Category: Blog News

Post 500

Post 500

Posted on by David Merkel

As WordPress counts, this is post 500, though it is only really the 409th post. (A glitch in the software yesterday ate up ten numbers… weird. I had planned on post 500 being near my first blogoversary on 2/20, but it was not to be.) I use the hundred milestones to take a moment to reflect on blogging, and update readers on what is going on in my life, my plans for the blog, and to ask for advice.

For the most part, I just blog now, and I don’t pay too much attention to the statistics on readership and links. I have a decent feel for where I fit into the financial blogosphere, and I know I won’t be the top writer here. I’m not for everyone.

As I have commented before, one of the good points and bad points of my blog is that blog readers really can’t tell what I will be serving up next. My interests are broad, and I like writing about a wide number of topics. I think it strengthens my understanding of the markets, rather than weakening it.

I have also said that this blog is not a business, but it is an option on a business. Well, the option came into the money regarding my new position with Finacorp. Today, an announcement will go out over PR Newswire over my new job there. To any of my readers in the regular media: if you read it, and you have a place for it in your publications, it will be much appreciated here.

So where am I going from here in blogging? I will continue to cover current issues, and long term ideas of interest, but I also have a list of articles that I would like to do:

  • Traffic
  • Academic Finance Lies
  • Rescuing Capitalism from Capitalists
  • Flexibility vs Fixed Commitments
  • Fundamentals of Market Bottoms
  • Revisiting DFR
  • Commercial Paper less Two-year Treasury Yields
  • Predicting Inflation
  • Unemployment Risk
  • Risk Management vs VAR vs ERM
  • Central Banks can lose money?
  • The Problem of Taxation

Before I close here, I want to thank my readers, and thank those that refer readers to me. I don’t take anyone for granted here. Your time is limited, and I appreciate that you read/refer to me. Special thanks to Abnormal Returns, Seeking Alpha, Marketbeat, The Big Picture, Random Roger, VIX and More, and more.

If you have suggestions for me, please send them my way. I write about what interests me, but I listen to readers in order to gauge the broader interest in what I write about.

PS — It is good to be employed once again.

Full disclosure: long DFR

An Economist at Last — Life Changes for David

An Economist at Last — Life Changes for David

Posted on by David Merkel

I started my business career as an actuary.? For an actuary, though, I had an unusual background — I wasn’t a math or a statistics major, I was an economics major, though admittedly, one with a lot of math.? You can’t get through the Ph.D. courses in econometrics without a lot of math.? In my business career, I’ve put my economics background to use, and added to it through studying finance.? Now, I studied much of the finance and economics of risk literature back in grad school, and developed a healthy dislike for MPT, the CAPM, and suchlike.

I grew up in a home where my self-taught mother used her head and picked stocks.? She did it quite well, too, and continues to do so today.? I figured that I could do it too, and over the past fifteen years, have done so.? Perhaps my major theme would be “hunt for value, and don’t be afraid to have a portfolio that looks weird.”? My studies of finance in my post-academic days were practical in nature, analyzing ways of beating the market, or reducing risk, realizing that any strategy can become overused, and useless.

After leaving my former employer, I’ve done a bunch of things — writing, consulting, etc.? Now it is time to focus.? I have taken a job as Chief Economist and Director of Research for Finacorp Securities, based in Irvine, California.? Their main focus is serving the investment needs of municipalities.? I have three main tasks:

  • Publish research that encourages clients to trade with us.
  • Provide research for internal staff and clients, enabling staff to serve clients better.
  • Build an asset management franchise for our clients around my value investing, and bond investing.

Beyond that, aid in the management of the firm where possible.? Now, I’m not changing locations; I am still based near Baltimore.? What I do can be done from anywhere, so long as I can connect to the Internet.
I have already produced a draft version of a newsletter for our institutional clients.? I am making preparations to?offer equity asset management services to clients.? What form that will take is still open.

That said, it is interesting at this point in my life to finally have the word “Economist” in my job title, as well as “Chief.”? In one sense, this dovetails well into my interests, as those who read my blog will know.? I write about the intersection of macroeconomics and investing.? That’s what I do.? It allows me to keep my interests broad, while solving a wide array of practical problems.? I have sometimes said that I am an investment omnivore.? That’s not quite true, but I like to wander across the investment wilderness, and gather disparate data, gaining good conclusions about the total investment landscape.

Anyway, that is what I am up to now.? To the extent that our newsletter or investment services might be open to individuals, I will let you all know.? I thank you all deeply for your support of me.

PS — I may be on FOX Business Wednesday between 12 and 2PM Eastern.? This is uncertain at present.? We will see.

Random Notes

Random Notes

Posted on by David Merkel

A few random notes:

  1. When I left my prior employer, one of the first things I did was buy a new laptop from Dell. It was much slower than I expected, and I began experimenting to see if I couldn’t speed it up. Now, here are a few tips: a) install sysinternals process explorer — it gives you much more information than task manager, and will show you what programs are hogging system resources. b) shut off or cripple the many little programs that lurk in the background, many of which occupy a decent amount of resources while waiting for program updates to be released over the internet. Do the updates manually, say, once a quarter. c) Reduce the number of programs that load at startup. d) I turned off the advanced graphics that were kind of pretty from Windows Vista. e) all of these helped, but the big bopper was removing McAfee and replacing it with ZoneAlarm Security Suite. McAfee was a real resource hog, and after removing it and installing ZoneAlarm, everything is faster. Everything. There is a limit to security systems; if they are pressed too far, they kill productivity. Productivity and security must be balanced.
  2. QBE’s gain is the Nasdaq’s loss. North Pointe, a not-all-that-well-known property-casualty insurer has sold out to QBE of Australia. Personally, I really liked NPTE’s management team, and thought they were on the right track. I appreciate insurance management teams that can focus on profitable niches, and are willing to let business go if they can’t make an underwriting profit. If QBE is smart, they will give prominent positions in their US operations to James Petcoff (the CEO) and Brian Roney (the CFO).
  3. Just as an aside, I felt like republishing this off topic post from RealMoney:

 David Merkel
How to Sell More Popcorn
11/3/2006 2:07 PM EST

When I was in college, I needed to make money, so I got a job working at a convenience store. The young lady who trained me showed me how to operate the popcorn maker. After adding the oil and the popcorn, she reached for the flavoring container and dumped the lot in. Her comment, “Just watch, the extra flavoring really creates sales.” She was right. As people walked in the door, a larger number than I would have expected bought popcorn. But there was a problem. The popcorn didn’t taste good. Too much salt and fake butter flavor. It led to few, if any repeat customers.

About a month later, when I was on the night shift, I tried an experiment where I cleaned out the popcorn maker, cleared out the old popcorn, and the popped a fresh batch using a little less than the instructions would indicate, much less the young lady who trained me. The smell was there, but it wasn’t overpowering. Since popcorn wasn’t usually done on the night shift, though, it would be noticeable.

The surprise: repeat customers for popcorn in the graveyard shift because it tasted good. Word of mouth spread, so I made popcorn regularly.

I believe in UPOD (underpromise, overdeliver) as Jim Cramer often points out. It applies to investing in two ways: first, buy companies whose managements do UPOD, and not OPUD. Positive surprises drive stocks higher, negative ones drive them lower.

That said, there is a second way that UPOD plays into investing. It’s what you tell your investing clients or readers. No strategy works all the time. No strategy is perfect even in the long run. No analyst is always right. Underselling your investment abilities, and demonstrating humility, may not attract as many clients in the short run, but it keeps them in the longer run, with continued diligent work.

And with that, I have to grab lunch; writing about the popcorn has made me hungry.

Position: None

Tickers mentioned: NPTE DELL

Future Blog Posts

Future Blog Posts

Posted on by David Merkel

Coming in the near term, I should have articles on the following:

  • The economics of Central Banking (can the Fed go broke?)
  • A critique of the Barron’s article on the Ratings Agencies
  • The Fundamentals of Market Bottoms (companion to this RealMoney article, The Fundamentals of Market Tops)
  • Predicting Consumer Price Inflation — What Works Best?? (Does anything work?)

That’s what is on the current schedule, together with other articles/events in the news flow.? I will be publishing through the so-called holiday season, so you may see some of this on Monday through Wednesday.

Also, in the near term, my left sidebar will include links and the Amazon widgets from my book reviews.

Thanks for reading me.? I really appreciate your patronage of my blog.

Reinsurance: The Ultimate Derivative

Reinsurance: The Ultimate Derivative

Posted on by David Merkel

Some housekeeping before I begin this evening. Here’s my progress on the blog:

  • RSS as far as I can test has no problems.? If you have problems with my feed, please e-mail me any details.? Before you do, try dropping my feed, and re-adding it through Feedburner.
  • My logo was anti-aliased for me by BriG.? Looks a lot cleaner.? Thanks ever so much, BriG!
  • The comment error problem is gone, and I suspect also the same one that I have when I post.? It was a bug in one of my WP plugins that was not 2.3.1 compliant.
  • My descriptive permalinks are still lost, though.

I still need to fix my left margins as well, and make my top banner clickable.? Still, that’s progress.

On to tonight’s first topic: my view on derivatives differs from that of other commentators because I am an actuary (as well as an economist and financial analyst).? In the late 1980s, the life insurance industry went through a problem called mirror reserving.? Mirror reserving said that the company reducing risk through reinsurance could not take a greater reserve credit than the reinsurer posted.

That’s not true with derivatives today.? There is no requirement that both parties on the opposite sides of an agreement hold the same value on the contract.? From my own financial reporting experience (15 years worth), I have seen that managements tend to take favorable views of squishy accounting figures.? The one that is short is very likely to have a lower value for the price of the derivative than the one who is long.

But can you dig this?? The life insurance industry is in this area more advanced than Wall Street, and we beat them there by 20 years minimum.? :D? Given the way that life insurers are viewed as rubes, as compared to the investment banks, this is rich indeed.

Now, as for one comment submitted yesterday: yes, counterparty risk is big, and I have written about it before, I just can’t remember where.? I would argue that the investment banks? have sold default on the counterparties with which they can do so.? That said, it is difficult to monitor true exposures with counterparties; one investment bank may not have the whole relationship.

Also, many exposures are hard to hedge because there are no natural counterparties that want the exposure.? When no party naturally wants? an exposure, either a speculator must be paid to bear the risk, or the investment bank bears it internally.

The speculators are rarely well-capitalized, and the risks that the investment banks retain are in my estimation correlated to confidence.? When there is panic, those risks will suffer.? Were that not so, there would be counterparties willing to take those risks on today to hedge their own exposures.

So, is counterparty risk a problem?? Yes, but so is deadweight loss from differential pricing.

Post 400

Post 400

Posted on by David Merkel

Time to take a moment to reflect on what?s happened over the last hundred posts (as WordPress counts them), together with what has been going on in my life, and what is in store for the future on my blog.? Ten months is a long time in blog terms.? Let’s start with what I have gotten right and wrong.

Right:

Wrong:

  • National Atlantic
  • Stock-picking generally
  • Blog programming

In general, my macro commentary has been pretty accurate.? At this juncture, being bearish on the dollar and credit have been winners.? No telling when that will change.? That said, my hand has gone cold in the market since value stocks went cold.? Beating the value index is not enough for me, thank you.? National Atlantic is a continuing problem, though it seems to have found buyers around $4.

Now, if someone had told me when I started this blog that more than one-third of my readers would be outside the US, I would not have believed it.? 19% of my readers are from Canada, 7% from the UK and 4% each from Uruguay and the Netherlands.? Hey, thanks for reading me; I hope what I write is relevant to you.? And thanks to the readers from China, Germany, France, Brazil, Singapore, Hong Kong, Australia, Japan, Spain, Italy, India, South Korea, Taiwan, and Bermuda.? I may not be a global traveler, but my blog gets around.

Where? do my readers come from?? In order, Abnormal Returns, The Kirk Report, The Big Picture, Stumble Upon, The Street.com, FT Alphaville, Random Roger, and VIX and More.? Most of the rest find me through search engines (Google) or RSS.? Seeking Alpha (Aleph — Shalom) is another source, and really don’t know how big that is, as well as other syndicators.

For the last four months, I have been trying to obtain work or build an asset management business.? Though the latter has been cold, I have received several job prospects, and I should have an announcement soon on what I will be doing.? I have sometimes said that this blog is an option on a business.? That has proven true for me.

Other improvements have been the continuing series on personal finance and book reviews.? Both of those came as a result of reader feedback.

On the negative side, the job hunt has left me little time to contribute to RealMoney.? Most of my blogging is at night, and RM is during the day, when I am trying to work.? I’ll see how much I can contribute to RM in the future.? I owe them a debt of gratitude for inviting me to write for them.? It sharpened my investment writing skills more than I would have expected.

Also on the negative side, I know that I have to do blog repairs.

  • My left margins aren’t quite right.
  • My top banner should lead back to the home page.
  • I need to anti-alias my banner.
  • An error message comes up when comments are posted (the comments do post, though).
  • The same is true when I post articles.
  • My descriptive permalinks are gone.
  • And more…

Anyone with a good lead on PHP programming should e-mail me.? I suspect the changes should not be too great.? Otherwise, I will? slog on, and do it myself.

In closing I want to thank referrers, syndicators, readers, blogs who link here, and especially commenters (even if you don?t agree, but keep it civil.? I end with a question for my readers.? What do you all want from my blog?

  • More on equities
  • More book reviews
  • More macro commentary
  • More personal finance
  • Something else
  • Or, the same mix that you are currently getting

Let me know.? It is a pleasure to write for all of you.

Full Disclosure: Long NAHC

Ave Atque Vale et Mea Culpa

Ave Atque Vale et Mea Culpa

Posted on by David Merkel

I’m going to be gone Monday through Wednesday of next week on business, and my ability to blog will likely be curtailed.? I would simply like to offer two observations.? The first is on the FOMC.? Given the balance of all of the data, I believe that the FOMC will loosen by 25 basis points on Tuesday.? They will issue the standard “two-handed economist” language about troubles from inflation and financial/economic weakness, indicating that the FOMC is vigilant, and that nothing more is coming given present data, because the FOMC is in control.

The markets will be disappointed by 25 basis points, and will get excited by 50.? Language of the statement will matter some, but I can’t imagine that it will be that amazingly different from before.

One other note: I will write more about National Atlantic at a later date, but for now I am just holding my head in my hands and moaning.? I know there are forced sellers in the name, but to be at 40% of tangible book on a short-tailed name is notable.? It indicates that claim reserves at the end of the second quarter would be 50% light, to justify current valuations.

I’m not suggesting that anyone buy the name; for me, if it stays at these levels, it will be my largest personal loss.? I teach my children about investing through my losses.? If things don’t change, this will be lesson one.

Full disclosure: long NAHC

Back in the Game

Back in the Game

Posted on by David Merkel

After a lot of struggle (in my younger days I would have learned the coding, and reprogrammed the whole thing), my links are working again, though I have had to sacrifice the descriptive permalinks for now.? In the bargain, at least I upgraded to WP 2.3.1, which is a lot slicker than the old version.

For this evening, I want to offer you two unrelated thoughts on the markets.? The first is that the plan of the Treasury to freeze reset rates on subprime mortgages is a great big zero.? The real problem is too many homes chased by too few people able to afford them at current prices.? Subprime loans are a very modest portion of residential real estate finance.? Beyond that, the Treasury proposal does triage — separating borrowers into healthy, dead, and savable.? The savable are a small portion of a small component in the total residential financing scheme.? It will keep a few more people in their homes,? but that’s about it.? There will probably be court challenges from hedge funds that lose interest from the changes; they will probably win, because this is an illegal “taking” by the US Government.? That said, there is no way that I can see that they will be able to collect damages.

I said this was a zero, because paying the mortgage payment is not the problem here; it is the overhang of excess houses.? This does nothing to solve that problem.? My more radical solution of offering free US citizenship to anyone who buys a house in the US free and clear (for more than $250,000), is a non-starter for a wide variety of reasons, but it would kill two birds with one stone.? Clear up the excess houses, and solve the current account deficit problem.? A side benefit is giving wealthy foreigners a stake in the prosperity of the US.

Here’s my second thought.? Japan wants China to revalue its currency upward.? Perhaps that’s no big deal, but it reflects US dollar weakness.? China has been running a dirty crawling peg versus the US dollar, while letting other currency relationships languish.? As a result, the Euro and the Yen have gotten expensive versus the Yuan.? In this case, I think the Japanese are correct.? Let the US Dollar fall more, and let other nations buy our goods and services, rather than just swallowing our bonds (promises to pay later).

Blog Troubles

Blog Troubles

Posted on by David Merkel

This post is both blog news and a test. At present, the link system of my blog does not seem to be working right. I was doing a little work to improve my blog’s RSS feed when I accidentally deleted one critical file, which I did not have backed up. After a lot of head-scratching, I decided to upgrade my blog to WordPress 2.3.1 in order to fix the problem.

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WordPress 2.3.1 is nicer than the 2.1 that I was running, but in the upgrade process something messed up, because the internal links of my blog and my footer seem to be gone. I seem to be getting some other errors as well, but they’re complex to describe.

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My apologies to readers. I hope to have this fixed soon.

What I am Thankful for

What I am Thankful for

Posted on by David Merkel

With all of my family and guests gone or asleep after a big Thanksgiving Day at my house (17 people), I reflect on what I am thankful for.

 

  • My relationship with my God, Jesus Christ.
  • My wife of 21 years (today).? What a good woman, and what a help she has been to me.? Among many other things, she helps me focus on what is truly important in our short mortal lives.? At the church that I met her at, she was regarded as the “prize” of all the young women there.? I can tell you that their opinions were right.
  • My eight children.? Some do better, some do worse, but in aggregate, they are all doing well.
  • My congregation; good friends all, and they are a real support.
  • My friends, including the readers of my blog.? We all need friends.

 

Now for the broader stuff:

 

  • Though our civil liberties have been degraded by the misguided “War on Terror,” we still have significant liberties in the personal, political, religious and economic spheres.
  • Our economy still prospers, even amid bad monetary and fiscal policy.
  • Development in the developing world is screaming ahead.? As (classical) liberal economic economic policies are embraced across the globe, poverty is being reduced globally, which is something dear to me.
  • I haven’t made a lot on investments this year, but I’m still doing adequately.
  • I have several possibilities for how I will work as I labor to support my family.? (Perhaps an announcement coming soon…)
  • I’m grateful that my views of the Fed, residential real estate, and the debt markets have largely proven correct.
  • I’m even grateful for my losses; they keep me humble, and teach me a lot about investing.

 

That’s what I am thankful for; I hope you have it as good, or better, than me.

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