Value Investing – Page 44

Sorted Weekly Tweets

Posted on 23 June 201223 June 2012 by David Merkel

A note to all of the actuaries in the audience, all three of you 😉 : an old friend from my GIC days is seeking a multi-talented actuary to work in the stable value business.? Must understand how wraps work, etc.? If interested, drop me a note, and I’ll send you the contact info.

On with the tweets:

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Eurozone

May not last long $$ RT @John_Hempton: @AlephBlog Spain imposing on bank junior bonds but prefs in Santander still trading at par! Strange. Jun 23, 2012
Buying Europe Banks Is Easy for Herro as Cheap Stocks Fall http://t.co/gfCOhY8q Key question here is accounting quality; not a buyer $$ Jun 23, 2012
Spain Said to Weigh Imposing Losses on Junior Bank Bondholders http://t.co/cD1hoAVa Fine, but they won’t fund jr debt for 20yrs or so $$ Jun 23, 2012
Spanish Aid Plan Is Flawed, Says IMF http://t.co/9V2FJ0Xc IMF doesn’t like the complexity of the E-Zone, wants it 2 behave like a nation Jun 23, 2012
Debt crisis: Angela Merkel defies Latin Europe and the IMF on bond rescue http://t.co/qTKEAr5O She who pays the $$ calls the tunes Jun 23, 2012
What?s So Special About the Euro Currency Area? http://t.co/oJWyrLAk Currency unions don’t work; must centralize or die $$ Jun 21, 2012
Merkel Balks at Sovereign Debt Purchases to Overcome Crisis http://t.co/UfuN4ae8 Physically, the crisis looks like it is wearing on Angela Jun 21, 2012
Spanish short-term debt costs reach alarm levels http://t.co/Dm8d2bsv Yields high enough that Spain unlikely to grow out of the debt $$ Jun 21, 2012
Cyprus Said to Face Europe Pressure for $13 Billion Aid http://t.co/z0etJBlX Who wants to maintain influence in Cyprus? Russia, E-zone? $$ Jun 20, 2012
‘ @aarontask He might b right. Key Q is how much Germans/Nordics/Dutch view themselves as Europeans 1st rather than Germans/Nordics/Dutch $$ Jun 20, 2012
Greek Leaders Poised to Agree on Three-Way Coalition http://t.co/JvAaPDDj It will be difficult for that coalition 2 hold together $$ Jun 20, 2012
Ma?ana-nomics at Los Cabos http://t.co/GtlAj4lY Weak Europoliticians blame US, when their banking system was overlevered & malregulated $$ Jun 20, 2012
G20 summit: perils of a half-baked rescue for Spain and Italy http://t.co/7E6jPK4W E-zone not ready 2 take strong actions; don’t force it $$ Jun 20, 2012
Is Spain past the point of no return? http://t.co/zCRF7qKo ??I suspect the ECB will have to be the buyer of last resort for Spanish bonds.?? Jun 19, 2012
Saddling Spain With Bank Burden Repeats Irish Error http://t.co/dWgYAUht Protect deposits, not bank bonds, preferreds, or stocks $$ Jun 19, 2012
“Which is why $JPM had the hedge there in the first place $$” http://t.co/o61frAFX Dimon Says ?Firewalls? May Halt Spread of Europe Crisis Jun 19, 2012
Germany set to allow eurozone bailout fund to buy troubled countries’ debt http://t.co/OEFi9UI9 Last refuge of scoundrels:blame speculators Jun 19, 2012
Fran?ois Hollande said meeting btw Ezone & Obama rescheduled4this morning2brief Americans on “mechanisms that allow us to fight speculation” Jun 19, 2012
Spanish Yields at 7% Show Investors Slamming Door http://t.co/JxGxNHDn Spain is slowly passing the “tipping point” into hopelessness. $$ Jun 18, 2012
Where is the relief? RT @jennablan: Where is the relief rally? Jun 18, 2012

FOMC Meeting/Press Conference

Fed Seen Extending Operation Twist and Avoiding Bond Buys http://t.co/qFOSA0rf Fed can’t do nothing, so it does something that is nothing Jun 21, 2012
RT @ezraklein: Hypothesis: Bernanke doesn’t do more because he doesn’t think he can. He says otherwise is because he doesn’t want the ma … Jun 20, 2012
Dr. Bernanke: Couldn?t increased unemployment be structural, after all, there is a lot more competition from labor in emerging markets? Jun 20, 2012
That’s all folks!!! Jun 20, 2012
Dr. Bernanke, Isn?t stagflation a possibility here? I mean, no one expected it in the ?70s either. $$ Jun 20, 2012
Q for Bernanke: If the Fed ever does shrink its balance sheet, what effect will it have on the banks? $$ Jun 20, 2012
Stocks trading off — correlated with future inflation rates; long Treasuries rallying nominal yields falling -> real rates stable-ish $$ Jun 20, 2012
What Bernanke is describing in terms of hedging and risk management has to be done in the insurance industry; actuarial risk analyses Jun 20, 2012
W/MBS rates, those mtges that are underwater don’t benefit, same for Alt-A & Jumbo; low rates don’t help many in residential real estate $$ Jun 20, 2012
Effect of Tsy ylds on corporate yields is stronger 4 AAA-A bonds, moderate 4 BBB bonds, little 4 junk & the effects get weaker w/maturity $$ Jun 20, 2012
That’s the wrap up for the central tendencies and averages of the FOMC’s additional data release. Anyone find those summaries useful? $$ Jun 20, 2012
Changes in Avg Target Federal Funds Rate at Year-End 2012-2014, Longer -0.07%, -0.10%, -0.22%, -0.09% $$ Levels: 0.30%, 0.50%, 1.11%, 4.11% Jun 20, 2012
Average appropriate timing of policy firming moved out 1.6 months to November 2013 $$ Jun 20, 2012
Changes in PCE Inflation central tendency 2012-2014, Longer -0.4)%, -0.07%, -0.12%, 0% $$ Levels: 1.48%, 1.76%, 1.77%, 2.00% Jun 20, 2012
Changes in unemployment central tendency 2012-2014, Longer +0.18%, +0.20%, +0.24%, +0.03% $$ Levels: 8.10%, 7.71%, 7.28%, 5.60% Jun 20, 2012
Changes in real GDP growth central tendency 2012-2014, Longer -0.50%, -0.37%, -0.11%, -0.04% $$ Levels: 2.13%, 2.57%, 3.28%, 2.44% Jun 20, 2012
+1 RT @bondscoop: Steve Liesman is the Fed’s Helen Thomas Jun 20, 2012
Fed wants to see long TIPS up in price relative to long nominal Treasuries. http://t.co/X5Gjt6jI Jun 20, 2012
@TheStalwart #FOMCGuesses OT extended, no QE3, central tendencies move back to where they were in January, shades lang down GDP, CPI, etc $$ Jun 20, 2012
C?mon, Ben, Just Say It; Please, Just Say QE3 http://t.co/ksIKxZ6C Sad that equity guys beg 4 stimulus; think OT extends; no QE3 yet $$ Jun 20, 2012

Rest of the World

Glencore Protests Bolivia’s Move on Mine http://t.co/OcIzatJ5 Bolivia has Venezuela envy; won’t end until Morales is shown 2b a fail. $$ Jun 23, 2012
Children of Mao’s wrath vie for power in China http://t.co/pWzj4Dbq All of the current ruling class survived the Cultural Revolution $$ Jun 22, 2012
Riskier Bets Pitched to Asia’s Rising Rich http://t.co/P6PjFqyR Yield is the oldest scam in the books; Asia’s brokers fleece clients $$ Jun 21, 2012
China warns its rare earth reserves are declining http://t.co/ve2e6PQq I doubt this, but if true -> significant scarcity of rare earths $$ Jun 20, 2012
Britain doomed, apparently http://t.co/WdvPCsxs Countries that don?t reset their systems through default, will experience money decay $$ Jun 20, 2012
Suicides, Arrests Show Trouble at Korean Savings Banks http://t.co/aP1fu6KS Pride drives suicides, rather than confession of wrongdoing $$ Jun 19, 2012
The UN’s Internet Power Grab http://t.co/LE704S74 Never surrender an advantage for no gain; does the Obama administration get that? $$ Jun 18, 2012
The Return of Egypt’s ‘Deep State’ http://t.co/i1IkbmMq Islamists & liberals checkmated by Egyptian Army 4 now. Liberals s/b glad $$ Jun 17, 2012
@dpinsen Agreed, better H/L would have been: “Egyptian Army reveals full control, ends show that played w/democracy 2 smoke out enemies” $$ Jun 17, 2012
Noda Ends Japan Nuclear Freeze, Risking Voter Backlash at Polls http://t.co/Jcoxl91Z He does the right thing, but will the voters agree $$ Jun 17, 2012

Banks

A History of Money Funds http://t.co/KXCpfCDz Let the critics of money market funds apply the same2banks; mark2market accounting. $$ Jun 23, 2012
Bank Investors Dismiss Moody?s Cuts as Years Too Late http://t.co/5cOsGOyG True. Moody’s should’ve done it in 2008; did politics stopthem? Jun 23, 2012
Citigroup Faces $5 Billion on Dollar?s Rise, Peabody Says http://t.co/5HZtJfvx So, on the heels of $JPM, $C has a currency mismatch? $$ Jun 21, 2012
Eminent domain for underwater mortgages could have biggest impact on banks http://t.co/NK9W0PyO Comments at end; disagreement welcomed $$ Jun 20, 2012

Central Banking

Bernanke Acknowledges Tsy Strategy @ Odds W/Fed Policy http://t.co/MqW6qda2 “Thx, Unca Ben 4letting us issue morre 30s” Ben:”Arrrgh!” $$ Jun 23, 2012
The Fed?s second best solution http://t.co/YJhiHbNd “collateral damage will mount, making the next policy steps even more excruciating.” Jun 21, 2012
Fed Born of Morgan?s Bailout Under Scrutiny After Dimon?s Loss http://t.co/7EHPlSvM How significant is it 4 Jamie D 2b on NY Fed board? $$ Jun 19, 2012
Krugman’s Intellectual Waterloo http://t.co/brrRB3CP Suggested possible Fed stimulus: blow housing bubble 2replace tech bubble $$ Jun 17, 2012
Also, the last H/L could have been: “Bernanke?s GDP View Invalidated as Economy Slows” FOMC has been lousy economic forecasters lately $$ Jun 17, 2012
Bernanke?s Inflation View Validated as Commodities Fall http://t.co/pjRKhXWv Median & Trimmed mean CPIs mot falling, better measures $$ Jun 17, 2012

Asset Management

Pimco?s Gross Warns of Risk Assets as Aberdeen Avoids Stocks http://t.co/pcqnMis6 Bill Gross signs on to deflation late & promotes it $$ Jun 23, 2012
Private Equity Has Too Much Money to Spend on Homes http://t.co/VPToSU8I Big buyers need to stay quiet if they want 2 make good returns $$ Jun 22, 2012
Simon Lack responds to AIMA’s hedge fund cheerleading http://t.co/VQq4s1O8 Backfill bias, IRR vs Buy&Hold, high fees, survivor bias $$ Jun 21, 2012
At 40,000 feet, Fidelity’s Danoff ponders Groupons http://t.co/BwOKJR8X Danoff is a survivor; he’s right it’s lonely 2b a stockpicker $$ Jun 21, 2012
Very good point. Wall Street is a 1-note Sam RT @chadstarliper: Has there ever been a time when Wall St didn’t think stocks were “cheap?” $$ Jun 20, 2012
Wall Street says stocks are bargains, but that assumes surging profits http://t.co/0c0iDdK6 Or at least growing sales w/flat profit mgns $$ Jun 20, 2012
America?s $8T corporate debt market faces liquidity drought as banks retreat from the trade http://t.co/rvXwFsjW Shouldn’t b that bad $$ Jun 19, 2012
Equities entail less risk than ?haven? investments http://t.co/u3befAMT Ain’t necessarily true; think of the Great Depression or 1871 $$ Jun 19, 2012
Valuation Matters…. Equity vs Bonds Edition http://t.co/23IikMDJ Earnings ylds v Tsy ylds unstable; Q-ratio, CAPE10, Price/resources bettr Jun 19, 2012
Biggest Stocks Beat S&P 500 Most in 13 Years as Valuations Fall http://t.co/7vLxG6VN Once valuations get so low, they must go up $$ Jun 18, 2012

Companies

DuPont selling Conoco at oil mkt trough $$RT @BarbarianCap: “Delta seals deal to buy Pennsylvania refinery” > hasn’t that been tried before? Jun 23, 2012
DuPont buying Conoco at oil mkt peak $$ RT @BarbarianCap: “Delta seals deal to buy Pennsylvania refinery” > hasn’t that been tried before? Jun 23, 2012
J.C. Penney Falls After Francis Leaves Amid Strategy Flop http://t.co/jfAVGj3V Rare setback 4 Ackman/Pershing on $JCP; retail is tough $$ Jun 20, 2012
Buffett Extends Real-Estate Bet With ResCap Pursuit http://t.co/ZsN6J0Pm Buffett is early, in my opinion, but has the capital to do it $$ Jun 18, 2012

Pensions

US public retiree benefits gap grows to $1.38T http://t.co/7bZ18GRB Gap widened by $120 billion since last year; thx Ben 4 low discnt rates Jun 20, 2012
Joe Nocera Is Wrong About Woonsocket’s Crisis http://t.co/Z3RM9UGO Harder2discharge muni “pension” bonds than renegotiate muni pensions $$ Jun 20, 2012
GM Seen Fueling Pension Deals as Employers Face Shortfall http://t.co/noz9auU0 Hope $MET & $PRU survive; guaranty funds limited in size $$ Jun 19, 2012
Terminal funding of DB pension plans will be a growing phenomenon if corps/states bite bullet and kick in more $$ to fund annuity purchases Jun 19, 2012
Problem to annuitants is companies can go broke; no PBGC coverage of annuities, and state guarantees r usually limited 2 $100,000 total $$ Jun 19, 2012

Media

Love the Leaker, Hate the Leak http://t.co/wiY7RwJU Value of releasing sensitive govt data to the public is in the eye of the beholder $$ Jun 21, 2012
How David Weidner Changed My Life http://t.co/g9LVJIWD @reformedbroker – how getting on @davidweidner ‘s Top 10 list gave him a big boost $$ Jun 19, 2012
+1 won’t watch RT @ReformedBroker: Bloomberg PR pushing their Meredith Whitney interview video hard today. They haven’t gotten the memo yet. Jun 19, 2012
Wrong: 20 rules that can save you from the Doomsday Cycle http://t.co/jLB0s2pL Why does Marketwatch give Paul Farrell space 2 write? $$ Jun 19, 2012
So long, suckers ? I?m leaving Wall Street http://t.co/x1Ju1fmZ David Weidner: Some lessons from 15 years observing the industry $$ Jun 19, 2012

Miscellaneous

Liquidity, Noise, and Signal http://t.co/cV15Mr2z Shorter the time period-> higher ratio noise/signal; leads2bad trades @ turning points $$ Jun 21, 2012
‘ @JATranfo Never criticized ECRI when out of favor; FWIW, I reverse-engineered their main model: industrial commod pxs & credit spreads $$ Jun 21, 2012
Lawmakers Push for Overhaul of IPO Process http://t.co/qhh7tX1V Every “fix” creates its own set of problems. Mania can hit auctions 2 $$ Jun 21, 2012
Yes $$ RT @Fullcarry: A point I have made many times in the past: the drop in yields the past decade is mostly due to a drop in real rates. Jun 20, 2012
Housing Starts in U.S. Fall 4.8% in May on Apartments http://t.co/PhMFwHQL Interesting contrary data; $EQR chart http://t.co/vleXkVAM $$ Jun 19, 2012
Asians Top Immigration Class http://t.co/Sir2IFxQ Certainly noticeable here in Ellicott City; most businesses have signs in Korean $$ Jun 19, 2012
Poorly reasoned: Court-Ordered Care ? A Complication of Pregnancy 2 Avoid http://t.co/DqmhsvkU Mothers w/child in womb uniquely affect child Jun 18, 2012
Please follow @jarrodwilcox, He has taught me many things, and I respect him a great deal #FF Jun 17, 2012
A Jewish-Asian Couple?s Union Leads to a Scholarly Interest in Intermarriage http://t.co/U3jfPkyK Both ethnic groups prize education $$ Jun 17, 2012

Comments

DavidMerkel’s discussion on “The New Yorker’s Newest Writer Is a Big Self-Plagiarist” http://t.co/g1i0YeF4 Writing belongs2those that paid Jun 20, 2012
“High energy particle physics is only a small part of science, and not adequate to measure the?” ? David_Merkel http://t.co/T4BrvWBj Jun 20, 2012
“Please, accidents per passenger mile would be better, rather than: “He also pointed to the fact?” ? David_Merkel http://t.co/Yg6r5N3X Jun 20, 2012
RE: @bloombergview Maybe DC city govt should start a reality TV show, w/prizes 2 the official who commits the most cr? http://t.co/lIXL6eMi Jun 20, 2012
RE: @bloombergview ?How will you deal with deferral of individual taxes on investment from DC plans, unrealized CGs, ? http://t.co/NY0Q3Ia5 Jun 20, 2012
“Cool picture, Ed. Thanks for sharing it.” ? David_Merkel http://t.co/Mg9lx0ij Jun 19, 2012
“Hitting the fiscal cliff won’t happen, and that’s too bad, because we need to discuss long-term imbalances” ? D_Merkel http://t.co/csiaLXlV Jun 19, 2012
“Here is a proposal for how rating agencies could be eliminated: http://t.co/rLrOK4vu…” ? David_Merkel http://t.co/q2mxmhpW Jun 19, 2012
“I trust ratings agencies more than mismanaged governments. Ratings are needed to provide?” ? David_Merkel http://t.co/vOdPJvzv Jun 19, 2012
“If this is representative of what the ruling Greek coalition will do, the government will fail?” ? David_Merkel http://t.co/HEe4GwHt Jun 19, 2012
“Much as we may dislike financial fraud, suggesting that those in the US that mismanaged their banks?” ? David_Merkel http://t.co/fEZQIo0h Jun 19, 2012
‘ @FilmCriticOne You say u want tax reform, but ur willing2let value grow untaxed through deferral? Get real; ability2defer is the issue $$ Jun 16, 2012

Dimon for Fed Secretary

@dlevineMW @moorehn and pay cut. The same rumors were applied to Hank Greenberg $AIG 4 Tsy Secretary user Bush, Sr. Said the same then $$ Jun 19, 2012
Jamie kind2let us live in his world 😉 RT @ReformedBroker He’s hedging the Senate w/the House right now, y’all r just pawns in a bigger game Jun 19, 2012
Why should Jamie accept the demotion? $$ RT @moorehn: This is just Jamie practicing for confirmation hearings as Treasury Secretary, right? Jun 19, 2012

Tax Policy

Tax Panels Turn Focus to Investments http://t.co/sq6AnHdE Best poss is lowering corp tax rates, equalizing all tax rates for individuals Jun 23, 2012
How to Kill the Corporate-Income Tax http://t.co/T5MgnVuD Evens out personal income tax rates by class. Good, but what about deferral? $$ Jun 20, 2012

Interview with Howard Marks

Posted on 20 June 2012 by David Merkel

As you might know, I reviewed Howard Marks’ excellent book The Most Important Thing, and its enhanced version, The Most Important Thing Illuminated.? Some PR flacks are more tenacious, and some less so.? Some come to me prior to publication, and some after.? Some represent an amazing author and book, others less so.

Even though the PR flack came to me after publication, she was tenacious, and offered me an interview with Howard Marks, Chairman of Oaktree Capital.? How could I refuse?

Now, I need to offer one apology before providing the link to the half hour audio interview.? If you read Howard Marks’ newsletters you know that he runs a shop that focuses on bonds, particularly high yield, convertible, and distressed debt.? But almost all of the principles that he puts forth apply to equity value investing as well, and so I assumed that he did some of that as well.? I should have looked at Oaktree’s strategies, and seen that they do little in vanilla asset classes like domestic US equities.

That invalidated a number of questions that I asked Mr. Marks via e-mail, but I had enough good questions to fill out a good half hour.? One final note: during the interview, he needed to take phone calls twice, and I edited those out of the audio file.? They took place near minutes eight and twenty-one.

With no further ado, here is my interview with Howard Marks:

Howard Marks Interview

Industry Ranks June 2012

Posted on 16 June 201216 June 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, P&C Insurance and Reinsurance, 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.

A word on banks and REITs: the credit cycle has not been repealed, and there are still issues unresolved from the last cycle ? I am not interested there even at present levels.? The modest unwind currently happening in the credit markets, if it expands, would imply significant issues for banks and their ?regulators.?

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 Cyclicals

What I find fascinating about the red momentum zone now, is that it is laden with cyclical companies.? That does not make sense in a confused market environment where the market has no been making any progress.

So, as I considered the green and red zones, I chose areas that I thought would be interesting.? In the red zone, I picked transportation names, and reinsurers, which have run, but could run a lot more.

I have move than enough energy producers, so I am not fishing for those industries here.

Much as cyclicals are displayed in the red zone, it does not mean the red zone or cyclicals are a good place to be.? The is a lot of weakness not just in the US, but globally.? I am left hard: where is the economy growing where the culture is honest enough that I trust the statistics?

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.

Company	Ticker	Industry Name	Financial Strength	Proj 3-5 Yr % Annual Total Return
FedEx Corp.	FDX	Air Transport	A	21
United Parcel Serv.	UPS	Air Transport	A	18
Autoliv, Inc.	ALV	Auto Parts	B++	26
BorgWarner	BWA	Auto Parts	A	20
Eaton Corp.	ETN	Auto Parts	A+	29
Gentex Corp.	GNTX	Auto Parts	B++	21
Genuine Parts	GPC	Auto Parts	A+	15
Johnson Controls	JCI	Auto Parts	A	25
Magna Int’l ‘A’	MGA	Auto Parts	A	29
Honda Motor ADR	HMC	Automotive	B++	19
Coca-Cola	KO	Beverage	A++	15
Molson Coors Brewing	TAP	Beverage	B++	21
PepsiCo, Inc.	PEP	Beverage	A++	15
Amgen	AMGN	Biotechnology	A++	17
Questcor Pharmac.	QCOR	Biotechnology	B++	22
United Therapeutics	UTHR	Biotechnology	A	35
Adobe Systems	ADBE	Computer Software	A	24
Autodesk, Inc.	ADSK	Computer Software	A	22
CA, Inc.	CA	Computer Software	B++	23
Intuit Inc.	INTU	Computer Software	A	15
Microsoft Corp.	MSFT	Computer Software	A++	20
Oracle Corp.	ORCL	Computer Software	A++	18
SAP AG	SAP	Computer Software	A	21
Symantec Corp.	SYMC	Computer Software	B++	22
Apple Inc.	AAPL	Computers/Peripherals	A++	24
Dell Inc.	DELL	Computers/Peripherals	A	28
Hewlett-Packard	HPQ	Computers/Peripherals	A+	33
Ingram Micro ‘A’	IM	Computers/Peripherals	B++	21
NetApp, Inc.	NTAP	Computers/Peripherals	A	22
Synaptics	SYNA	Computers/Peripherals	B++	22
Tech Data	TECD	Computers/Peripherals	B++	20
Akamai Technologies	AKAM	E-Commerce	A	29
Digital River	DRIV	E-Commerce	B++	21
Archer Daniels Midl’d	ADM	Food Processing	A+	17
Fresh Del Monte Prod.	FDP	Food Processing	B++	15
Heinz (H.J.)	HNZ	Food Processing	A+	15
Herbalife, Ltd.	HLF	Food Processing	B++	15
Kellogg	K	Food Processing	A	17
Kraft Foods	KFT	Food Processing	A+	15
Peet’s Coffee & Tea	PEET	Food Processing	B++	19
Tootsie Roll Ind.	TR	Food Processing	A+	15
Canon Inc. ADR	CAJ	Foreign Electronics	A	22
FUJIFILM Hldgs. ADR	FUJIY	Foreign Electronics	A+	37
Kyocera Corp. ADR	KYO	Foreign Electronics	A+	16
Sony Corp. ADR	SNE	Foreign Electronics	A	42
Quality Systems	QSII	Healthcare Information	A	32
AGCO Corp.	AGCO	Heavy Truck & Equip	A	22
Caterpillar Inc.	CAT	Heavy Truck & Equip	A+	22
Cummins Inc.	CMI	Heavy Truck & Equip	A	25
Deere & Co.	DE	Heavy Truck & Equip	A++	20
Gardner Denver	GDI	Heavy Truck & Equip	A	18
PACCAR Inc.	PCAR	Heavy Truck & Equip	A	25
Equifax, Inc.	EFX	Information Services	B++	18
Thomson Reuters	TRI.TO	Information Services	B++	24
Hanover Insurance	THG	Insurance (Prop/Cas.)	B++	23
Baidu, Inc.	BIDU	Internet	A	33
Ctrip.com Int’l ADR	CTRP	Internet	A	36
eBay Inc.	EBAY	Internet	A+	20
Google, Inc.	GOOG	Internet	A++	23
IAC/InterActiveCorp	IACI	Internet	B++	19
Netflix, Inc.	NFLX	Internet	A	32
priceline.com	PCLN	Internet	A	21
Sohu.com Inc.	SOHU	Internet	B++	28
First Solar, Inc.	FSLR	Power	A	37
Badger Meter	BMI	Precision Instrument	B++	17
KLA-Tencor	KLAC	Precision Instrument	B++	21
Landauer, Inc.	LDR	Precision Instrument	B++	15
National Instruments	NATI	Precision Instrument	B++	17
Rofin-Sinar Techn.	RSTI	Precision Instrument	B++	22
Thermo Fisher Sci.	TMO	Precision Instrument	A	17
Waters Corp.	WAT	Precision Instrument	A	16
CSX Corp.	CSX	Railroad	B++	22
Norfolk Southern	NSC	Railroad	A	22
CME Group	CME	Securities Brokerage	A	18
Goldman Sachs	GS	Securities Brokerage	A	24
IntercontinentalExch.	ICE	Securities Brokerage	A	20
Investment Techn.	ITG	Securities Brokerage	B++	31
NYSE Euronext	NYX	Securities Brokerage	A	26
Schwab (Charles)	SCHW	Securities Brokerage	A	21
Altera Corp.	ALTR	Semiconductor	A	19
Analog Devices	ADI	Semiconductor	A+	15
Intel Corp.	INTC	Semiconductor	A++	21
Linear Technology	LLTC	Semiconductor	B++	20
Microchip Technology	MCHP	Semiconductor	B++	25
NVIDIA Corp.	NVDA	Semiconductor	A	26
QLogic Corp.	QLGC	Semiconductor	B++	35
Semtech Corp.	SMTC	Semiconductor	B++	17
Silicon Labs.	SLAB	Semiconductor	B++	16
Skyworks Solutions	SWKS	Semiconductor	B++	15
Taiwan Semic. ADR	TSM	Semiconductor	B++	26
Tessera Technologies	TSRA	Semiconductor	B++	37
Texas Instruments	TXN	Semiconductor	A++	21
Xilinx Inc.	XLNX	Semiconductor	A	18
ADTRAN, Inc.	ADTN	Telecom. Equipment	B++	25
Broadcom Corp. ‘A’	BRCM	Telecom. Equipment	B++	19
Cisco Systems	CSCO	Telecom. Equipment	A++	21
F5 Networks	FFIV	Telecom. Equipment	B++	20
Juniper Networks	JNPR	Telecom. Equipment	B++	31
NETGEAR	NTGR	Telecom. Equipment	B++	22
NeuStar Inc.	NSR	Telecom. Equipment	B++	16
Polycom, Inc.	PLCM	Telecom. Equipment	B++	33
Qualcomm Inc.	QCOM	Telecom. Equipment	A+	16
Forward Air	FWRD	Trucking	B++	20
Knight Transportation	KNX	Trucking	B++	23
Werner Enterprises	WERN	Trucking	B++	15
Research in Motion	RIMM	Wireless Networking	B++	21
Zebra Techn. ‘A’	ZBRA	Wireless Networking	B++	20

Use these ideas as you see best.? I am not reinvesting at present, and so I am not actively looking at these names. That said, a number of them are in my portfolio, namely: INTC. THG, HPQ, ORCL, AMGN, HMC

Full disclosure: long INTC. THG, HPQ, ORCL, AMGN, HMC

Sorted Weekly Tweets

Posted on 9 June 2012 by David Merkel

US State Economics

State Politicians and the Public Pension Cookie Jar http://t.co/NLyWlK2X Politicians don’t cut public pensions b/c they pad own pensions $$ Jun 09, 2012
North Las Vegas Crisis Shows Fragility of Nevada Economy http://t.co/sCnrcmRk Moral laxity of Vegas invites elements that lead2trouble $$ Jun 09, 2012
Wrong: What Scott Walker can teach Barack Obama http://t.co/lpO5hETn When Walker campaigned he did not know he would have a majority in +1/2 Jun 06, 2012
both houses of the legislature. He seized the opportunity & did something bold in order to fix Wisconsin’s finances. Result: Survives recall Jun 06, 2012

US Fiscal Policy

U.S. House May Split Up Package of Expired Tax Breaks http://t.co/hXcmb1Ec Good idea; let each tax break stand on its own &b abolished. $$ Jun 09, 2012
True Capitalists Are Pro-Market, Not Pro-Business http://t.co/HVQjkfk2 Get business special interests out of tax code & govt subsidies $$ Jun 08, 2012
Senate Dealmaker Baucus Turns to Rewrite of US Tax Code http://t.co/naa2hePj Baucus is going to try to gore everyone equally, maybe? $$ Jun 08, 2012
RT @TheOneDave: True capitalists are pro-market rather than pro-business, according to Yale’s Stephen Carter: http://t.co/vQQ64YDa via @ … Jun 08, 2012
Americans Cling to Jobs as U.S. Workforce Dynamism Fades http://t.co/acaAmcGm Inverted Mtge, 2 earners, ec uncertainty reduce flexibility $$ Jun 08, 2012
Teachers Unions Have a Popularity Problem http://t.co/QGqzD8Ys Pct of electorate backing rights of teachers 2 collectively bargain falls $$ Jun 05, 2012
Monetary Aid Coming as Wal-Mart Helps Housing http://t.co/pBBoiRH6 Mixed Bag: QE3, Youth unemployment & being near a WalMart boosts home $$ Jun 04, 2012
U.S. Multinationals Lobby to Alter Tax Rules They Sought http://t.co/7maKR41m Would be better to eliminate, & raise taxes on divs & CGs $$ Jun 04, 2012

US Mortgages & Real Estate

Mortgage Rates Hit New Low, 30-Year Drops to 3.67% http://t.co/BLQGkosE Because housing is not recovering, mtge rates continue to fall $$ Jun 08, 2012
FHA Turns to Investors as Losses Continue to Rise http://t.co/c73e01TU US Govt messes up another lending guarantee area. They always do $$ Jun 08, 2012

Asia

Strong Yen Won?t Survive Japan?s Fiscal Cliff http://t.co/e7P6RyFl Shilling argues that Japan will suffer as it ages & sells govt debt $$ Jun 09, 2012
Ikea to Consider India Entry, Plans More China Stores http://t.co/lfrvVgTY Many difficulties setting up biz in overregulated India $$ Jun 08, 2012
Japan Confronts Flight to Quality With Brutal Yen http://t.co/bWj62zo3 Wondering when the “flight to quality” may no longer benefit Japan $$ Jun 07, 2012
China Cuts Interest Rates for First Time Since 2008 http://t.co/7bIbIdUd Unlikely to do much to stimulate, not much demand 4 loans now $$ Jun 07, 2012
Bad News Piles Up for China’s Economy http://t.co/coT0mfgf Repeated cycles of malinvestment are finally hitting tipping point of failure $$ Jun 07, 2012
Keep tight stops RT @mercenaryjack: Contrarian buy signal $USDJPY RT Japan Confronts Flight to Quality With Brutal Yen http://t.co/D98ax8rH Jun 07, 2012
Japan?s Debt Sustains a Deflationary Depression http://t.co/6sUCexpl As Japan ages & shrinks, will be hard 4 it to maintain economy $$ Jun 05, 2012
Bob Fu: The Pastor of China’s Underground Railroad http://t.co/1HXIypo5 Fascinating tale of life in China & influencing China from outside Jun 04, 2012

?Politics

Brown Challenged Over Dodd-Frank http://t.co/UsRpt5tf Scott Brown best chance at election: pro-business moderate; paint Warren extremist $$ Jun 08, 2012
What’s Changed After Wisconsin http://t.co/rTa0vaWi Don’t normally link2 Peggy Noonan, but the last line was quite a stinger. Jun 08, 2012
“Because Bill Clinton loves politics, he hates losers. Maybe he just can’t resist sticking it to them a little, when he gets a chance.” $$ + Jun 08, 2012
Romney Executive Style Forged in Faith He Rarely Mentions http://t.co/SOOSDnwI He has 2b quiet; there is no upside explaining Mormonism $$ Jun 08, 2012
Hollande Gets Crisis-Protection Tips From Business-Friendly Lyon http://t.co/4emjSYXn Interesting piece; Lyon businessmen guide Socialism $$ Jun 08, 2012
Walker Bets on Brats to Heal Wisconsin as Praise Pours In http://t.co/9Kto2qIA Smart move on Walker’s part after a bitter election fight $$ Jun 08, 2012
Chavez Losing Grip on ?Benjamin? as U.S. Dollars Sought http://t.co/YQ9aLNTp Thier’s law in action in Venezuela http://t.co/mNNp2KzJ $$ Jun 08, 2012
Congressman to Bernanke: Take QE3 Off the Table http://t.co/QpQnU0BZ I’m sorry, but the Fed doesn’t listen 2 Congress; they’re above that $$ Jun 07, 2012
Bernanke Cites Risks, but Doesn’t Signal Action http://t.co/Ew9Nc2K8 Bernanke is a dove, but does not like to telegraph views, only leak $$ Jun 07, 2012
French, Greek Unemployment Rise http://t.co/vKfvrwWY Highest jobless rate in France in a decade and a record unemployment rate in Greece $$ Jun 07, 2012
Hollande Deficit Vow Lures Investors to French Debt http://t.co/25CZUhHS I’ll believe it when I c it. What taxes rise & programs cut? $$ Jun 07, 2012
Merkel Allies Signal Progress on Fund to Pool Debts http://t.co/p8UGaOXr Don’t see how this works economically or politically long-term $$ Jun 07, 2012
RE: @bloombergview Bloomberg’s regulation fails one basic test: “I’d like two sodas, please.”? Very dumb, and he went? http://t.co/GphkCClc Jun 07, 2012

?? Student Loans Held by the Federal Government http://t.co/IsW6eywX When the govt enters a lending business, it typically creates a bubble $$ Jun 06, 2012

?? Obama’s Debt Boom http://t.co/OsPykK3q $$ borrowed & misspent produces no growth; same 4 QE which inflates goods and Hi-Qual asset prices $$ Jun 06, 2012

Wisconsin Voters Head to Polls in Recall Election http://t.co/9pNJvCsL <2% of WI voters uncertain. Most divisive election I can recall.. $$ Jun 05, 2012
Recall Stirs Passion in a Purple State http://t.co/2NsLiisy I think Wisconsin would b more civil if it weren’t recall election $$ #civilwar Jun 04, 2012

Energy

Oil Heads for Longest Weekly Losing Streak in 13 Years http://t.co/Gx0wPKr4 After oil bubble popped in 2008, we went down to $50, not now $$ Jun 09, 2012
Oil Tankers Squeezed as Rates Drop to Lowest Since ?97 http://t.co/dXFAzMw4 Could go lower; what will the bondholders do w/the boats? $$ 😀 Jun 05, 2012
Romney Aversion to Wind-Power Aid Alienating Republicans http://t.co/V7yp3lHE Good. End *all* energy subsidies, especially ethanol. $$ Jun 05, 2012

Bond Markets

Investors Bail on Junk Bonds http://t.co/Iwk1URn2 This is still early, & we lack notable defaults necessary to have a full-scale panic $$ Jun 09, 2012
A Safe Haven in ‘Cat’ Bonds http://t.co/MbXh1KLB Every fixed income subclass eventually underwrites crud in a mania; still waiting here $$ Jun 07, 2012
MF Global and the Risks Looming in the Repo Market http://t.co/AD8XXOGh Should have been a red flag to see Corzine change the core biz $$ Jun 07, 2012
The TIPS curve has become inverted http://t.co/DN0ZHsbY CPI inflation expectation falling in near term; may justify some dumb move by Fed $$ Jun 06, 2012
Thought experiment: What if PIMCO Hi Inc $PHK 70% prem2NAV did a rights offering giving each share a tradable right 2 buy a share @ par? $$ Jun 05, 2012
Quirks of High-Yield ETFs http://t.co/voVBkmvr Good article; I will follow up w/a piece comparing time- & $$ -weighted returns of bond ETFs Jun 04, 2012
In all of the bond furor of last week, anyone else notice that the real yield on the on-the-run 20-yr TIPS went negative? I didn’t either $$ Jun 04, 2012

Eurozone

I like to think that I am pretty imaginative, so, wow! $$ RT @betandbetter: @AlephBlog and the reality of France is worst than u CAN imagine Jun 07, 2012
The rise and fall of European banking http://t.co/94t9dzk2 Lenders retreat within own borders to minimize losses in breakup scenario $$ Jun 07, 2012
4 reasons why the euro will survive http://t.co/PcDpsERP Too painful, Votersr risk-averse, euro is innovative?? & ECB can handle troubles $$ Jun 07, 2012
Spanish, French Borrowing Costs Diverge http://t.co/X2XfTUem Spain had to cut the size of its auction to make it succeed $$ Jun 07, 2012
My Self-Esteem a Mess Is Refrain for Spain?s Unemployed http://t.co/sV7l8Gbq When the economy turns down many other problems occur $$ Jun 07, 2012
Germany Grapples With Role in Rescue http://t.co/dvkQXL38 Will the rest of Eurozone embrace the idea of a Federal Europe? Open question. $$ Jun 06, 2012
Maybe the solution is to send unemployed Greek, Portugese, Spanish, Italian & Irish workers to Germany, there is low unemployment there $$ Jun 06, 2012
“It has brought untold suffering to Europe” http://t.co/JDvp91eq Interview w/Felix Zuluaf, translated from German, regarding the Eurozone $$ Jun 05, 2012
@JackHBarnes @japhychron Maybe define a euro as exchangeable into fixed %s of subcurrencies, and let the subcurrencies trade; learn new wgts Jun 05, 2012
RT @JackHBarnes: How hard would it be to relaunch sub currencys at the N.C.B level, but have a quote vs the Euro as a whole? Dynamic int … Jun 05, 2012
Spain Warns Market Access Being Shut http://t.co/tkr6No7s Spain auctions 2-yr, 4-yr & 10-yr bonds on 6/7, which will tell us a lot. $$ Jun 05, 2012
Germany refuses Eurobonds: http://t.co/RLqELufX Germany would accept eurobonds if full fiscal/banking unification http://t.co/qXcrvsXh $$ Jun 04, 2012
Portugal Props Up Three Banks http://t.co/xJOpX1yP The Eurozone must either centralize, or break into smaller compeatible units $$ Jun 04, 2012

Companies

Intel Can?t Break TV?s Bundles http://t.co/4RUtMAPi Difficult 2encourage a la carte pricing for television shows; few incentives FD: + $INTC Jun 08, 2012
Pushing the PRAM: when chips just can’t get any smaller http://t.co/G7Tcd6hg Fascinating technologies 4 future shrinkage of storage & NAND $$ Jun 08, 2012
Could value investors be the reason a stock’s cheap? http://t.co/xAMVjAqx No, cheap stock is y value investors show; we don’t make it cheap Jun 08, 2012
Big Customers Are Taking Longer to Pay http://t.co/7JS1Nov0 Causes everyone to seek longer financing terms; not a good sign $$ Jun 07, 2012
The (very) bullish case for the American auto market http://t.co/ukPi2GUj Premature to forecast a boom here; credit is not that good $$ Jun 05, 2012
JPMorgan Faces $4.2B Trading Loss, ISI Forecasts http://t.co/0FPsl5bR $JPM looks cheap here, but is it safe here? Almost tempted 2 buy $$ Jun 05, 2012
Hedges Gone Awry Set Back Chesapeake http://t.co/Kw7gUpOD How many times does a hedger lose $$ speculating? Usually once, the last time 😉 Jun 04, 2012

Monetary Policy

Rely on BB2provide dovish $$ policy RT @cabaum1 Bernanke says nothing without committing to anything http://t.co/qCV9J5SF via @BloombergView Jun 07, 2012
Why Everyone Still Wants Dollars http://t.co/9QbDkaxl $$ hegemony will stop when neomercantilistic nations stop subsidizing exporters via FX Jun 07, 2012
Pimco?s Home-Loan Wager Seen as Prescient on QE3 Odds http://t.co/gr8BmHOr Key Q: if QE3, what will the Fed buy? Tsys, Agys, Mtges, other $$ Jun 07, 2012
@ampressman Monetary policy has not been run properly since Volcker left. $$ Jun 06, 2012
RE: @bloombergview Where is your proof that QE works? A stupid idea thought up by ivory tower economists. Rubbish. http://t.co/Wgzpx01I Jun 06, 2012
@GaelicTorus Sorry, disagree. Fiat monetary policy is constrained by the total resources/productivity of an economy @ a given price level $$ Jun 06, 2012
Bill Gross: Global monetary system may be fatally flawed http://t.co/Hm2kIEFD System doesn’t work well if savers don’t earn more than CPI $$ Jun 06, 2012

Economics

Behind every model is an analogy; behind every datum is history; marry the 2, you have a story. Math obscures, doesn’t reveal econ truth $$ Jun 07, 2012
Wrong: What If Speed Traders Competed on Price? http://t.co/jZm0dlOs Moves to lower the tick size have always led to more games, not less $$ Jun 07, 2012
Are Economics PhDs Learning the Wrong Thing? http://t.co/oT5oH9eK If more Economics depts taught philosophy & history would help fix Econ $$ Jun 07, 2012

Resources

Gold Bugs Defy Bear-Market Threat With Soros Buying http://t.co/Q3g6xOwS Gold does well when real interest rates fall, & vice-versa $$ Jun 06, 2012
Exhausting the Earth’s Resources? Not So Fast http://t.co/OZlc0GS5 It will b a long time b4 mining asteroids will b economic. $$ Jun 05, 2012
Next Frontier: Mining the Ocean Floor http://t.co/o7DAp8Oi After years of discussing it, it is finally happening, w/Glencore buying ores $$ Jun 05, 2012

Miscellaneous

Wall Street to Muppets: Thanks for the Love http://t.co/d0KLKPYF Blunt opening: “The dumb money is back.” Equity mutual funds get $$ inflows Jun 06, 2012
10 Things Law Schools Won’t Tell You http://t.co/l5NcIHBd Most of it boils down to oversupply, high training costs, low quality, job lies $$ Jun 06, 2012
Bristol Immune Drug Success in Cancer May Spur Industry Race http://t.co/kivy3JgW Promising therapy awakens immune system 2fight cancer $$ Jun 05, 2012
NRA-Backed Law Spells Out When Indianans May Open Fire on Police http://t.co/8v922BB2 Law will likely not last long; few corrupt cops $$ Jun 05, 2012
AIG Chief Sees Retirement Age as High as 80 After Crisis http://t.co/VF0thYCp A bit of a tin ear as he relaxes at his Croatian villa $$ Jun 04, 2012
IPads on a Plane Let Scoot Save Fuel by Shedding TV Tons http://t.co/50POpeO2 Never realized the entertainment system weighed so much $$ Jun 04, 2012
Q: What Is New and Scary? A: The Revised GMAT http://t.co/Z0LR8dq4 Nu requires test-takers2read & sort complex charts & analyze much data $$ Jun 04, 2012
Iran and Israel Can Agree on This: Rita Jahanforuz Totally Rocks http://t.co/83HxNwsx Jewish Star Remakes Persian Oldies; Fans in Tehran $$ Jun 04, 2012
European Project Trips China Builder http://t.co/7jtu1Q5M Long tale of woe in Poland from accepting lowball bid from Chinese construction co Jun 04, 2012
Good time had by all $$ MT @interfluidity: a mexican lunch in ellicott city with @interfluidity makes for a delightful afternoon. Jun 04, 2012

Strong Hands

Posted on 8 June 2012 by David Merkel

When I started writing this blog, my Major Article List was a big thing to me.? I wrote some pretty good things at RealMoney.com, and I wanted to have a record of the best of that.? I only wish I had done the same thing for my Columnist Conversation comments, because many of them were far better than most articles at RealMoney.? Give TST credit, they would frequently take my best comments, and turn them into posts, and pay me for them.? They did not have to do that.

But, I would love to republish many of my best timeless posts here.? I offer a deal to RealMoney: In exchange for being able to republish old posts and comments of mine here, I will offer you new posts of mine, or the best of my old posts at my blog, so long as they are timeless.

Regardless, when I was at RealMoney, I wrote a series that dealt with the motives of various investors as it stemmed from their balance sheets.? For those that have access to RealMoney, here are the articles (note: I wrote different titles than what was used):

Managing Liability Affects Stocks, Pt. 1
Separating Weak Holders From the Strong
Get to Know the Holders? Hands, Part 1
Get to Know the Holders? Hands, Part 2

The main idea is this: There are a wide variety of investors, and they have differing abilities to hold assets.? Why should investors have differing abilities to hold assets?? And why should that matter?

When will you need the cash?? That should be a central question for every investment adviser, dictating asset allocation.? This is basic asset-liability management.? This gets neglected in investing more often than most imagine.

Mutual funds know that money will be pulled if they underperform.? This forces them to be more short-term in investing.? An exception can be closed-end funds, since they have captive capital, so long as the discount to NAV doesn’t get too great, and they attract activist investors.
Same thing for hedge funds; they tend to be volatility-averse on average; and their investors may be technically more sophisticated than mutual fund investors, in practice, they make the same mistake of chasing performance.
Average individual investors chase trends; that is very short-term.
ETPs react to the market.? Indexed investing amplifies a market as it grows, and muffles a market as it shrinks.
Endowments can resist short-term underperformance for a few years, then the trustees get antsy.
Same thing for Defined Benefit [DB] pension plans, but more so.
Most banks and insurers have short liability structures so they can’t allocate that much to long duration assets like stocks and esoteric illiquid assets.? Life insurers could invest there, but the risk-based capital regulations make it unworkable.? That leaves P&C insurers writing long-tailed business; many of them are value investors, and use the long-duration liabilities (as Buffett calls it “float”) to invest in a wide number of cheap assets where it may take a while for value to be realized.
Trusts, limited partnerships, etc., hinge on how much leverage they employ and how often the terms of the leverage shift, as well as any limitations on when capital must be distributed.? Sometimes that’s not obvious, as in the failure of many mortgage REITs when the repo haircuts got boosted in the midst of the financial crisis, leading to forced selling, as they did not have enough capital to post as margin against all the assets that they held.? The forced selling led to falling prices for mortgages, which led to further increases in the repo haircut, which created a self-reinforcing spiral until a new class of investors held many of the mortgages, and many mortgage REITs were bankrupt or broken.

With respect to institutional investors, my experience is the more of the investment is done internally, the more patient the capital tends to be.? Perhaps that’s the illusion of control, but I tend to think that investors have more trust in their own reasoning than in the reasoning of external managers.

The longer the time that you can invest and wait for returns, on average, the more aggressive you can be in investing.? The investor that can “Buy-and-hold” can take on the most difficult situations if there is a sufficient discount in the price to make the wait worthwhile, and avenues that allow for change to be encouraged.

So, when I think of how my investment is affected by those that invest alongside me, I divide them up this way:

Strong Hands — long liability structures, excess capital, experienced, patient, never compelled to do anything; they can live with short-term losses.
Weak Hands — no balance sheet or short liability structures, have to make a certain return each year, less experience, leveraged; they can’t live with short-term losses.

When I go through 13F filings, I note the quirkiness of the assets held, and often held for a long time.? Almost all of the 13Fs that I track I would classify as strong hands.? They don’t care about the next quarter; they are thinking about the next 3-5 years.? They care about the growing underlying value of the businesses; they wouldn’t care if stock market was only open one day per month.? Some, like Seth Klarman, do little on the long side when opportunities are not compelling.? Like underwriters at well-run insurers, when an insurance market is nuts, you stop writing business, and spend time improving your skills.

So for my own investing this past period after I finished my 13F analysis, I took the companies that had:

The 100 largest increases in my 13F investors
The 100 largest increases in cash invested as a fraction of market cap
The 100 with the greatest number of my 13F investors
and the 100 largest positions as a fraction of market cap,

and put them in as competitors in my ranking system, against my current portfolio.? Because of redundancy, it was about 320 companies in all.? I think it was a good exercise, because it made me think about a bunch of companies that I would otherwise never consider.? Anyway, the process is complete, and the equity portfolios have some promising new names with good prospects, and fellow shareholders that are for the most part “strong hands.”

On the Facebook IPO

Posted on 7 June 2012 by David Merkel

If you are a manager of corporate bonds, you get to learn the speculation cycle.? New IPOs may close in weeks if things are cold, and close in minutes if things are hot.

When things are hot in bonds, eventually the syndicate (“Wall Street”) decides that it is time to test the bullishness of buyers.? At such a time, they extend the time of the offering, and either lower the yield spread (raise the price), or increase the size of the deal.

When I was a corporate bond manager, if a deal was upsized by a large amount during a period while the market was hot, I would not buy.? Tough decision, but cutting against the grain is usually a good thing.? My brokers marveled that I was not participating in these large “benchmark” deals.? More often then not, they failed, and I smiled on the sidelines.? The brokers “stuffed” the ignorant buy-side that was all too willing to take risk.? Typically after that, corporate investors were more careful.

I don’t know the right value for Facebook, and I don’t think anyone does.? Too much of the value depends on future decisions, competitor actions, and economic conditions.? Valuing stocks where the positive cash flows are far out into the future is tough, should the cash flows materialize.

The last IPO I bought was Assurant [AIZ] where I was buying the company for <90% of book value,? and 9x earnings.? I’m a value buyer, so I buy companies where prospects are not fairly calculated by the market, but I avoid new issues where the price is outlandish.

Look, Wall Street works on two levels: distribute paper at a slight discount price, until buyers take it for granted and bid aggressively, leading to a mini-crisis, like it is for Facebook now.

Did Wall Street get the best price for Facebook’s current shareholders at the IPO? Probably yes.

Was that the right price? For recent investors, the answer is no.? But in any IPO process there were a wide number of ways to protect themselves:

1) Don’t participate in IPOs. When general valuations in the market? are high, IPO valuations are higher.

2) Avoid buying IPOs in hot sectors, they are often overvalued.? Only go for IPOs in sectors no one cares about, like insurance, where I offer you Assurant [AIZ} and Safety Insurance [SAFT], among others.? (I don’t suppose it helps you to learn that insurers return better than almost any other industry?? Didn’t think so… because it is a boring yet complicated business.? Even Buffett said about Assurant — “too complicated,” and he is one of the greatest insurance executives of all time.)

3) Avoid IPOs where the deal size is upsized.? When a deal is upsized that often means the underwriters are taking advantage of demand, which diminishes the likelihood of any short-term outperformance.? For this point, in the bond market, I would cut my bid, unless I really liked the credit, together with my analyst.

4) Avoid IPOs where the price talk is raised, which also limits the likelihood of any short-term outperformance.? Same thing as a bond manager, I would drop out out if the new yield did not meet my yield needs.

5) Buy IPOs when they are forced to occur and are hated, like my experience with the Prudential “C” bonds, and most mutual insurer conversions.? IPOs are like the market on steroids, you want to avoid them when things a hot, but they are interesting when things are cold.? After all, who wants to IPO when things are cold?? There are occasional situations where legal matters force a company to go public, and that can be an interesting time to be an opportunistic buyer.

6) Avid IPOs where the valuation is stretched.? It may be a great business concept, but can it grow into that fancy valuation?? Unlike Dr. Damodaran, I don’t go in for fancy reasoning that justifies high valuations.? Most investors are better off avoiding high valuation situations, and focus on more down-to-earth types of businesses.? (My recent purchases include: Crude Oil Refining & Transport, Integrated Oil Major, two basic technology companies with forward P/Es under 10, a specialty retailer that is the strongest in its category, and two insurers, one that is a holding company, and one that is a hedge fund.)

7) Finally, avoid IPOs where those that know nothing about investing are interested.? Facebook is a perfect example here, with a large number of users who love the company, but have little idea of how profits are made, or how they will grow.

IPOs are tough, I think tougher than ordinary investing, so? avoid them unless you have an edge that justifies participation.? Be tough on yourself here — what is your edge?? Share it with a friend who has expertise, and see if he agrees with you.? This is not easy stuff, it only seems easy when the market is running hot, and that is a bad place to be when it goes cold.

Full disclosure: long AIZ, for me and clients

Aim for the Middle

Posted on 1 June 2012 by David Merkel

“Ya gotta take more risk to get more return.”? That’s the street language version of what is commonly trotted out, but it is only half true.

The truth is that moderate risk taking outperforms taking no risk or taking high risks.? This is true in bonds.? BBB bonds return best of all — they are the middle of credit risk.? There is no native group that wants to own them exclusively.? Higher-rated bonds do next best, and junk bonds do worse still on average.

Think of it this way: Those that invest in cash get a low return.? But those that invest in high-risk growth companies also get a low return, on average.? Those that take moderate risk have the best potential of making money.? That is why I focus on investors that take moderate risk relative to their peers.

Moderate risk taking does best on average, at least as far as public capital goes.?? Private capital may have more control and expertise, and can take more risk as a result.? In general, the less control and expertise, the less risk should be taken. With private equity, this is one of the tough truths: Private capital can change matters if it is large enough. Then it has to deal with changing the management of the business.? Public equity does not get there, except in rare cases.

That is a major reason why moderate risk-taking wins on average. In one sense, it is why low volatility investing and value investing work.? You are putting your money at risk, but you are doing so with a margin of safety.? Part of making money is survival; if you don’t survive round one, you won’t make money in round two and the rounds that follow.

That’s why swinging for the fences with stocks doesn’t work.? You get too many strikeouts, and few home runs.? Personally, I try to be a singles hitter in investing.? It’s doable, both intellectually and financially.

This applies to asset allocation as well. 60/40 stocks/bonds does as well as 100% stocks, and with less volatility.? 80/20 stocks/bonds did best the last time I tested — perhaps the true ratio is 70/30 given the outperformance of bonds over stocks over the last decade, but I am reluctant to think so because over the long haul, the best a bond can do is pay its coupon and return the principal.? Even in the case of premium calls, you get your principal back at what is typically an unfavorable time to reinvest.

Another reason to aim for the middle is that you will not get jolted hard during downdrafts, and be tempted to trade out at the maximum point of pain, or, buy in near the peak when the bulls are running their last lap.? A lot of money gets lost that way.

It’s also a reason to hang onto some slack cash or other safe assets, like high-quality noncallable bonds lacking weird features.? It may diminish returns in the short run, but it allows you to stay in the game of investing.? Too many people give up at the wrong time — many friends that I had that gave up on stocks in late 2002 – early 2003, deciding to focus on “what they knew”: residential real estate.? Another group gave up on stocks late 2008 – early 2009, with no place to go with their cash.

Realistic expectations are needed as well.? If you earn more than the growth rate of GDP plus a few percent, count yourself blessed and realize that it is very hard to do that consistently over the long-term.

So aim for the middle: take moderate risks, diversify, be realistic, and adjust your portfolio slowly as conditions change.? Then you can stay in the game, and compound your returns.

391 Auctions

Posted on 26 May 201227 May 2012 by David Merkel

Jason Zweig of the Wall Street Journal has an interesting piece up called Could Computers Protect the Market From Computers?? I appreciate Jason, he writes a lot of intelligent stuff, and had the guts to revise one of my favorite books, “The Intelligent Investor.”

We are talking about positive feedback loops, where computers amplify the actions of humans demanding action now.? Computers, for all of their strengths, are rules based, and we the humans feed them the rules, or the information that allows them to react to data as they emerge.? The rules may be very complex, but they are rules, and do not allow for humans to modify the computer’s reaction to the market on-the-fly.

I’m skeptical that we can stop unusual things from happening resulting from computers trading rapidly by having other computers monitor it.? First, stocks are volatile, and news can break that leads to significant rallies/declines.? Second, part of the difficulty from the “flash crash” was computers getting out of sync with one another.? We can’t guarantee that the regulatory computers might not fall behind the trading computers, and what might happen if the “right” action to slow trading emerges slowly.

Third, one has to recognize that you should only have regulations that are understood easily by participants, and accepted, or else the rules will face a lot of lobbying pushback.

I think that there is little to no gain to the market as a whole from sub-second trading speeds.? I think we could slow down the market, and force a more rational market than what we currently have, by limiting the ability to cancel orders — all orders must be good for at least one second.

Markets need good rules and structure to work well.? Rather than having shadowy computer overlords, which only academics could like, craft a rule that says, “One auction per second.”? Or create a central order book and eliminate alternative venues for execution.? The cost listed in the article is cheap.? I’m agnostic on what the best solution is, but to me, the best solution involves slowing things down, so that information does not cause cascades off of short-term signals.

Even simple rules like, “Stop trading for any company that has dropped/risen by more than 5% on the day for 30 minutes,” would be preferable to any guidance from computers that is less clear.

Rather than using computers and complex reasoning, we need simple rules to slow things down, or…who cares, let errors happen.? I made money on the day of the “flash crash” by buying shares of a company that was solid but temporarily depressed.? Teach people not to use market orders or they could get harmed.

This is the market, after all, and if you are “bellying up to the bar,” you should be ready for the fact that you are outgunned.? You are likely not smarter than all of the resources being deployed against you by hedge funds, high frequency traders, etc.? Secondary markets in equities exist to provide flexibility to holders of the equities, most of whom hold their stocks every day, with only a small fraction trading.? Trading is a sideshow to value creation, which happens in the companies, not the exchanges.

Which makes me take step back and mention that Buffett wouldn’t care if the exchanges were closed for a year, because he buys solid companies.? Suppose for a moment, I had written an article called 391 Auctions, where I would suggest that the markets have one auction each minute, and that all orders must last until the end of the minute, with no cancellations.? (After I wrote, this I changed the article title, so I did do it.)

With 391 auctions per day, who couldn’t think that we were providing enough opportunity for price discovery each day?? Slow things down, and ignore those arguing for technical efficiency versus those arguing for rational markets that allow people to make reasonable decisions in real time.? One auction per minute?? Could work well — watch the bids and asks line up, once per minute.

Markets need structure to work well.? This could be one way of doing it; I am open to other ideas, but letting the computers attempt to do it opaquely seems like a loser to me.? Slowing things down seems like a winner, because secondary trading is a sideshow to the real value creation that happens inside the companies.

The Rules, Part XXXII

Posted on 25 May 201225 May 2012 by David Merkel

Dynamic hedging only has the potential of working on deep markets.

Arbitrage pricing can reveal proper prices in smaller less liquid markets if there are larger, more liquid markets to compare against.? The process cannot work in reverse, except by accident.

The recent case of JP Morgan’s hedging activities bring to light an observation that should be clear to all but isn’t.? Hedging only works when you are small relative to the markets in which you hedge.

Let’s consider tranched credit index default swaps.? We can create models where the prices of each tranche can be calculated given default frequency and severity.? But default is not a constant beast.? Defaults come in waves, and when incidence is high, so is severity of loss.? Vice-versa when incidence is low, leaving aside fraud.

We might have a good idea of where credit default should trade for a basket of corporate debtors “credits” so long as we look at the thing as a whole,? and don’t carve it up.? In general, a basket of borrowers is easier to predict than individual borrowers.

But the basket gets difficult when we split it up into first loss, second loss, third loss, etc. claims where different parties lose their capital at differing levels of total loss.? Yes, in theory, we can come up with prices.? We can even come up with hedge ratios? that show the theoretical tradeoff between tranches as losses increase or decrease, which might work, might, if you are a small player in that market.

Woe betide you, if you do anything too fancy, and you are big relative to the market.? Because you are big, you have affected the prices of the market.? Price relationships that were normal before you arrived have shifted and reflect your interests, which in the short-run makes your accounting look better.? As the bubble grows, those investing in the bubble look better.? But as the bubble expands, those that have invested in it find a wave of cash fighting against them, but it doesn’t matter, because momentum investors are still buying.

At the end, the large investor amid the bubble finds himself stranded.? The market knows his positions, and he can’t make trades to extricate himself, because the terms are onerous.

Look, I used to trade small-issue lesser-known bonds.? I only bought stuff that I knew would be money-good, i.e. pay off.? In that case, you have the option of speculating when spreads are wide, and selling when they get tight.? But if you do that with bonds that you don’t know whether they will likely pay in full, the ability to hedge is meaningless, because your hedge could break in a default.

And so it was for JP Morgan.? When you get too big relative to the market, it had better be when you are the buyer or seller of last resort, and you are catching the turn.? But in normal markets, bigs are pigs, and are likely to be slaughtered.

It doesn’t matter what your model says is the right tradeoff if you are too big relative to the market.? Your own actions have poisoned the signals that your models receive.

Amaranth fell into this same bucket, with a talented energy trader who understood how the market generally worked.? As his success grew, so did his size, and he didn’t realize that the size of the fund was distorting market prices.? At the end there was one unlikely scenario that was unhedged, and that was the scenario that occurred, and the results led to the collapse of the fund.

If Amaranth had been smaller they could have traded out of it.? At their size, they were “elephants in an elevator.”

Size matters, and for investment purposes, smaller is better.? And for the most part, less complex is better too.? Don’t demand liquidity from markets, or you will lose.? If liquidity comes to your door, and it seems to be a good deal, wave it in.

High Profits

Posted on 23 May 2012 by David Merkel

Dr. Jeff Miller wrote an interesting question the other day:

“Why does a Shiller disciple care about profit margins?“

Now, I am not a disciple of Dr. Shiller, I disagree with him on many issues, Trills for an example.? When Shiller talks, odds are 50-50 that I agree, which makes him interesting to me, unlike Bernanke and Krugman who I almost always disagree with, and James Grant and Caroline Baum, who I almost always agree with.? Someone who agrees with me and disagrees with me equally is interesting, because he makes me think harder.

And with his cyclically-adjusted price-earnings [CAPE] ratio, I was a reluctant partial convert.? Consider this piece.

There are a couple ways to answer the question:

Most stocks are cheap on a forward P/E basis, less so on a trailing P/E basis, and still less so on a P/B or P/S basis.? The difference between P/E and P/S is profit margin — E/S.
Consider the critiques from Dr. John Hussman, who awaits the reset that will come if/when profit margins get competed down.
My answer: we should care about it a little, for the above reasons.? But labor is no longer scarce, which leads to higher profit margins for a time while wages are depressed.

My view is that profit margins will not revert to mean for many years, until the increase in capitalist labor is absorbed.? Until then economic results will be poor those that labor on the low end — you have got a lot of new competition.

As I wrote earlier:

A reason to consider the validity of the CAPE is twofold: it has a huge similarity to Tobin’s Q-ratio, which compares market capitalization to replacement cost.? It also has a similarity to Michael Alexander?s Price-to-Resources ratio, out of which the book makes a lot (link here for an example).? It?s a Price-to-Adjusted Book value ratio as I see it.

The CAPE has value as a proxy.? It mirrors overall market value pretty well, like other fundamental ratios.

But I don’t agree, at least in part because profit margins should remain high, until readily obtainable labor is less scarce.? Getting there could be a long time.? Profit margins could remain high for a long time as a result, leaving? markets in a limbo zone, where it treads water as underlying value builds.

So profit margins should remain high for now.? Once labor is scarce globally,? and companies must pay more to get more or better quality labor, then will profit margins come under stress.