Eyes Financial System’s Weak Link http://t.co/ShsZIBcWT4 Solution is simple; bifurcate repo acctg 4 statutory cash flow testing $$ $XLF Dec 03, 2013
Creating a Black Swan http://t.co/wMnfc81Ai0 Attempts 2 explain how negative black swan events get created in financial markets $$ $SPY $TLT Nov 30, 2013
The Black Swan http://t.co/IBQL7AG4XJ A good piece that explains positive & negative “Black Swan” events, & how 2 thus position for them $$ Nov 30, 2013

Companies & Industries

Crude Oil Refiners Are In A Sweet Spot | Commodities http://t.co/HjtUJOe0gZ Because crude oil can’t b exported, refiners benefit $$ $SPY Dec 07, 2013
Retailers Are in a Deflated Holiday Mood http://t.co/Rd7JLXlRj8 One reason why I rarely invest in retailers, aside from grocery $$ $SPY $TLT Dec 07, 2013
Heavy Inventories Threaten to Squeeze Clothing Stores http://t.co/t542Zlltcf That said, clothing is dirt cheap, so why worry much? $$ $SPY Dec 07, 2013
Hidden U-Haul Billionaire Emerges With Storage Empire http://t.co/YRE2pc6Tf4 Fascinating tale of how brothers rescued the family business $$ Dec 06, 2013
UnitedHealth Projects 2014 Results Below Analysts’ Estimates http://t.co/c9fGK1QUzp Health Insurers take one for Obama’s errors $$ #FTL Dec 03, 2013
Olin Corporation Common Stock up 9% today http://t.co/HwlrL4TD9z Something is happening w/OLN today. Anyone know what? FD: + $OLN $$ $SPY Dec 02, 2013
Microsoft, Yahoo Upgrades Shows Snowden Won, Obama Failed http://t.co/sqzBmoIY8n Encryption keys double, squaring time needed to crack $$ Nov 30, 2013
Fair-Weather Friends or Raining on Your Parade http://t.co/uVksfLp84u Good snarky post. Time to lighten up on property-centric reinsurers $$ Nov 30, 2013

Market Dynamics

Gen Re?s Gilbert Says Fed Sets Up Stocks for a Decline http://t.co/o28udyUMGC The Fed will learn the limits of its power in a few years $$ Dec 07, 2013
The Blessing of a Declining Stock Price http://t.co/Ta2eE12QW7 This is how I do it; I buy companies that have moved against me $$ $SPY $TLT Dec 07, 2013
The Stock Market Is ‘Shrinking,’ Despite Record-High Indexes http://t.co/cj6YcrhBYL Interesting argument of stock scarcity pushing prices $$ Dec 07, 2013
Buffett’s Alpha http://t.co/D3UrTxePlp Finally a paper from academics that gives Buffett the credit he deserves. Efficient markets? No. $$ Dec 07, 2013
Gross to Run Pimco Unconstrained as Dialynas Takes Leave http://t.co/rgLxxVp3Xj Unconstrained is no guarantee of good performance $$ $TLT Dec 06, 2013
?Quant? hedge funds: Computer says no http://t.co/ZCXplVsnnA Runs in cycles as more or less focus on anomalies in investing $$ $SPY $TLT Dec 01, 2013
Don?t Ignore Doctor Copper http://t.co/JYw6XNcR5z Copper is indicating a punk economy $$ $SPY $TLT Dec 01, 2013
Howard Marks: Too Cute for His own Good? http://t.co/BWZ2bDD0xP Unfair. Marks says that the opportunity set is small, get it? $$ $SPY $TLT Dec 01, 2013

Other

Fixing What’s Wrong With Economics 101 http://t.co/BR8Lt8Z19H We need 2 scrap neoclassical economics, and move economics away from math $$ Dec 07, 2013
Madoff Behaved Like a Lunatic Over Fund Probe, Jury Told http://t.co/CUfV17a9tA Seems like Madoff employees kept their heads down $$ Dec 07, 2013
CS50, a computer science course, breaks stereotypes and fills halls at Harvard http://t.co/wnc2WYQbpo Making IT relevant across cultures $$ Dec 01, 2013
Caveat Emptor: Lovers of Latin Try to Sell a Dead Tongue http://t.co/d5YuHQQZtd Looks like wishful thinking 2me. Esperanto, anyone? $$ Nov 30, 2013
Why Taylor Swift Is the Reigning Queen of Pop http://t.co/sTEJPtyp66 Swift’s popularity secret? My take:she appears more humble than most $$ Nov 30, 2013
Build a Better Turkey Sandwich http://t.co/mM42sClsuL Thanksgiving keeps on giving in six inspired takes on the leftover-turkey sandwich $$ Nov 30, 2013

Classic: Become a Smarter Seller, Part 2

Posted on 7 December 2013 by David Merkel

The following was published at RealMoney, but I don’t know when, but I do know that this is the first draft, not the finished product — my editor did not want me to mention that I was unemployed.

?I always sell too soon.” ? Baron Rothschild

In 2003, when I was briefly unemployed, I noticed that my personal account was starting to underperform.? Partly to give myself more confidence at interviews, and partly to get rid of a distraction, I went over my portfolio to tune it up.

I started out by ranking my portfolio from top to bottom in terms of expected returns.? Nothing complex ? I just went my price targets and compared them to current prices.? Highest percentages are at the top; lowest are at the bottom.? My next step was to do the same for a list of replacement candidates.? I then looked at the second list, and found that my top three replacement candidates beat the expected returns for the median company in my portfolio.? I bought those three companies for my portfolio, and funded it by selling the four stocks in my portfolio with the lowest expected returns.? At the same time, I added a small amount to two underperforming names in my portfolio.? Here were my actions, and the results through 7/14/03, the date that I sold Pechiney:

Action	Size	Name	Ticker	7-Mar	14-Jul	Return	Average Return
Sell	100%	Adtran	ADTN	30.46	58.52	92%
	100%	Am Power Conversion	APCC	14.66	17.11	17%
	100%	Texas Instruments	TXN	16.26	19.12	18%
	100%	Bank of Montreal	BMO	27.94	31.91	14%	35%
Buy	100%	Precision Castparts	PCP	22.59	33.00	46%
	100%	Nucor	NUE	38.70	48.81	26%
	100%	Pechiney	PY	11.60	24.61	112%
	25%	Petrobras	PBR	13.60	20.80	53%
	25%	Dycom Inds.	DY	9.50	17.92	89%	63%

With the exceptions of Pechiney and Nucor, I still hold positions in all of the purchases.? When Pechiney hired the investment bankers, I tossed in the towel; I thought they were fighting for their cushy jobs, not enhancing shareholder value.? I was surprised to see them sell out to Alcan.? I sold Nucor in late 2003, over the rise in scrap steel prices; even though Nucor can raise its own prices, its profits will not increase as much as other steel firms.? I also goofed in my evaluation of Adtran.? It had much better prospects than I thought.

There were other companies on my purchase candidate list with expected returns that beat the expected returns of companies remaining in my portfolio, but did not beat the median expected return.? I set the bar at the median in order to avoid excessive turnover.

The price return on the purchases versus the sales was better by more than I would ordinarily expect, and faster as well ? I look for returns on my portfolio to beat the S&P 500.? This series of trades certainly helped.

Rebalancing

The two smaller purchases were done for a different reason than the other trades.? PBR and DY were already in my portfolio, but had been performing badly.? The weight that each had in my portfolio had shrunk to be the smallest in my portfolio.? After a review of the fundamentals, I did what I call a rebalancing trade.

When I was interviewing managers at Provident Mutual, another question that we would ask managers is how they would rebalance positions in response to market movements.? Many of them would do nothing; others had no fixed strategy.? A few had really worked on this aspect of portfolio management, and to my surprise, their strategies on this topic were similar, even though other aspects of their portfolio management styles were different.? One was value, one was growth, one was core, but they each had evidence that their approach improved their returns by a couple percent per year.

There is a growing academic literature on market microstructure; one thing it addresses is measurement of the total costs of trading.? One of the costs of trading comes from whether a trade demands or supplies liquidity to the market.? When a trader posts a limit order, he offers other market participants an option to exchange shares for liquidity at a known price.? In offering liquidity, the trader hopes to get an execution at a favorable price.

The approach that the three managers use, and I employ in my personal account, is as follows:

Define a series of fixed weights for the stocks in the portfolio.
Do a rebalancing trade when any position gets more than 20% away from its target weight.? Use this time as an opportunity to re-evaluate the thesis on the stock.
If the rebalancing trade generates cash, invest the cash in the stocks that are the most below their target weights, to bring them up to target weight.
If the rebalancing trade requires cash, generate the cash from stocks that are the most below their target weights, to bring them down to target weight.

This discipline forces you to buy low and sell high, and also, to reevaluate your holdings after significant relative market movement.? This method works best with companies that possess low total leverage relative to others in their industries.? This helps avoid the problem of averaging down to a huge loss.? This also works best for diversified portfolios with 20-50 stocks, with reasonable even weights.? In my portfolio, the weights range from 2 to 7.5%, with 33 companies altogether.

The 20% figure is arbitrary, but in my opinion, it strikes a balance between excessive trading, and capturing reasonable trading profits, by providing shares and liquidity to the market when it wants them.? The incremental profits add up as companies and industries fall in and out of favor, and the rebalancing system buys low, and sells high.

Long DY, PBR, PCP (at that time, at present [2013] I have no positions in companies mentioned)

Action

Name

Rebalancing