Portfolio Management – Page 59

Sorted Weekly Tweets

Posted on 28 September 2012 by David Merkel

My week on twitter: 34 retweets received, 1 new listings, 33 new followers, 40 mentions. Via: http://t.co/SPrAWil0 Sep 27, 2012

Energy

Natural Gas Cars Are On The Road; Potholes Remain http://t.co/T9KxgbCa Optimistic that CNG & LNG will get enough distribution 2b viable $$ Sep 29, 2012
United Airlines will study Delta’s refinery bid http://t.co/iHEuWvfp This will not end well; fundamentally different businesses $$ $UA $DAL Sep 29, 2012

Rest of the World

Japan Data Show Recession Risk Growing http://t.co/UArgdWd4 “Find someone who is optimistic about the economy & ask them how they can b” Sep 29, 2012
Shanghai Bonded Copper Stocks May at Record, Survey Shows http://t.co/MMrqmsmi Glut of gluts, what will China do with a flat economy? $$ Sep 28, 2012
Toyota Unplugs Electric Car Hype http://t.co/s36gMkcZ Indeed it is hype, better 2 run cars on Natgas or gasoline $$ less waste 4 now Sep 28, 2012
China Bankrolling Chavez?s Re-Election Bid With Oil Loans http://t.co/y3tAN7WF China wants oil, Chavez wants $$ , a match made in… Sep 28, 2012
SNB Disputes S&P Estimate of Bond Purchases http://t.co/eC1AxRkc Well of course they would dispute it, harms their policy credibility $$ Sep 28, 2012
Spanish Bonds Slump as Marchers Plan Further Protests http://t.co/Sq3eiO1n Eurozone is a political construct, will agreement persist? $$ Sep 28, 2012
Why Asian Airlines Reign Supreme http://t.co/yNcjYfce It is amazing how great service drives the rankings $$ Sep 28, 2012
The real extent of China?s economic hard landing http://t.co/n6g2jBCP By one measure, China’s real GDP growth rate is 1.6% $$ Sep 24, 2012
Is China Burning? http://t.co/PxfPOebV China stirs up anti-Japanese hatred to divert attention away from the weakening economy $$ Sep 24, 2012
India Bids for ConocoPhillips Assets in Canada http://t.co/cIc6wlut Spidey sense says India will get the worse of it $$ FD: + $COP Sep 24, 2012
Aussie Debacle Flags China Hard Landing as Iron Market Melts http://t.co/8PKnupSl China sneezes, the Australians catch a cold $$ Sep 24, 2012
How weak must the Danish economy be, for them to do this? Are their banks in that bad of a shape? $$ http://t.co/vNR7Utt5 Sep 24, 2012

Credit Markets

Junk Bonds in US Poised for Biggest Retreat in 4 Months http://t.co/rIqU3rjt 2 early 4 a washout; no significant defaults on the radar $$ Sep 29, 2012
U.S. 30-Year Mortgage Rates Fall to Record Low of 3.4% http://t.co/EB2UZaic Those that r not inverted can refinance; tough 4 rest $$ Sep 28, 2012
Mortgage-Bond Spreads Cap Biggest Weekly Drop Since December ?08 http://t.co/cjGISver Anticipates Future Fed buying, doesn’t help much $$ Sep 22, 2012

Central Banking

Money For Nothing: Inside the Federal Reserve http://t.co/QoHuWfGb Independent, non-partisan, non-conspiracy-theorist documentary comingsoon Sep 29, 2012
Bernanke Put: Beware of Easy Money http://t.co/bPsdilQM The lure of free money brings out the worst in all of us. $$ Sep 28, 2012
Plosser Says QE3 Risks Fed Credibility, Won?t Boost Jobs http://t.co/ffkpU2Jh Right; once we r @ the zero bound the Fed is impotent $$ Sep 28, 2012
Fed Helps Lenders? Profit More Than Homebuyers http://t.co/CYz6O8r0 Offering 2buy RMBS benefits existing holders more than anyone else $$ Sep 28, 2012
Sean Fieler: Easy Money Is Punishing the Middle Class http://t.co/Lg2yzUCs Who gets benefits of productivity improvement? Ppl or Govt $$ Sep 28, 2012
A time of hoarding and inflation fears, 1930s edition http://t.co/wOkNf0Uj @izakaminska tells us about inflation worries in the 1930s $$ Sep 25, 2012
Signs Of The Gold Standard Are Emerging From Germany http://t.co/YPLrNcvz Not likely; would be interesting 2c Germany go Euro -> Gold $$ Sep 24, 2012
‘Free’ Checking Costs More http://t.co/QXxPaQCH Another casualty of Fed policy, which disproportionately hurts those less-well off $$ Sep 24, 2012

US Politics

U.S. Unease Over Drone Strikes http://t.co/Hlc2djCz This is yet another reason y much of the Muslim world hates the US $$ Sep 28, 2012
US Ties Libya Attack to ‘Powder Keg’ in Mali http://t.co/998UPNLd When did the Obama administration know this, y wasn’t it disclosed? $$ Sep 28, 2012
Ryan at the AARP http://t.co/ZgXiPrkr He didn’t trim his ideas and still won applause. AARP leaders more liberal than members $$ Sep 24, 2012

Market Dynamics

Where stock market will be in fall of 2016 http://t.co/AolvDXon Seiver’s model indicates a flat market for the next four years $$ Sep 29, 2012
Wrong: An Easy Strategy For Bulking Up On Yield http://t.co/HYbdXqzT Better to buy companies w/strong dividend capacity than high divs $$ Sep 28, 2012
New Wave of Workers Tries Novel Approach: Save More http://t.co/sE9pp03d Everything old is new again; save $$, do not rely on returns Sep 28, 2012
Ken Fisher: Bull Market Is Halfway Done http://t.co/xDEa0MXq I am a moderate bull now, but I find that large cap leadership could fail. $$ Sep 28, 2012
Are financial advisers worth their fee? http://t.co/HdRYJ3ak Gamma: value of protecting an individual from buying high & selling low $$ Sep 28, 2012
Prospects for Stock and Bond Returns Are Dim http://t.co/IYAVPFAU The performance difference will depend on inflation vs deflation $$ Sep 24, 2012
Pension Crisis Looms Despite Cuts http://t.co/9ZW8eUeR Eventually state constitutions will be amended 2 roll back existing benefits $$ Sep 22, 2012
Borrowing Against Yourself http://t.co/kB7IVuN2 Debt against investments is usually a bad idea unless ur a specialist in the business $$ Sep 22, 2012

Miscellaneous

Auto-Insurance Cost to Rise 2.8% to $839, Group Says http://t.co/8XLCC4CE Insurance companies pass costs & reduced interest through $$ Sep 28, 2012
Scientific Reproducibility: Begley’s Six Rules http://t.co/8EkCDsMP Following the 6 rules would reduce the # of articles published $$ Sep 28, 2012
Gordon Moore’s journey http://t.co/PHYlU3Nq Long Q&A w/a founder of Intel; An accidental entrepreneur who knew his weaknesses $$ FD: + $INTC Sep 24, 2012
Bronte Capital?s short waves http://t.co/EHhxTO4j Do not underestimate John Hempton; bright guy. Very good @ spotting bad ideas/frauds $$ Sep 22, 2012
Yale Versus Norway http://t.co/aSF8PEZR Worth a read. My sympathies r w/Norway here, but I fear they r tooting their horn @ a bad time $$ Sep 22, 2012
Cheating Upwards http://t.co/UtDtRjSD Children r less ethical now than 35 years ago, who were less ethical than 35 years ago, who were… $$ Sep 22, 2012
Push to Let College Students Carry Guns Picks Up Steam http://t.co/ke6zM1Si Who is responsible for my protection? Me or the Govt? Me $$ Sep 22, 2012
How to Stop Hospitals From Killing Us http://t.co/QKOsAOpy Should b known: going 2a hospital can kill you. 6th leading cause of death $$ Sep 22, 2012

Responses

@AOverheard Could b a good move, would have to review the Stat statements. I sold my shares at a split-adjusted $290. Buying debt:no-brainer Sep 29, 2012
@historysquared In the process of raising 8 children (5 adopted) I have seen 1) those w/limited abilities expand them 2) those w/great + Sep 29, 2012
@historysquared abilities waste them. 3) those w/great abilities improve them, & 4) those w/limited abilities improve only a little Sep 29, 2012
@groditi Of all the companies that I own $SPLS worries me the most. Stronger than bricks & mortar competitors, but can they beat $AMZN? $$ Sep 28, 2012
@munilass I think both of those insights r correct; algorithms r only as good as the problems they r applied 2; most people don’t like logic Sep 28, 2012
RE: @bloombergview Well reasoned.? No arguments here. $$ http://t.co/ChJ9BDib Sep 26, 2012
RE: @bloombergview “Luck” happens when preparation meets opportunity, There are exceptions like Sixto in South Africa? http://t.co/JmFQSDFB Sep 26, 2012
@volatilitysmile All financials, or just depositary financials… would agree if it is the latter. Sep 25, 2012
@pjackson @LaurenLaCapra @_tpr @japhychron As an example, consider the tax reform act of 1986; almost all tax preferences lost. $$ Sep 25, 2012
@pjackson @LaurenLaCapra @_tpr @japhychron Or prepare for the day of the “grand bargain” where everyone’s ox is gored 4 the good of all $$ Sep 25, 2012
@pjackson @LaurenLaCapra @_tpr @japhychron I think you have to plan for the day of crisis, so that you can be ready to say, “Do this.” $$ Sep 25, 2012
@MerrittJennifer @LaurenLaCapra It would not be immediate, but housing prices would fall, & so would refinancing $$ Sep 25, 2012
@pjackson @LaurenLaCapra @_tpr @japhychron Lauren asked what we would do, not what was possible. Only a crisis will see actions taken $$ Sep 25, 2012
@japhychron @LaurenLaCapra @_tpr so that Medicare covers less: cheap fixes & palliative care; state rtees: deal to reduce all benefits $$ Sep 25, 2012
@LaurenLaCapra @_tpr @japhychron Hard to fit into a tweet; phase out GSEs & Int ded, shrink FHA, ag lending, scale back SS, redo Medicare + Sep 25, 2012
@LaurenLaCapra @_TPR @japhychron Ultimate Q is how many things we *can/should* subsidize, particularly w/GSEs, entitlements, state rtee bens Sep 25, 2012
RE: @bloombergview When the government or Fed buys the securities of companies, it plays favorites. We should make th? http://t.co/3ndyaApd Sep 24, 2012
@GregorMacdonald Re: gold, have u seen this? http://t.co/5rPvqfEz Re: solar, have u seen this? http://t.co/tZiaP5mV Wonder what it costs? Sep 22, 2012
@abnormalreturns Stocks r correlated w/inflation expectations. Gold is negatively correlated w/real rate of interest. Facts. $$ Sep 22, 2012
@etpxp Hard to do a real test. Sep 22, 2012

Retweets

In praise of all-cash compensation. RT @EpicureanDeal: Defending the Indefensible http://t.co/a7pGhqLr featuring @LaurenLaCapra Obvious $$ Sep 22, 2012
RT @volatilitysmile: “a failed president is running slightly ahead in the polls of a challenger who has a real CV but is so politically … Sep 24, 2012
At low OASs?! No $$ RT @PIMCO: Gross: How many Treasuries you own is not the question. How many 3 and 3.5% 30 year mtges is. Own mortgages Sep 24, 2012

Too Much Investment

Posted on 24 September 2012 by David Merkel

Investment is usually a good thing, but it can be overdone.? How?? Let me list some of the examples:

China has overinvested in export industries, infrastructure, and housing, among other things at present.
The US and most of the developed world overinvested in housing, or at least, borrowed too much against it.? The same applies to the banking, investment banking and shadow banking industries.
The US invested too much in internet companies in the late 1990s.
The US invested too much in commercial real estate in the late 1980s
Japan overexpanded its heavy industries and real estate in the late 1980s.
Some invested too much in gold in the late 1970s.
Most developing nations invested too much money in national industrial champions for the purpose of import substitution in the 1960s-80s.
Banks lent too much to developing countries in the 1970s
The US put far too much money into growth stocks in the 1960s.
The Soviet Union continually overinvested from the 1960s until the 1980s.
People in the US put too much money into speculative investments in the 1920s.

If I really wanted to I could expand this list a great deal.? Almost every boom involves overinvestment, and often too much debt finance.? The above? are mostly macro examples of overinvestment, but it happens on the micro level as well.

People who are determined to get rich at all costs and lose in the process
People who are determined to get rich at all costs and win in the process, but lose many of the good basic things of life — family, friends, and deny themselves the enjoyment of their wealth.
Growth companies that invest in low ROE ventures rather than return cash to shareholders.
Growth companies misestimate more, and take chances that are not economic.
Companies that try to grow faster than their markets without a sustainable competitive advantage usually fail miserably.

It happens with governments as well, where they recharacterize spending as investment.? One particular example would be education, where little improvement comes from additional dollars spent.? Far better to move the curriculum back 60 years, and have students learn the basics.? More money is not needed; a better parenting culture is needed, plus a scope & sequence that is realistic in its pedagogy.

Fast growth is often bad growth if the return on equity for new investment is falling.??? That means that the carrying capacity of the current strategy is being exhausted.? It is even worse for central planners, who don’t have good data and keep throwing money at projects with little idea of the true effectiveness.

In vestment is a good thing when it serves an area of scarcity.? It is a bad thing when it serves an area of glut.? That’s the simple summary.? I may expand on this in a future article.

Industry Ranks September 2012

Posted on 22 September 201222 September 2012 by David Merkel

My main industry model is illustrated in the graphic.? Green industries are cold.? Red industries are hot.? If you like to play momentum, look at the red zone, and ask the question, ?Where are trends under-discounted??? Price momentum tends to persist, but look for areas where it might be even better in the near term.

If you are a value player, look at the green zone, and ask where trends are over-discounted.? Yes, things are bad, but are they all that bad?? Perhaps the is room for mean reversion.

My candidates from both categories are in the column labeled ?Dig through.?

If you use any of this, choose what you use off of your own trading style.? If you trade frequently, stay in the red zone.? Trading infrequently, play in the green zone ? don?t look for momentum, look for mean reversion.

Whatever you do, be consistent in your methods regarding momentum/mean-reversion, and only change methods if your current method is working well.

Huh?? Why change if things are working well?? I?m not saying to change if things are working well.? I?m saying don?t change if things are working badly.? Price momentum and mean-reversion are cyclical, and we tend to make changes at the worst possible moments, just before the pattern changes.? Maximum pain drives changes for most people, which is why average investors don?t make much money.

Maximum pleasure when things are going right leaves investors fat, dumb, and happy ? no one thinks of changing then.? This is why a disciplined approach that forces changes on a portfolio is useful, as I do 3-4 times a year.? It forces me to be bloodless and sell stocks with less potential for those with more potential over the next 1-5 years.

I like some technology names here, some energy, some healthcare-related names, particularly those that are strongly capitalized.? I?m not concerned about the healthcare bill; necessary services will be delivered, and healthcare companies will get paid.

I?m looking for undervalued and stable industries.? I?m not saying that there is always a bull market out there, and I will find it for you.? But there are places that are relatively better, and I have done relatively well in finding them.

At present, I am trying to be defensive.? I don?t have a lot of faith in the market as a whole, so I am biased toward the green zone, looking for mean-reversion, rather than momentum persisting.? The red zone is pretty cyclical at present.? I will be very happy hanging out in dull stocks for a while.

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

The Red Zone has a Lot of Noncyclicals

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

So, as I considered the green and red zones, I chose areas that I thought would be interesting.? In the red zone, I picked energy services, and very basic goods.

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

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

But what would the model suggest?

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

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

Full disclosure: long for me and clients: HPQ, INTC, CSCO, TEL

The Dilemma of Adding Yield, Redux

Posted on 22 September 201222 September 2012 by David Merkel

After my post last night, I was asked how I make corrections in analyzing premium versus discount bonds.? (Note: if a bond trades at a higher price than the final amount of principal to be paid at maturity, it is called a premium bond.? If lower, it is called a discount bond.)? Happily, there is a story attached to it.? Here it is:

In early 2002, most investment banks placed their cash and CDS traders next to each other. It improved the ability of Wall Street to trade against the rest of us significantly.? By the end of 2002, every major investment bank was doing this.? Many were publishing data on CDS premiums.

I had a habit where I would go out for Chinese food once a week — get out of the office, clear my mind, bring stuff that was important to think about.? One week there was a piece about using CDS spreads to correct for premiums and discounts to par.

The idea was this: if a bond trades at a premium to par, pretend you have bought CDS protection on the amount of the premium.? Deduct the cost of that from the coupons you are paid and re-estimate the yield.? When a bond bought at a premium defaults, guess what? You will never get the premium back — thus using CDS to estimate the insurance cost.? You might not seek the default protection, but it would be valuable to know how much it was worth.

Vice-versa for discount bonds: pretend you have sold CDS protection on the amount of the discount.? Add the the premiums you might receive to the coupons you are paid and re-estimate the yield.? When a bond bought at a discount defaults, guess what? You will fare better than those that bought at par or a premium — thus using CDS to estimate the added yield from that benefit.? You might not sell the default protection, but it would be valuable to know how much it was worth.

Then one day I asked on of my dealers where the CDS was trading on a medium-sized company.? After a pause to talk to the trader he came back, there was no CDS trading on that company.

Okay, what to do? Then it struck me.? Use the credit spread (yield difference over a similar length Treasury Note) as the proxy for the CDS premium.? Bing! problem solved, and more relevant because I didn’t use CDS — it gave me a standard to use in many situations where bonds with different levels of premium or discount were being compared.? I could use this for any bond.

Here are two examples for how it would work.? Here is the analysis for a premium bond:

Year	Cash flows	Swap pmts	Adjusted Cash Flow
0	? (1,100.00)	?????????? (0.65)	?????????????? (1,100.65)
1	?????????? 70.00	?????????? (0.65)	?????????????????????? 69.35
2	?????????? 70.00	?????????? (0.65)	?????????????????????? 69.35
3	?????????? 70.00	?????????? (0.65)	?????????????????????? 69.35
4	?????????? 70.00	?????????? (0.65)	?????????????????????? 69.35
5	???? 1,070.00		???????????????? 1,070.00
Premium/(Discount) to immunize —>		???????? 100.00

	Yield		Spread over Treasuries
Initial	4.71%		0.71%
Treasury rate	4.00%
Comparison	4.65%		0.65%

Initial Price	???? 1,100.00
Coupon Rate	7.00%

And then what it looks like for a discount bond:

Year	Cash flows	Swap pmts	Adj Cash Flow
0	????? (900.00)	???????????? 0.66	?????????????????? (899.34)
1	?????????? 23.00	???????????? 0.66	?????????????????????? 23.66
2	?????????? 23.00	???????????? 0.66	?????????????????????? 23.66
3	?????????? 23.00	???????????? 0.66	?????????????????????? 23.66
4	?????????? 23.00	???????????? 0.66	?????????????????????? 23.66
5	???? 1,023.00		???????????????? 1,023.00
Premium/(Discount) to immunize —>		????? (100.00)

	Yield		Spread over Treasuries
Initial	4.58%		0.58%
Treasury rate	4.00%
Comparison	4.66%		0.66%

Initial Price	??????? 900.00
Coupon Rate	2.30%

So if I had two annual five-year bonds from the same issuer: 10% discount, 2.3% coupon versus 10% premium, 7% coupon, with the equivalent Treasury at a 4% yield, I would be indifferent between the two, even though the yield to maturity on the premium bond is 0.13% higher than that of the discount bond.

If you want to download the simple spreadsheet (be sure to allow for calculations to iterate) you can find it here: Premium-discount adjustment calculator.

That’s all, and for those that try it, I hope you enjoy it.? Wait, one last story:

In late 2002, a broker proposed a relatively complex swap trade.? I suspect he was trying to get an odd bit of paper off of the balance sheet for something more liquid.? As I recall there were premium/discount differences, but also, liquidity, subordination, duration, deal size, and credit rating.? The swap almost looked good, so I decided to “bid him back,” offering the swap at terms more advantageous to my client (and adding in a margin for error — ya wanta rent our balance sheet for illiquidity purposes, ya gotsta pay).

The broker was a little surprised, because the trade looked optically good by most common standards, but as I described to him all of the yield tradeoffs in the swap, he said, “Wow, never hear a trade taken apart like that before. I’ll take it to the trader.? Are you firm at your level? (I.e. will you hold to your terms proposed, or is this just the start of negotiations?)” I assented, and he went to the trader, who agreed to the swap at my terms.? You always have to blink when they do that, because you may have made an error, but my adjustment carved 1% of par off of the swap terms.

I suspect that I got a good trade off, and he needed to get rid of illiquid security that had overstayed its welcome.

In any case, that’s how to do swap trades.? Have fun.? I certainly did.

The Dilemma of Adding Yield

Posted on 21 September 201221 September 2012 by David Merkel

Back when I was exclusively a bond manager, 2001-2003, which I chronicled in my series “The Education of a Corporate Bond Manager,” I successfully struggled with one concept: when do you try to add more yield to your portfolio, and when don’t you?

This is a tough question, because in the short run, it almost always makes sense to add yield to any portfolio.? Additional yield seems like free money.? What’s worse, your sales coverages at the major investment banks are programmed to offer more yield, so what do you do?

I had to learn the hard way myself, with few to teach me.? There are two aspects to this question: the micro, and the macro.

Micro

Know how to compare bonds so that you are able to figure out what a good swap is.? Thus you must understand:

The yield gained for illiquidity — public, 144A, private.
The yield lost for size — micro, small, medium, large.
The yield gained from duration — what is the proper yield give-up for investing “x” fewer years?
The yield gained from going down in credit — what names are mispriced, and offer value, though lower-rated?? What is the proper yield give up at various ratings, and how do you adjust them to reflect reality?
The yield differences regarding premium vs discount bonds — this is a relatively simple one, as you can take any spread of a bond over Treasuries, and recalculate it to be the spread against a par bond.? You’d be surprised how few people do that.? As a result two things happen: people buy expensive premium bonds that look cheap but aren’t, and some firms never buy premium bonds, even in cases where it makes sense.
The yield change for optionality, whether positive for puts, or negative for calls.
The yield differences across industries
The yield differences across special names — there are always a variety of names that trade wide or narrow — consult your analysts to understand which ones are mispriced.
The risk of a “special situation.”? Why are you the smart one, and others not?

Macro

This is the risk cycle. Think about:

How quickly are deals completed
How tight is the pricing in new deals
The tone of voice from your brokers
Your intermediate-term view of economics — if things are getting better be bullish, if worse be bearish.
Failures. Be wary as they begin, but be a buyer when you think things are at their worst. You will get the best prices for the recovery.? Few do this.

As a Wall Street Journal article pointed out, many bond mutual funds are reaching for yield now.? This is a time to be wary, but if you are playing for the end of cycle we aren’t there yet.? We have not had a significant default, or a series of small defaults.

So be on your guard, I am neutral at present, but I am watching for items that would make me more bullish or bearish.

On Low Volatility Investing

Posted on 19 September 2012 by David Merkel

Recently a friend of mine sent me an e-mail after my review of Eric Falkenstein’s latest book.? Here it is:

David, I?ve been reading a decent amount of the academic literature on low vol investing and it?s certainly got my attention.? I?ll definitely be purchasing his book to read thru it, but I think he and Mebane Faber have had quite a bit of this stuff on their respective blogs.? Frankly I liked the research enough that I decided to part ways with some gifted Verizon stock that the in-laws gave us and bought a global low-vol ETF (ACWV). ?

http://us.ishares.com/product_info/fund/overview/ACWV.htm

I wish it had a bit more international tilt, but there is a sister international ETF that I can buy, so I might add that at some point to balance out the geographic exposure.? The one thing that really surprised me the most was that I figured this thing would have huge weights in Utes/Telecom.? Not so–actually the industry diversification looks very attractive.? And for 35bps of fees vs nearly 4% yield, hard to go wrong with this product for a nice LT buy and hold.? Kinda funny when I find myself, as a stock guy, actually liking a highly diversified index-type product? I just needed a bit more balance in the portfolio from all my very idiosyncratic idea.

Some of your readers might be interested in some of these ETFs if you think they are worth talking about.

For raw quantitative index investing, funds like these are good ideas, at least for now.? But with all new strategies, I ask the question, what will happen when a lot of people do this?? It is possible for stocks that minimize volatility as a group to become overpriced.

Think about what a minimum volatility portfolio looks like.? The companies pay decent dividends, are mostly not in cyclical industries… the portfolio looks like growth at a reasonable price.? Company financial & operating leverage is relatively low.? When I think of all of these together, it sounds like high free cash flow, and/or high growth of free cash flow.? This would be similar to high-quality growing companies that don’t take on a lot of debt.

A minimum variance portfolio, should the portfolio characteristics continue over the rebalancing horizon, will behave somewhat like a high yielding bond, but noisier.

The fund that my friend mentioned has an above average P/E ratio, an above average dividend yield, and an above average Price-to-Book ratio.? It tends to choose stable, eclectic companies within each economic sector.? For example, when I looked at financials, I saw a disproportionate amount of REITs, Insurers, and obscure Japanese and Asian banks.

This is a little quirky, but the stable elements of a variety of different sectors seem to do well over time as a portfolio.? But just as “value stocks” as a group can become overvalued, the same can happen for the stocks in the minimum volatility portfolio.? It would be good to track the average E/P & B/P (trailing twelve months) for the portfolio.? If the valuation metrics get too high, it could be a sign that low volatility is becoming a crowded trade.

That said, given the dynamism inherent in re-estimating a minimum variance portfolio, it might not be so obvious when low volatility is over-invested.? Maybe watching when the ratio of the Morgan Stanley Cyclicals index versus the S&P 500 might give us a negative clue. It was less attractive to invest in stable stocks in August of 2000 and February 2009.? These are two very different dates.? The former showed stable stocks peaking, while the latter was cyclical stocks troughing.

My own investing methods rely on no one factor, but looks at what makes a stock valuable through multiple lenses.? But tonight I highlight low volatility, because I think that investors do occasionally overpay for quality, but in general a quality bias pays off over time, as does a value bias.

We Eat Dollar Weighted Returns ? V

Posted on 18 September 2012 by David Merkel

This is the first episode of “We Eat Dollar Weighted Returns” where the fare is yummy.? Here’s the twist: investors in some bond ETFs have done better than one who bought at the beginning and held.

Now, all of this is history-dependent.? The particular bond funds I chose were among the largest and most well-known bond ETFs — HYG (iShares iBoxx $ High Yield Corporate Bd), JNK (SPDR Barclays Capital High Yield Bond), and TLT (iShares Barclays 20+ Year Treas Bond).

As bond funds go, these are relatively volatile.? TLT buys the longest Treasury bonds, taking interest rate risk.? HYG and JNK buy junk bonds, taking credit risk.

Let’s start with TLT:

Date	Cash Flow	Buy & Hold Return	Cumulated
11/9/2002	248,935,892		1
8/31/2003	-73,889,166	12.31%	1.1231
8/31/2004	439,348,999	3.11%	1.15802841
8/31/2005	73,509,821	6.72%	1.235847919
8/31/2006	442,211,811	6.12%	1.311481812
8/31/2007	165,784,828	3.37%	1.355678749
8/31/2008	-344,202,681	9.54%	1.485010502
8/31/2009	887,336,789	12.30%	1.667666793
8/31/2010	120,142,522	-5.85%	1.570108286
8/31/2011	-452,062,384	4.64%	1.64296131
2/29/2012	-3,038,265,474	32.32%	2.173966406

	IRR	Buy & Hold	Difference
	11.47%	8.42%	3.05%

I analyzed this back in June, saw the anomalous result, an decide to sit on it until I had more time to analyze it.? The way to think about it is that investors reached for yield at a time when stocks were in trouble, and indeed, rates went lower.? The average investor beat buy-and-hold by 3%.

Here are the results for the junk ETFs:

HYG	4/4/2007	2/29/2008	2/28/2009	2/28/2010	2/28/2011	2/29/2012

Distributions		-9,708	-92,708	-358,324	-512,979	-694,209
Net Additions		371,140	1,989,303	1,781,425	3,201,608	5,840,594
Net Assets		352,636	2,089,054	4,611,414	8,257,928	14,258,718
Investment Return		-8,796	-160,176	1,099,260	957,884	854,406
ROA		-4.57%	-13.12%	32.81%	14.89%	7.59%

	4/4/2007	9/16/2007	8/29/2008	8/29/2009	8/29/2010	8/30/2011	2/29/2012
13.40%	IRR	-361,432	-1,896,594	-1,423,100	-2,688,629	-5,146,384	14,258,718
6.04%	Buy-and hold
7.36%	Difference

JNK	11/28/2007	6/30/2008	6/30/2009	6/30/2010	6/30/2011	6/30/2012

Distributions		-9,011	-111,409	-361,521	-616,525	-735,822
Net Additions		404,658	1,481,309	2,180,582	2,366,102	3,928,526
Net Assets		394,346	1,900,709	4,301,252	6,915,538	10,780,535
Investment Return		-1,302	136,463	581,481	864,710	672,292
ROA		-0.61%	11.89%	18.75%	15.42%	7.60%

IRR	11/28/2007	3/14/2008	12/29/2008	12/29/2009	12/29/2010	12/30/2011	6/30/2012
13.22%	IRR	-395,648	-1,369,900	-1,819,061	-1,749,577	-3,192,704	10,780,535
6.49%	Buy-and hold
6.73%	Difference

Both funds were small in advance of the credit crisis, and investors bought into them as yields spiked, and bought even more as income opportunities diminished largely due to the Fed’s low-rate monetary policies. The average investor beat buy-and-hold by 6%+.

Now, the? junk funds were small during default, and grew during the boom, amid unprecedented monetary [policy from the Fed.? (Note: I think that Bernanke will rank below Greenspan in the history books in 210o, and both will be judged to be horrendous failures.? It is better to let things fail, and clear out the bad debt, rather than continue malinvestment.? We need fewer banks, houses, and auto companies, among others.? The government, including the Fed and the GSEs, should not be in the lending business.? Lending should be unusual, and applied mostly to financing short-term assets.? Long-term assets should be financed by equity, or at worst, long-dated debt.

For all three funds, we have the historical accident that the Fed dropped Fed funds rates to near zero, leading to a yield frenzy.? But what happens when defaults spike?? What? happens when no one want to buy long dated Treasuries at anything near current levels?

I think bond investors are more rational than stock investors; they have more rational benchmarks to guide them.? Bond investors have cash flows to analyze against EBITDA (earnings before interest, taxes, depreciation and amortization.? Stock investors wonder at earnings, which are easily gamed.

The real question will come when we have the next credit crisis?? How many holders of HYG or JNK will run then?? Or when inflation starts to run, and the Fed stops buying long Treasury bonds, and even starts to sell them, what will happen to dollar-weighted returns then?

This is an interesting piece for bond assets in a bull market.? We need to see bear market results to truly understand what is going on.

Full disclosure: long TLT for myself and clients

Sorted Weekly Tweets

Posted on 14 September 2012 by David Merkel

Financial Markets

State court ruling deals blow to U.S. bank mortgage system http://t.co/QilYZQJZ Washington State Supreme court allows MERS 2b sued &more $$ Sep 14, 2012
Partial explanation for flash crash and HFT http://t.co/ylpBj6Bm http://t.co/ABsvytw9 AP http://t.co/7xH09jMn http://t.co/hyznU44r $$ Sep 14, 2012
Violation: Prop Feeds #1 and #2 sent data to proprietary customers before NYSE sent data to the public feed. http://t.co/skh2CaUW ouch $$ Sep 14, 2012
Equity Firms Like Bain Are Depicted as Colluding http://t.co/8KMIo1xy This could be significant, but some of the legal issues r squishy $$ Sep 14, 2012
A Conversation with Ray Dalio http://t.co/clEaTy9C Full transcript, which I like, because watching video is slow $$ Sep 14, 2012
Jeff Gundlach’s Eye-Opening Presentation ‘Mirror, Mirror On The Wall’ http://t.co/QE6PHUoP Be prepared for lots of informative charts $$ Sep 13, 2012
Fink Belies Being Boring Telling Customers to Buy Stocks http://t.co/MYdrW95h A feature article on $BLK and Larry Fink; next Tsy Sec? $$ Sep 13, 2012
Oddly, what Dalio is saying here is very close to Harry Browne’s idea of the Permanent Portfolio. $$ http://t.co/C0x37B3Y Sep 13, 2012
Mortgage REITs’ leverage poses significant risks to the overall mortgage market http://t.co/Ifje6AxB Public markets r mismatched/limited $$ Sep 12, 2012
Bill Gross Sees Higher Long-Term Yields Amid Reflation http://t.co/eYPeRZlt If that were true, rates would be high already. $$ #youlose Sep 12, 2012
Is BlackRock Kissing Individual Bonds Goodbye? http://t.co/s2RywmL3 Mmmm…. converting transaction revenues into an annuity… yes… $$ Sep 12, 2012
361 Capital Weekly Research Briefing http://t.co/nd6akDbW Interesting briefing that makes a mostly bullish case $$ Sep 11, 2012
Is Everything We Know About Stock/Bond Allocations Wrong? http://t.co/85D2kUik Questions the wisdom of risk parity for asset allocation $$ Sep 11, 2012
Want to Buy a Private Stock? http://t.co/E3WojVi2 Listen to @jasonzweigwsj Do not buy private equity; you don’t have the expertise. $$ Sep 09, 2012

Federal Reserve

New round of quantitative easing biggest yet? http://t.co/ANA3MX2y Potentially. Problems will come as Fed corners low-rate GSE Resdl MBS $$ Sep 14, 2012
FOMC Central Tendencies: Target Fed Funds Rate at Year-End 2012-5, long-run 0.26 0.38 0.80 1.72 4.07 Chg: -0.04 -0.12 -0.30 NA -0.13 $$ Sep 13, 2012
FOMC Central Tendencies: Appropriate Timing of Policy Firming extends 7.6 months from June to 2.8 years Sep 13, 2012
FOMC Central Tendencies 2012-2015, long-run PCE inf 1.75 1.84 1.82 1.97 2.00 PCE inf 2012-2014 long-run +0.27 +0.08 +0.05 0.00 $$ Sep 13, 2012
FOMC Central Tendencies 2012-2015, long-run Unemp 8.11 7.70 6.98 6.38 5.60 Uemp change 2012-2014 long-run +0.01-0.01-0.30 0.00 $$ Sep 13, 2012
FOMC Central Tendencies 2012-2015, long-run GDP 1.84 2.78 3.4 3.39 2.44 GDP change 2012-2014 long-run -0.29 +0.210 +0.12, 0.00 $$ Sep 13, 2012
Budeeah, budeeah, budeeah, That’s all folks! Sep 13, 2012
Something happened around 2:30, but what? Sep 13, 2012
Press seems feistier than usual at the Bernanke Presser $$ Sep 13, 2012
Wow, a 2% move in gold qualifies as “explodes?” Wow #verbinflation http://t.co/8hodDxcp Sep 13, 2012
Extends low FF to mid-2015, ~9 months Sep 13, 2012
Fed’s web server is paralyzed, overwhelmed Sep 13, 2012
Ding! It’s SHOWTIME, Ben! $$ Sep 13, 2012
Bernanke Proves Like No Other Fed Chairman on Joblessness http://t.co/qHWtJv7W Bernanke imagines that he is fighting recession $$ Sep 12, 2012
Fed Stuck at Zero Into 2015 Seen in Swaps, QE Odds Reach 99% http://t.co/IM6HBDQR Given that fixed income mkts anticipate: no QE effect $$ Sep 10, 2012
An idea better kept in reserve http://t.co/ujKFy1Vc When u r playing around near the zero bound, all sorts crazy things could happen $$ Sep 10, 2012

US Politics and Economics

US Consumer Price Index Increases by Most Since 2009 http://t.co/6u2Di5r4 Given the unlimited QE, hard to see why prices should be weak $$ Sep 14, 2012
Airbrushed History and Dusted-Off Promises http://t.co/gMetXbgi Obama promised much more in 2008-9 than he is owning up to now. $$ Sep 13, 2012
Household Income Sinks to ’95 Level http://t.co/LA6pnEC3 R U better off than 4 years ago? Mean, yes. Median, no. $$ Sep 13, 2012
In Chicago, the Teachers’ Last Stand http://t.co/3uAcUJZT Bad news for the teachers, given underfunded DB plan, $$ struggles will worsen Sep 13, 2012
This is Illinois after all…corruption & bad mgmt r normal. Teachers fear 4 their unfunded pensions & high $$ jobs. http://t.co/KVWIURuV Sep 13, 2012
About Those Policies That Got Us Into This Mess http://t.co/cUDmsUJy Interesting: many of the critical laws were signed by Democrats $$ Sep 13, 2012
White House pushes back on claims from Woodward book http://t.co/IPpUUGXg The fiscal crisis was Obama’s fault as well as Congress’ fault $$ Sep 12, 2012
Strike Puts Spotlight on Teacher Evaluation, Pay http://t.co/MJ0A4pCt Break the union and hire non-union teachers who r motivated $$ Sep 12, 2012
Stagnant Incomes Signal Restraint in Spending by U.S. Consumers http://t.co/uiBxYBzM Y b aggressive spending when policy is uncertain $$ Sep 10, 2012
Why Health Care Matters and the Current Debt Does Not http://t.co/yw4MLv6o Because the healthcare unfunded liabilities r a LOT BIGGER $$ Sep 10, 2012

Other

#FF @TALENTEDBLONDE @prieur @rcwhalen @AmyResnick @AnnieLowrey @brucekrasting @derekhernquist @fundmyfund @ftalpha @BloombergNews $$ Sep 14, 2012
Children of Single Parents Much More Likely in Poverty http://t.co/PbaJuoGU “Dog Bites Man” Two parents r normally stronger than one $$ Sep 13, 2012
The Manhattan Project to End Fad Diets http://t.co/NvkkihYt Sounds promising, but there is 2 much $$ & wishful thinking w/fad diets Sep 13, 2012
Michael Pettis publishes! It’s a great night! $$ Sep 13, 2012
Charities Deceive Donors Unaware Money Goes to a Telemarketer http://t.co/vKXjfU7K Don’t ever give money to a charity over the phone $$ Sep 12, 2012
Medics Being All They Can Be Find Civilian Job Barriers http://t.co/p7gZbgNT Vets have to have a way to transist to civilian work $$ Sep 12, 2012
Is College a Lousy Investment? http://t.co/GoKcgrLB It depends. If u r in the top 20%, no. If u r in next 20%, maybe. Otherwise, yes $$ Sep 12, 2012
13 Tools To Tame Social Media Overload http://t.co/UYXZUMAt A variety of programs that can stiffen your resolve to avoid wasting time $$ Sep 11, 2012
Why the New Marketing-Driven Corporate Research Lab Needs the CIO http://t.co/d8wWCDJc Research, Development & Marketing belong together Sep 10, 2012
Letting Babies Cry a Bit Is OK http://t.co/UmqwwLbl Babies stop crying (leave aside pain/sickness) when crying does not get rewarded $$ Sep 10, 2012

Energy

Wind is intermittent, advances in batteries that can store energy are also needed. http://t.co/eBsqqW5y Sep 13, 2012
Asian Water Scarcity Risked as Coal-Fired Power Embraced http://t.co/C4QQXAQm The need for water is forcing tough choices in India $$ Sep 11, 2012
Gamechanging Natural Gas Tech Gets Green Light http://t.co/tiI2hiu2 Methane hydrates r recoverable; triples existing oil & NG reserves $$ Sep 10, 2012
Saudi Arabia Concerned About Rising Crude Prices http://t.co/f3eUmId0 High quality problem, but how much can the Saudis a4d 2cut back $$ Sep 10, 2012

Rest of the World

Swiss Farmers Clash With Traders as Bubble Builds in Town of Zug http://t.co/EjPUX0Pa Another report from the Bubble caused by the SNB $$ Sep 13, 2012
Skip College Is Top Advice for World-Beating Koreans http://t.co/YQ9DKAZO Any strategy to improve your lot can be overused, even college $$ Sep 12, 2012
Less-Rosy Reality http://t.co/HfidgmGM This current round of euro-optimism will wear badly with time. Cash flows will dictate reality $$ Sep 11, 2012
Can Asia avoid the middle-income trap? http://t.co/PLB8ER7i How technology is killing the Asian growth miracle http://t.co/ue15U4sd $$ Sep 10, 2012
Hollande Challenges Unions on Labor Law as Stagnation Sets In http://t.co/xRBJdqdt Pretty tough to start fighting w/base w/low poll #s $$ Sep 10, 2012
Why Merkel Wants To Keep Greece in Euro Zone http://t.co/b3cTiHfq It is cheaper in the short run than bailing out the banks $$ Sep 10, 2012

Companies

Why Ruane Cunniff & Weitz Funds Like Valeant Pharmaceuticals (VRX) http://t.co/QBLd8SGV Combination of Pharma co, & asset-stripper $$ Sep 14, 2012
Andrew Ross Sorkin?s Bad Math on AIG http://t.co/pHdsYWRV Notes tax favors $AIG received, could have mentioned forgiven bailout terms $$ Sep 13, 2012
Legg Mason CEO to Leave Amid Pressure http://t.co/PB4ZxKCj $LM was better in the past, when they did not rely on fund mgmt as much $$ Sep 12, 2012
David Merkel: Why You Will Never Be Buffett http://t.co/iPfn9Gxo @reformedbroker features two of my articles on Buffett. Thanks, Josh $$ Sep 12, 2012
Ship Magnate Uses Gut in $11 Billion Bet Worst Since ?70s Ending http://t.co/f5BGyDoZ Long article on the gamblin’ head of $FRO & $SDRL $$ Sep 10, 2012

On Bailouts

Two notes on the bailouts: first, those saying the US Govt made $$ on the bailouts are not counting in Fannie & Freddie Sep 11, 2012
Second: they aren’t counting the cost of capital: had they invested $$ at the same time in a 50/50 mix stocks/bonds would’ve made much more Sep 11, 2012
So, aside from encouraging future moral hazard, the bailouts lost $$. Strictly on a moral basis, the govt should not play favorites. Sep 11, 2012

China

The Communist Party?s Big Problem? It?s Not Bo Xilai http://t.co/BXRshBNQ Publication of a long, critical commentary of CCP direction $$ Sep 13, 2012
Shadow Bankers Vanishing Leave China Victims Seeing Scams http://t.co/4RmbjG8d When bankers flee, go B/K, commit suicide: not good sign $$ Sep 13, 2012
China’s Revolution Risk http://t.co/lzs5k5ll One has to remember that not all risks are simple and economically rational. $$ Sep 12, 2012

Replies

@BarbarianCap @derekhernquist Thanks much. Don’t know what to say. 🙂 $$ Sep 15, 2012
@derekhernquist You’re welcome, Derek. I appreciate following you, & you following me. Why did I start the blog? To give something back $$ Sep 15, 2012
@moorehn Yeah, I know. I just Googled a few phrases from your show to see what would come up. Sorry that that did. Sep 15, 2012
@moorehn Rush Limbaugh also used “It’s like a sugar high.” 4 QE yesterday on his radio show http://t.co/BhS48hxN No, I don’t listen 2 him $$ Sep 15, 2012
@ritholtz Yes. First time but there are other cases in the works $$ Sep 14, 2012
@LaMonicaBuzz Definitely the latter. Full disclosure: long $SPLS $$ Sep 13, 2012
@JamesGRickards Confidence comes from a strong balance sheet & sustainable economic policies Sep 13, 2012
@XQuickFixX That figure is for average over a lifetime. Sep 13, 2012
@XQuickFixX “average BA college degree makes ($52,200)” Link? Sounds too high Sep 13, 2012
@wsquared58 Good for you Sep 13, 2012
@TheStalwart Cool, well, we will watch and see to the EOD Sep 13, 2012
@TheStalwart Are you forecasting the immediate move, say, 15 minutes, or to the end of the day? Sep 13, 2012
. @Nonrelatedsense Browne’s system is simple, like a VW bug. Bridgewater is like a Maserati in comparison. Both are elegant AA ideas $$ Sep 13, 2012
@waughkd I have been to SD once in my life; my brother lived on an Indian reservation there 4 years. The physics of wind power is tough $$ Sep 13, 2012
@XQuickFixX It used to be that that earned below median incomes; now they earn above median; it’s the pensions that r really high Sep 13, 2012
@munilass Thanks for tweeting that; I have had a lifelong interest in prime numbers, though the math here is beyond me. Sep 13, 2012
@GaelicTorus I’ve debated that; I sometimes do negative book reviews. More often it doesn’t get a review. Sep 13, 2012
@GaelicTorus Book isn’t out yet, not seeking a copy. Sometimes I get books I did not request, e.g., Hank Paulson’s book & didn’t review $$ Sep 13, 2012
@GaelicTorus former employee of $GS who left, purportedly because his ideals were shattered as $GS changed 2b more mercenary $$ Sep 13, 2012
@JacobWolinsky thanks 4 that data point. traded away most of my commodity stocks a while ago. Did not want to be a hog. $$ Sep 13, 2012
@JacobWolinsky If China’s growth materially reduces, many commodities will have a hard time. Sep 13, 2012
@groditi I could convert it to a PDF and send it to you just e-mail me at david.merkel@gmail.com Sep 13, 2012
Commented on StockTwits: I never use stops. Never. I just buy, hold, and sell after a few years. I you choose well,… http://t.co/HXgjGxic Sep 12, 2012
@TheStalwart Car chases go on a lot longer because other cars pull over for the police $$ Sep 12, 2012
@MarkDampier I’m skeptical too… $BLK is big enough to be able to get good executions for clients. They shouldn’t have to use ETFs $$ Sep 12, 2012
@BradErvin1 You can’t do that. The only thing you can rely on is that glutted sectors will always return less than non-glutted sectors. $$ Sep 12, 2012
.@BradErvin1 The crisis came from capital misallocation. The bailouts tossed more capital into sectors that were glutted already. Not C-P $$ Sep 11, 2012
@Oval54 comes back w/interest to special interests, not to the average person Sep 11, 2012
@EddyElfenbein Can’t be any other way. My first statistics professor told us on on day 1: “Statistics is a meeean profession.” $$ #malehumor Sep 11, 2012
@BoydRoddy @finemrespice Funny thing is that Federal Reserve did not talk publicly about the life cos, but sys risk during $AIG crisis $$ Sep 11, 2012
@finemrespice @BoydRoddy Agreed, it wasn’t the sole reason. Systemic effects of AIGFP, and do you hae a link on the FRC Basel issue? Sep 11, 2012
@finemrespice @BoydRoddy AIG’s Domestic Life companies lost all of their surplus when the AAA subprime RMBS underlying sec lending failed $$ Sep 11, 2012
@cabaum1 Quirk of Twitter, no #FM, #FT, #FW, #FTh, #FSa, or #FSu, only #FF for “Follow Friday,” & people typically only do #FF on Friday Sep 10, 2012

Retweets

US Govt outsources a lot RT @paulvieira:Joe Biden Calls Outsourcing “Not Bad If You’re Running A Company” http://t.co/vB42Feia via @buzzfeed Sep 14, 2012
RE: @bloombergview Bernanke should do the right thing: admit that he is wrong, and resign. http://t.co/1R5mxQw9 Sep 13, 2012
RE: @bloombergview Doing the same thing again and again, and expecting a different result.? You back an insane moneta? http://t.co/73aZFlFI Sep 13, 2012
I’m in the stagflation camp too $$ RT @BubblesandBusts: @alephblog I’ll take the under on GDP and over on unemployment and inflation Sep 13, 2012
RT @KeithMcCullough: Maybe one of the saddest days in American economic history; history wont forget this Sep 13, 2012
RT @credittrader: THIS!! RT @PragCapitalist: Bernanke basically just described the theory that asset bubbles are good for the economy…. $$ Sep 13, 2012
I tend to agree $$ RT @Nonrelatedsense:I think any allocation model faces a challenge today. Those two face more than they have in the past. Sep 13, 2012
Creation of credit has never brought prosperity. U r deluded $$ RT @BloombergView: Bernanke, You have no excuse | http://t.co/KwoPTjCJ Sep 13, 2012
As my Dad would say, for “socks & underwear” too $$ RT @pdacosta: Fed Chairman Bernanke spotted at Wal-Mart. Shopping for kitchen sink. Sep 13, 2012
Best since Paulson, including Hank $$ RT @pegobry: Geithner: best Treasury Sec in decades? Sep 12, 2012
RT @wesbury: It’s the spending. It’s the spending. It’s the spending. It’s the spending. It’s the spending. It’s the spending. It’s the … Sep 12, 2012
Performance art, yes $$ RT @TheStalwart: I think I might like to attend this conference, merely as performance art. http://t.co/PO6fzBp6 Sep 11, 2012
RT @dwotapka: RT @AskMiles: My mother used to say I’d get bored with pizza if I had it every day. My mother was wrong. Sep 11, 2012
At least those that cite the labor force participation rate $$ RT @TheStalwart: U-6ers are the truthers of the economics profession. Sep 11, 2012
RE: @bloombergview Same is true of Obama.? We face gridlock regardless of who gets elected. http://t.co/jGXTXoLI Sep 11, 2012
RT @annasacca: “Anyone wanting to learn about private equity would benefit from The New Tycoons by @jasonkellynews” http://t.co/xaF7HhLf $$ Sep 11, 2012
RT @BoydRoddy: Sole reason for AIG rescue: Sec.Lending undisclosed scheme under Neuger imperiled largest Life co’s in the world. No Life … Sep 11, 2012
As a happy user for around 2 years, I salute you; to my readers, look into getting free Opendns. $$ RT @opendns: Thanks for the RT! Sep 10, 2012
RT @opendns: We’re hearing reports that OpenDNS #SmartCache is helping OpenDNS users get to sites otherwise down during @godaddy #outage … Sep 10, 2012

On Tech Company Dividends

Posted on 11 September 2012 by David Merkel

There’s a lousy idea floating out there, that it is a bad thing for a tech company to pay dividends (also here).? Not true!? Companies that pay dividends treat their capital more carefully, because now their equity has an explicit cost.? Studies that I have read indicate that dividend-paying stocks do better then those that do not pay dividends, in the long run.

That said, it doesn’t mean that companies that pay high dividends do better than those with low dividends.? It is well-known in REIT stocks that those that pay low but growing dividends have outperformed those with high dividends that grow slowly.? The right combination is that a small dividend is paid, and the company uses the retained earnings wisely, in order to grow the business profitably, leading to increases in dividends.

When Microsoft started paying a dividend I was a skeptic, because Microsoft was overvalued at the time.? No degree of financial engineering would change that.? Dividends are at most a modest positive for any stock.? Better you should look at the underlying ability to grow free cash flow and be able to reinvest it well.

That’s where investors should focus.? Dividends are good, but growing dividends are better.

Best of the Aleph Blog, Part 18

Posted on 8 September 201220 June 2017 by David Merkel

These articles appeared between May and July 2011:

Most People are not Better off Buying Common Stocks on their own

versus

Why Amateurs Should Invest in Common Stocks

Yes, I wrote them both, but they complement each other.? Yes, most average people get skinned investing in common stocks, but if you apply yourself assiduously to investing, it will improve your performance in other jobs, by broadening your skill set.

Impossible Dream, Part 2

Impossible Dream Project, Part 1

The latter of (part 1) these was my highest day and month for access of my blog.? I came close to eclipsing the monthly total last month, but missed by 2%.? These pieces take up asset allocation via valuation, and momentum.

Learning Leadership

A story of how Roy and I disobeyed orders a little, and created a lot of growth for the company that we served.? Personally, I think this is a great story… I never created more value than when I worked for Provident Mutual.

On Longevity Derivatives

I like to think that I am an intelligent skeptic on derivatives; in this case credit risk fights any real hedging.

Segmenting to Make Better Decisions

The smaller the range of choices is, the better people do in choosing.? One way to facilitate that is to break down decision making into a series of choices with each having few options.

The Rules, Part XXI

All assets represent future goods.? The prices of assets represent the trade-off between present goods and assets.

The Rules, Part XXII

Rapid money supply growth with no consumer price inflation can only really occur within the confines of an asset price bubble, or else, where does the money go?? Interest rates are low at such a time because of the incredible liquidity, and complacency of lenders that they will get an equal amount of purchasing power back.? Perhaps another possibility is when a country?s currency is being used more and more as a shadow currency, like the US in the Third World.? But even that will come home someday.

Learning to Like Lumpiness

This is probably one of the most important articles I have written, because investment returns are lumpy, and we need to learn to live with it.? For those of us that are smart, we need to take advantage of it.

What is Liquidity (V)

Liquidity cannot be created, but it can be redirected.

Got Cash?

Cash is valuable even when interest rates are low.? Cash is flexibility and optionality.

Enduring Ponzi

Madoff’s Ponzi scheme lasted so long because it raked off so little.

The Costs of Illiquidity

On the tradeoff of liquidity in order to get yield.

Silent as Night

It also taught me a lesson.? When fees are deducted daily, no one notices.

?Is He Economically Rational??

Now after all of this, it?s not so much a question of rationality but ethics.? Who will do the right thing for the one he ultimately serves?? Working for those people is a joy, and is beneficial to those that own. Doing right does well for many.

Downgrade Jitters

On why credit ratings are opinions, and not facts.

Where to Hide?

How to preserve purchasing power, even when it is difficult.

The Costs of Illiquidity ? II

Don’t buy REITs that are not publicly traded.