Category: Value Investing

Book Review: The Facebook IPO Primer

Book Review: The Facebook IPO Primer

Posted on by David Merkel

There is more money to be lost than made in most controversial IPOs, on average. Don’t get me wrong, this is a good book, and the author knows what she is talking about, but whether one should buy Facebook in its IPO next month is a huge open question, and I would encourage you to read this book to think through the problem.

If you read the book, you will get a healthy dose of skepticism, mixed with the idea that many large IPOs in tech have been successful, like Google.? The main idea is that you have to do due diligence.? All snowflakes have six corners, but they are all different.

The book gives you five different ways to value Facebook, and those methods are all over the map, as they should be for a company where the economics are yet to be determined.? At least it is profitable.

The range of valuation gives everyone something to hang onto, but the thought process should force everyone to think about how Facebook will monetize all of their users.? Will the users behave in a way that allows Facebook to make money off them?? So far, yes, but the future is far more volatile than I can imagine.

In general, I would advise readers to avoid IPOs.? Most people lose money in buying them on the secondary markets.? Better you should buy stock in less flashy businesses like utilities, insurance, and energy stocks.? You will make more money there — businesses with a high earnings yield tend to do better than other stocks, and Facebook does not make it there, for now.? Buying Facebook implies a company that will grow far more rapidly than most, and far a long time, which is not common.

If you are thinking about buying shares of Facebook, spend five bucks or so, and get this book.? It’s less than a brokerage commission, and worth more than most in educating you about the value of Facebook.

Quibbles

None; this is a good book.? What matters most is how you think about it.

Who would benefit from this book: If you want to buy the Facebook IPO, buy this book and learn something.? Be aware before you buy, or be dissuaded before you do nothing.? If you want to, you can buy the book here: The Facebook IPO Primer.

Full disclosure: The publisher asked if I wanted to read the book electronically.? I said ?yes? and I downloaded it and read it.

If you enter Amazon through my site, and you buy anything, I get a small commission.? This is my main source of blog revenue.? I prefer this to a ?tip jar? because I want you to get something you want, rather than merely giving me a tip.? Book reviews take time, particularly with the reading, which most book reviewers don?t do in full, and I typically do. (When I don?t, I mention that I scanned the book.? Also, I never use the data that the PR flacks send out.)

Most people buying at Amazon do not enter via a referring website.? Thus Amazon builds an extra 1-3% into the prices to all buyers to compensate for the commissions given to the minority that come through referring sites.? Whether you buy at Amazon directly or enter via my site, your prices don?t change.

Tickers for the Current Rebalancing

Tickers for the Current Rebalancing

Posted on by David Merkel

When I look at what stocks to switch to as I manage my assets, and those of my clients, I look for assets that may be more valuable than the market currently believes.? Most of that involves looking at industries and valuations, but that has led me to the following group of tickers:

ABC ACCL ADTN AET AKAM ALTR AMKR APA ARB ARKR ARO ARRS ARTNA AVY BBY BDX BEAM BGS BHP BIDU BLT BSX BX BZ C CACH CAG CAH CBG CCH CELL CF CFN CLF CMVT CNQR CODI COV CP CPB CPE CPSI CREE CSCO CSTR CSWC CTRP CZZ DD DFS DGX DHT DLPH DLX DRIV DVN DVR EBAY EEP EFC EFX EPAX ERIC FBHS FCX FDP FORR FSLR FTE FUJIY GD GKK GLDD GLW GNRC GOOG GT GTAT HAL HII HNZ HOGS HON HRC HWCC IACI IART IN IRE ISIL ITRI ITT IVC JBL JCI JCP JNPR K KFN KKR KLAC KNM KOP KRA LDR LIFE LLTC LMCA LOW LPS LSI LVLT MASI MCHP MCK MDCI MDRX MKC MOS MPC MRVL MS MSI MTG MWW NAV NE NFG NFLX NILE NLY NOK NTGR NTI NTIC NTK NTRI NUVA NVDA ONNN PC PCLN PHG PLCM PTNR QCOR QGEN QLGC QSII RAH RIMM RMD RUK SEMG SGX SIGI SLM SNE SNX SOHU SPLS SPN STE STJ STM STX SWKS SXT T TFX THOR TNDM TNS TRGT TRIP TSM TSRA TXN UTHR VAR VFC VOLC VPRT VRX VZ WBMD WBSN WDC WMB WMGI WNR WPI WST XRAY YHOO ZINC

Other ideas are solicited, but I think these companies as a group? will outperform over the next three years.

Book Review: The Most Important Thing Illuminated

Book Review: The Most Important Thing Illuminated

Posted on by David Merkel

I previously reviewed The Most Important Thing.? Great book, but can a great book be made better?? Yes, but only by a little bit.

The illumination of this book comes from comments from Christopher Davis, Joel Greenblatt, Paul Johnson and Seth Klarman, an estimable bunch of investors and investment thinkers.? Howard Marks offers a few more comments as well.

None of the comments are bad, but also, none of them disagree with Howard Marks.? Then again, I didn’t find anything to disagree with in the original book, so maybe that’s not a negative.

Many of the comments are brief, and most of them serve to intensify what Howard Marks wrote, e.g:

  • This is a really important point.
  • This is an excellent summary of the idea.

Relatively few of the comments really expand the discussion, so here is my advice for you: if you already own The Most Important Thing, you don’t need this.? Borrow it at your library if you must.? If you don’t own it, you will get a slightly richer experience with this book than the original.

I recommend this book to all who aspire after value investing.

Quibbles

Again none.

Who would benefit from this book: All value investors, and those who want to be value investors can benefit from this book.? Those that want to understand how the economy really works will benefit as well.? If you want to, you can buy it here: The Most Important Thing Illuminated.

Full disclosure: The publisher asked if I wanted to read the book electronically.? I said ?yes? and I downloaded it and read it.

If you enter Amazon through my site, and you buy anything, I get a small commission.? This is my main source of blog revenue.? I prefer this to a ?tip jar? because I want you to get something you want, rather than merely giving me a tip.? Book reviews take time, particularly with the reading, which most book reviewers don?t do in full, and I typically do. (When I don?t, I mention that I scanned the book.? Also, I never use the data that the PR flacks send out.)

Most people buying at Amazon do not enter via a referring website.? Thus Amazon builds an extra 1-3% into the prices to all buyers to compensate for the commissions given to the minority that come through referring sites.? Whether you buy at Amazon directly or enter via my site, your prices don?t change.

A Brief Note on Earnings Yields (2)

A Brief Note on Earnings Yields (2)

Posted on by David Merkel

My last post on this focused on trailing earnings.? Trailing earnings have the advantage of being objective, but analysts try to estimate the future.? To some degree they succeed, and that becomes the bar by which we measure the progress of companies.

Now fewer companies have analysts following them, and the database that I use is not as reliable on earnings estimates for foreign companies trading on US exchanges.? The following table covers a huge percentage (98%+) of the market cap of domestic stocks trading in the US.

Definitions:

  • FE Yield: forward earnings yield for the next full 12 fiscal months.
  • E Yield: trailing earnings yield for the last twelve months.
  • D Yield: dividend yield given the current price.
  • F Payout %: what percentage of the next fiscal year’s earnings is comprised by dividends.
  • E Growth: how much do the estimated earnings of the next fiscal year increase over the earnings of the last 12 months.

 

Industry FE Yield E Yield D Yield F Payout % E growth
0906 – Broadcasting & Cable TV

28.27%

5.85%

1.47%

5%

384%
0436 – Tires

21.00%

15.81%

0.72%

3%

33%
1106 – Airline

19.29%

1.80%

0.08%

0%

971%
0709 – Insurance (Life)

14.46%

13.36%

1.77%

12%

8%
0412 – Auto & Truck Manufacturers

14.11%

26.47%

0.57%

4%

-47%
0966 – Retail (Technology)

14.05%

-8.68%

2.33%

17%

-262%
0724 – Money Center Banks

12.42%

9.33%

1.41%

11%

33%
1027 – Office Equipment

12.30%

10.85%

2.55%

21%

13%
0124 – Metal Mining

12.02%

11.23%

4.18%

35%

7%
0606 – Oil & Gas – Integrated

11.22%

11.04%

2.39%

21%

2%
1015 – Computer Peripherals

11.10%

9.27%

0.21%

2%

20%
0706 – Insurance (Accident & Health)

11.06%

9.11%

1.22%

11%

21%
0509 – Crops

11.05%

9.06%

1.23%

11%

22%
0930 – Printing Services

11.04%

2.80%

4.37%

40%

295%
0121 – Iron & Steel

10.73%

3.33%

2.48%

23%

222%
0809 – Major Drugs

10.49%

5.80%

3.60%

34%

81%
0118 – Gold & Silver

10.46%

1.78%

1.53%

15%

487%
0518 – Office Supplies

10.40%

8.42%

2.51%

24%

24%
0133 – Paper & Paper Products

9.99%

8.15%

2.19%

22%

23%
0206 – Construction & Agricultural Machinery

9.70%

7.02%

1.56%

16%

38%
0730 – S&Ls/Savings Banks

9.57%

2.35%

1.18%

12%

308%
0106 – Chemicals – Plastics and Rubbers

9.51%

7.13%

2.04%

21%

33%
0727 – Regional Banks

9.46%

7.27%

1.57%

17%

30%
0415 – Auto & Truck Parts

9.45%

7.75%

1.38%

15%

22%
0603 – Coal

9.33%

8.55%

2.95%

32%

9%
0609 – Oil & Gas Operations

9.29%

6.98%

1.48%

16%

33%
1024 – Electronic Instruments & Controls

9.26%

7.48%

0.98%

11%

24%
0130 – Non-Metallic Mining

9.11%

8.66%

0.54%

6%

5%
1006 – Computer Hardware

8.92%

6.34%

0.14%

2%

41%
0203 – Aerospace and Defense

8.80%

8.37%

2.23%

25%

5%
0927 – Printing & Publishing

8.59%

3.34%

2.12%

25%

158%
1112 – Railroads

8.59%

6.78%

1.72%

20%

27%
1021 – Computer Storage Devices

8.57%

4.69%

0.00%

0%

83%
0109 – Containters & Packaging

8.50%

4.22%

1.57%

18%

102%
0612 – Oil Well Services & Equipment

8.40%

6.16%

1.62%

19%

36%
1033 – Semiconductors

8.28%

6.05%

1.70%

21%

37%
0409 – Audio & Video Equipment

8.22%

4.33%

0.30%

4%

90%
0969 – Schools

8.17%

10.21%

0.76%

9%

-20%
0951 – Retail (Department & Discount)

8.16%

5.72%

1.96%

24%

43%
0127 – Misc. Fabricated Products

8.08%

7.02%

1.00%

12%

15%
0703 – Consumer Financial Services

8.08%

6.05%

1.89%

23%

33%
0954 – Retail (Drugs)

8.08%

6.99%

1.52%

19%

16%
0218 – Misc. Capital Goods

7.99%

5.92%

1.12%

14%

35%
0715 – Insurance (Property & Casualty)

7.97%

8.27%

0.83%

10%

-4%
0921 – Motion Pictures

7.92%

7.80%

0.98%

12%

2%
0924 – Personal Services

7.81%

6.61%

1.98%

25%

18%
0718 – Investment Services

7.67%

4.89%

1.86%

24%

57%
0103 – Chemical Manufacturing

7.54%

5.92%

1.77%

23%

27%
0209 – Construction – Supplies and Fixtures

7.53%

4.47%

2.09%

28%

69%
0406 – Appliances & Tools

7.50%

5.34%

1.72%

23%

40%
0806 – Healthcare Facilities

7.49%

5.18%

0.10%

1%

45%
0503 – Beverages (Alcoholic)

7.45%

5.40%

1.52%

20%

38%
0512 – Fish/Livestock

7.45%

6.55%

2.17%

29%

14%
1018 – Computer Services

7.44%

4.48%

0.71%

10%

66%
1003 – Communications Equipment

7.39%

4.95%

1.06%

14%

49%
1103 – Air Courier

7.36%

5.54%

2.04%

28%

33%
0957 – Retail (Grocery)

7.35%

4.43%

1.85%

25%

66%
0221 – Mobile Homes & RVs

7.25%

5.78%

1.19%

16%

25%
0903 – Advertising

7.16%

6.26%

1.63%

23%

14%
1036 – Software & Programming

7.14%

5.24%

0.93%

13%

36%
0524 – Tobacco

7.08%

5.61%

3.90%

55%

26%
1030 – Scientific & Technical Instruments

7.04%

5.33%

1.35%

19%

32%
0433 – Textiles – Non-Apparel

7.00%

3.95%

0.09%

1%

77%
0812 – Medical Equipment & Supplies

6.98%

5.53%

1.02%

15%

26%
0430 – Recreational Products

6.97%

4.56%

1.49%

21%

53%
0803 – Biotechnology & Drugs

6.92%

4.31%

2.11%

30%

61%
1203 – Electric Utilities

6.85%

6.32%

3.89%

57%

8%
0515 – Food Processing

6.79%

4.26%

2.40%

35%

59%
0945 – Retail (Apparel)

6.76%

5.01%

1.23%

18%

35%
0421 – Furniture & Fixtures

6.72%

4.99%

1.73%

26%

35%
0963 – Retail (Specialty Non-Apparel)

6.61%

5.44%

0.75%

11%

21%
1115 – Trucking

6.56%

2.90%

0.61%

9%

126%
0960 – Retail (Home Improvement)

6.55%

4.81%

1.86%

28%

36%
0403 – Apparel/Accessories

6.55%

4.20%

0.77%

12%

56%
0939 – Rental & Leasing

6.55%

3.07%

0.53%

8%

113%
0112 – Fabricated Plastic & Rubber

6.53%

2.58%

0.74%

11%

153%
0712 – Insurance (Miscellaneous)

6.44%

5.00%

1.99%

31%

29%
0303 – Conglomerates

6.39%

1.87%

0.31%

5%

241%
0521 – Personal & Household Products

6.37%

5.03%

2.65%

42%

27%
0506 – Beverages (Non-Alcoholic)

6.32%

5.55%

2.61%

41%

14%
0909 – Business Services

6.29%

5.06%

1.13%

18%

24%
0936 – Recreational Activities

6.29%

4.56%

2.04%

32%

38%
0975 – Waste Management Services

6.22%

4.43%

2.15%

35%

40%
0972 – Security Systems & Services

6.19%

-1.48%

1.33%

21%

-519%
0942 – Restaurants

5.99%

4.98%

1.93%

32%

20%
0915 – Communications Services

5.98%

1.28%

4.73%

79%

368%
1209 – Water Utilities

5.86%

5.93%

3.19%

54%

-1%
0418 – Footwear

5.64%

4.51%

1.07%

19%

25%
1109 – Misc. Transportation

5.62%

4.04%

1.23%

22%

39%
0918 – Hotels & Motels

5.44%

3.77%

0.86%

16%

44%
0215 – Construction Services

5.08%

2.21%

1.10%

22%

130%
0424 – Jewelry & Silverware

5.01%

3.56%

0.04%

1%

41%
0427 – Photography

4.99%

1.72%

0.00%

0%

189%
1206 – Natural Gas Utilities

4.91%

3.56%

4.01%

82%

38%
1012 – Computer Networks

4.76%

0.87%

0.28%

6%

445%
1118 – Water Transportation

4.62%

-0.91%

0.75%

16%

-607%
0912 – Casinos & Gaming

4.57%

6.23%

1.14%

25%

-27%
0948 – Retail (Catalog & Mail Order)

3.91%

2.86%

0.01%

0%

37%
0933 – Real Estate Operations

3.03%

2.79%

4.01%

132%

9%
0115 – Forestry & Wood Products

2.14%

2.13%

2.60%

121%

1%
0212 – Construction – Raw Materials

2.11%

-1.93%

1.38%

65%

-209%

And here it is by sectors:

Sector FE Yield E Yield D Yield F Payout % E growth
06 – Energy

9.94%

8.60%

1.93%

22%

16%
07 – Financial

9.44%

7.21%

1.48%

21%

31%
04 – Consumer Cyclical

9.15%

10.61%

1.06%

10%

-14%
09 – Services

8.85%

4.32%

2.18%

50%

105%
01 – Basic Materials

8.67%

6.43%

2.02%

31%

35%
11 – Transportation

8.60%

4.99%

1.49%

30%

72%
Grand Average

8.39%

5.97%

1.81%

30%

41%
02 – Capital Goods

7.98%

6.14%

1.72%

28%

30%
10 – Technology

7.89%

5.53%

0.84%

15%

43%
08 – Health Care

7.38%

4.79%

1.88%

39%

54%
05 – Consumer Non-Cyclical

6.72%

5.15%

2.79%

54%

30%
03 – Conglomerates

6.39%

1.87%

0.31%

16%

241%
12 – Utilities

6.13%

5.30%

3.93%

74%

16%

Some of the percentages for earnings growth are inflated because the last 12 months include writeoffs, disappointments, etc., but forecasted earnings are typically optimistic, and anticipate no errors.

I would encourage you to view this where you look down the list, and say, “Wait. That doesn’t look right. That industry shouldn’t be that high/low relative to other industries.”? Then dig in and try to analyze for individual companies where there might be real advantage in the industries with good relative prospects.

Being forward-looking is an advantage if you have an ability to discern where industry trends are going to change; I may have that to some small degree, which is why when I invest, I look at trailing earnings and forward earnings.? Have one foot in reality, and the other foot in hope/analysis.? Things change less than expected, but things change.

As for me, I’m happy with my energy, insurance, and technology stocks, even if I haven’t been rewarded well over the last three months.? They are cheap, and have decent pricing power.? I stress patience, and so I hold after poor results, and I might increase the stakes.

Sorted Weekly Tweets

Sorted Weekly Tweets

Posted on by David Merkel

Valuations

 

  • High Yield Closed End Funds 68% over NAV, 3% avg premium. Loan Participation CEFs 40% over NAV, -1% avg discount. Conditions r medium hot $$ Apr 07, 2012
  • Why Stocks Look Too Pricey http://t.co/TWqZzGg3 Various Indicators Suggest the Market Is No Longer a Bargain, at best fairly valued $$ Apr 07, 2012
  • Contra: The alarming fall in syndicated lending http://t.co/hiGK9UoK With the high yield mkt running hot why not avoid restrictive banks $$ Apr 06, 2012
  • Not so new… Eddy Elfenbein said something similar 4 months ago: http://www.crossingwallstreet… http://t.co/mhIxGGwt Apr 04, 2012?(on inflation expectations driving stock prices in the short run)
  • Time to take some risk off the table http://t.co/sCuYxc6u Trends breaking globally, US looks okay. Humble Student has made good calls lately Apr 04, 2012
  • The Dangers of an Interventionist Fed http://t.co/thKsHa8J QE Removal: what happens to banks if Fed does & 2 inflation if Fed doesn’t $$ Apr 03, 2012
  • Junk Bonds ? Getting Risky for a New Reason? http://t.co/7bJ08JxT Record pace of junk issuance bodes ill 4 performance… 3 yrs from now. $$ Apr 03, 2012
  • Two Pros Weigh In on U.S. Stocks: Ben Inker’s Bearish View http://t.co/iJ7742P5 Katie Nixon’s Bull View http://t.co/Zn9jj503 $$ Apr 02, 2012
  • Eichengreen on Credit Bubbles http://t.co/bSs0MHPA Leading indicator of finl stress in em mkts: loan growth > 2x GDP growth 2 yrs earlier $$ Apr 01, 2012
  • Taking the High Out of High Yield http://t.co/WYIvHb0n Nonprofessionals are the ones buying junk at the margin. This won’t end well. $$ Apr 01, 2012

 

Central Banking

 

  • The ECB has completely lost control over the monetary policy for Greece http://t.co/MHNTXLHo Massive liquidity drain; total credit failure Apr 07, 2012
  • Post-war financial repression is back http://t.co/JGLo9Aic If the post-war experience is any guide, savers face many years of suffering. Apr 06, 2012
  • Bernanke – I’m Slowing Down the Ship http://t.co/TJcJl20n Stocks don’t like less inflation coming and so they fall. But bonds rally. $$ Apr 06, 2012
  • Draghi Scotches ECB Exit Talk as Spain Keeps Crisis Alive http://t.co/rREDdqrW LTRO can only go so far; can solve liquidity, not solvency Apr 06, 2012
  • The Market?s Obsessive Fixation on The Fed & QE http://t.co/W6kg1n7k Runs through a Fed tightening scenario, thinks Fed won’t sell bonds $$ Apr 04, 2012
  • Oest.. Nationalbank follows Bundesbank in refusing some periphery collateral http://t.co/96xx0xg7 Not so big in itself; Tear in EZ fabric Apr 04, 2012
  • Draghi Tested as German Pay Deals Add to Euro Divergence http://t.co/glKumOZx Inflation rising @ core? May even labor productivity some $$ Apr 04, 2012
  • @federalreserve Tried using your Data Download Program today http://t.co/vRroRPMt I managed 2get the data I needed, but it was tough 2use Apr 03, 2012
  • Bernanke – ‘The Fed never makes mistakes’ http://t.co/JBgRHqx2 He goes, speaks to soft audiences, argues that no one could have known #dope Apr 01, 2012

 

China

 

  • Coup Rumors in China Have Deeper Meaning http://t.co/QaoDxKFF Small fissures appearing in the Communist Party’s hold on power $$ Apr 07, 2012
  • Australia?s Export Slump Intensifies Rate-Cut Pressure http://t.co/sIDzeteW China sneezes, Australia catches a cold, mate. $$ Apr 06, 2012
  • China doomsayer sees crash coming http://t.co/2QatU1ps Hardly a crash, but GDP shrinking. Wait, that *is* a crash for China? $$ Apr 06, 2012
  • The Revenge of Wen Jiabao http://t.co/nw5qvCNa Long read. Eye-opening. Formal system of Comm Party eclipsed by family coalitions that war $$ Apr 04, 2012
  • The informal aspects of how China is governed relies on rival coalitions of elite families over the long run. Short-run, Comm party rules $$ Apr 04, 2012
  • China Accelerates Markets Opening as QFII Quota Doubles http://t.co/yrXVDcdR May prove 2b significant due to unintended consequences $$ Apr 04, 2012
  • China Manufacturing Gain Masks Exporters? Woes http://t.co/VyeN9AWF Goods unneeded by the rest of the World build up in China $$ #glut Apr 03, 2012

 

United States

 

  • When safe assets return http://t.co/QLUPuj1j Long piece on the status of money-like instruments, public and private. Many questions. $$ Apr 07, 2012
  • Income Inequality Is Killing the Economy, Obama Says?Is He Wrong? http://t.co/xrA4pGu2 Going up in developed world, going down globally $$ Apr 07, 2012
  • And I don’t get it as well, Josh.? I’m as Libertarian as they come, but with financial services, I know that trickery? http://t.co/lIJDCr1Y Apr 05, 2012
  • More woes in Fedl subsidized solar power: http://t.co/83ch2YUM & http://t.co/6XaEjl10 ht: @zerohedge | Send bureaucrats 2study physics? $$ Apr 04, 2012
  • The return of the US manufacturer http://t.co/75WCMyPi Manufactured goods represented 61 per cent of all US exports during 2010 $$ Apr 04, 2012
  • +1 RT @ReformedBroker: ADP is the Diet Arizona Iced Tea of Employment gauges. Like, we’ll take it if it’s there but no one’s looking for it Apr 04, 2012
  • When does the US Treasury bubble burst? http://t.co/8agHomQH “Pomboy pointed out that Treasury yields are less than current CPI rates” $$ Apr 03, 2012
  • Why Are the Fed and SEC Keeping Wall Street?s Secrets? http://t.co/bZYF3LgV Fed & SEC view those they regulate as their clientele $$ Apr 02, 2012
  • US consumers dipping into savings http://t.co/757XDPuW Implies that the recovery is weaker than presently posited, demand comes from savings Apr 01, 2012
  • Obama Campus Fervor Losing 2 Apathy as Students Sour on 2012 http://t.co/kcyQbWKI Students thought they were getting change, got Bush-plus Apr 01, 2012
  • How Stockton, California Went Broke in Plain Sight http://t.co/ggOzSOmV If you hand out benefit increases like they are candy… $$ Apr 01, 2012

?

Finance

 

  • Quants: The Alchemists of Wall Street http://t.co/L0CzLQVN Recommend this video, features Paul Wilmott, Matthew Goldstein, & more $$ Apr 07, 2012
  • The 401(k): Americans ?just not prepared? 2 manage their own retirement funds http://t.co/8Tr0wggt Conclusions similar http://t.co/etCEp8BT Apr 06, 2012
  • Hedge Funds Accomplishing Very Little in the Aggregate? http://t.co/pxqjw2kk HFs tend 2b volatility-averse, weaker funding than long-only $$ Apr 04, 2012
  • Ackman SPAC a nice touch, no? RT @ReformedBroker: Private Equity-held Burger King coming public again. “Hooray!” said no one to no one else Apr 04, 2012
  • Performance persistence in hedge funds http://t.co/zORfjAts How do hedge funds differ v unlevered value investors? $$ gets pulled vals drop Apr 04, 2012
  • ETN Double Dipping With GAZ? http://t.co/Uo9y1T5p Interesting piece. An ETN issuer can make more $$ stopping creation & lending shares Apr 04, 2012
  • Loan classes “season” over 10-30% of the life of loan… defaults/prepays stabilize. Large cohorts 4 bond issuance go bad in the 3rd yr $$ Apr 03, 2012
  • Merrill, Morgan Stanley seen losing grip on rich http://t.co/44mW7ki0 Top 4 brokers mkt share 56% in 2007, 45% in 2011 & still falling $$ Apr 03, 2012
  • Low Vol Underperforming http://t.co/NYqjw2Fp Every valid strategy has times when it doesn’t work, to shake out the weak hands $$ Apr 03, 2012
  • Corporate pension funds break away from equities http://t.co/EMPaDGea Yes, when yields r low, DB plans move 2 bonds. Brilliant. $$ Apr 03, 2012
  • Does Danger Loom for Multiemployer Pension Plans? http://t.co/VpfDZ04m Plans that are <80% funded must take steps 2 nurse plans 2 health $$ Apr 01, 2012
  • Credit Suisse Opened Volatility Bets to Small Investors http://t.co/ZLMGANXh Wall Street produces products 2 benefit itself, not retail $$ Apr 01, 2012
  • Keynes: One Mean Money Manager http://t.co/WJ2jESFE “The board of King’s College gave him uncontested authority to invest as he wished.” Apr 01, 2012

 

Japan

 

  • Just a guess, but after Japan’s Current Account goes into deficit for ~2 years, the big adjustment down in the Yen will happen. $$ #ouch Apr 06, 2012
  • @valuewalk Probably because so many have lost money shorting the yen, & some have made $$ long the yen, that many just trust the momentum $$ Apr 06, 2012
  • @valuewalk long-dated yen currency puts have fairly low vol 😉 Not doing that either, but… someone will. Apr 06, 2012
  • Yen Forecast: Xie Sees 40% Drop, Japan Bubble Bursting http://t.co/EjI7hytt Wow. Thinks Japan near tipping point 4 internal financing fail Apr 06, 2012
  • Japan?s Strongest Storm Since 1959 Slams Into Tokyo Region http://t.co/CCOVz7C6 Very unusual 4 Tokyo 2 have such strong winds w/no typhoon Apr 03, 2012
  • Yen Losing Most Since ?95 Not Enough for Toyota http://t.co/IT0g84s8 Japanese Industry cheerleaders 4 “penny parity” $$ #race2thebottom Apr 02, 2012

 

Insurance

?

  • Advisers, B-Ds retreat from Hartford http://t.co/garB6Bwn Not offering new annuities means can’t roll to $HIG products when surr chg ends $$ Apr 03, 2012
  • Agents will try to get holders of $HIG annuities to roll elsewhere when surr charge ends (new commission $$ ), but be careful if you own an+ Apr 03, 2012
  • annuity from $HIG, b/c one reason they are getting out of the biz, I think, is that some of the secondary gtees were 2 generous + Apr 03, 2012
  • there is probably a business in analyzing secondary gtees, b/c some r quite valuable, &u wouldn’t want 2get tricked into rolling it by agent Apr 03, 2012
  • Contra: Rising equity markets to drive US life insurers-Barclays http://t.co/S6JtPun7 Catch my comment at the end, didn’t get new DAC issue Apr 02, 2012
  • Insurance Fees, Revealed http://t.co/mLzhpT6V NY State says agents must disclose how compensated & offer to provide full details #woohoo Apr 01, 2012

?

Personal

 

  • Sinkhole at the bottom of my street after a water main break. The water is more than 5′ deep & and hollowing out the road beneath. Apr 07, 2012
  • Street is one way, so I took my son who is a Police Explorer 2 talk to the policeman there. They knew each other. It’s a one-way street so + Apr 07, 2012
  • I asked the policeman (who was short handed) if he would like us 2 block street 2 traffic. Gratefully “yes.” We set up the safety gear. Apr 07, 2012
  • This is the opposite of last summer where we didn’t have power 4 6+ days, but we had water. We have power but no water. Hope it won’t b long Apr 07, 2012
  • Three Year Anniversary http://t.co/0HDD3iyD Congratulations, Hunter! @DDInvesting is our internet guide to all distressed debt $$ Apr 04, 2012
  • LinkedIn Events: Towson University Investment Group – Markets Summit http://t.co/kpgkDTto I’ll b participating on a panel. See you there! $$ Apr 04, 2012
  • @Frank_McG @volatilitysmile As I said to my wife today, “Take care of your wife, and she will take care of you.” Worked for the last 25 yrs Apr 02, 2012

 

Miscellaneous

 

  • Reprise: The Elfenbein Gold Model http://t.co/r3rHvZw3 @eddyelfenbein at his best, I fully subscribe to his model, reflecting cost of carry Apr 06, 2012
  • Matzo Ball Soup, Check. iPad, Check. For Passover, Jews Try Techie Seders http://t.co/xUW3izZl I dislike technology in religion. Yuck $$ Apr 06, 2012
  • Flying Auto Reviving Dreams of Chitty Chitty Bang Bang http://t.co/WixQb8AV Cheap @ $279K, this one might actually work $$ Apr 06, 2012
  • This discussion has problems because there is no agreed upon definition of what “free will” means.? As with all quest? http://t.co/NoMpZf0U Apr 04, 2012
  • Here Come Tablets. Here Come Problems. http://t.co/ezFK4Wfu Five common mistakes: a slow rollout is better to get the bugs out. $$ Apr 03, 2012
  • Gene Maps Are No Cure-All http://t.co/JOLTtWTK Study Warns That DNA Scanning to Predict Disease Can Mislead; ‘Not a Crystal Ball’ $$ Apr 03, 2012
  • Ten Claims in Support of IFRS Adoption by the SEC ? & Why They are False http://t.co/nj2PZ1pd & http://t.co/4YrMSvaH & http://t.co/7lLtioGo Apr 03, 2012
  • The Mighty Mathematician You?ve Never Heard Of http://t.co/9Qp1NqOB Never heard of her & her impact on physics was as great as that of math Apr 01, 2012
  • Mangled Horses, Maimed Jockeys http://t.co/6Dl1gEmJ Maybe there is a public policy reason to close down racetracks, & after that boxing $$ Apr 01, 2012

 

Energy

 

  • Australia LNG Boom Threatened by US Shale Exporters http://t.co/qleN6sVd Cheap US Hydrocarbons invert prior economic certainties $$ #shale Apr 04, 2012
  • Shale oil: from curse to cure for East Coast refiners? http://t.co/MdlXvjIb US Shale oil is high quality; challenge is delivery2refineries Apr 04, 2012
  • Repsol Worst Debt Swaps on YPF Seize Threat http://t.co/BewpJA4p Argentina not 2b trusted; would buy $REP bonds on weakness, stock a ?? $$ Apr 04, 2012
  • Encana in Play as Petronas Seeks Natural Gas http://t.co/SEx832F1 Petronas looking long-term, b/c prospects for natgas pricing r poor $$ Apr 04, 2012
  • Why high gas prices at the pump? The answer is BICS http://t.co/LopjaesG Brazil, India, China, & Saudi Arabia have increased gasoline demand Apr 03, 2012
  • The rapidly shifting supply fundamentals in US natural gas http://t.co/myofZrQD Injection cycle starting early w/supplies high already $$ Apr 03, 2012

 

Rest of the World

 

  • Contra: The Buck Stops Here: A BRIC Wall http://t.co/RYykjXXr The BRIC nations r2 statist 2 link 2 gold. Good idea, doesn’t fit the politics Apr 06, 2012
  • Germany Asked to Forgo $1.3 Billion Deutsche Telekom Payout http://t.co/b8cvOOlB Interesting how Capex constrains euro-telcos, not US $$ Apr 04, 2012
  • Europe?s Ratings Revenge Founders on Market Reality http://t.co/D3dNu7sF Eurocrats stumble in dark; will return 2 old system; it worked $$ Apr 04, 2012
  • How A Baby Bust Will Turn Asia’s Tigers Toothless http://t.co/VE78u9tu Economic growth is partially population growth; sterile societies $$ Apr 01, 2012
  • Swedish High Street Rebound Ends Bets for Riksbank Cuts http://t.co/jYioq0NN A relative bright spot in Europe; having the Knonor helps $$ Apr 01, 2012

 

Company News

 

  • RE: @emergingmoney Never been crazy about firms that perpetually run w/neg working capital. Interesting idea, though. http://t.co/Xx6yFf8v Apr 04, 2012
  • Optical Delusion? Fiber Booms Again, Despite Bust http://t.co/9QiAmZOH Whouda thunk it? I knew this was getting close, demand 4new fiber Apr 04, 2012
  • Scarred Avon Is Takeover Target http://t.co/f2T9E7V7 Don’t think $AVP is a good takeover target: toss dist syst or incompatible syst $$ Apr 03, 2012
  • Technology obsoletes too easily, particularly in hot sectors. Very difficult to get to $1T of?Market Cap. Bit-by-bit? http://t.co/XjGU9ouG Apr 03, 2012
  • $AAPL ‘s War on Android http://t.co/ILGQVAZD Long, fascinating article; perversely, attempts to enforce patent can invalidate patents $$ Apr 02, 2012
  • Dude, is There any Value Left in $DELL ? http://t.co/iG5q5iea U know your marketing is stale when people reference advertising >10yrs ago $$ Apr 02, 2012

 

Housing

 

  • The rebound is now http://t.co/l4coNvgt Worth watching, but I would wait until the foreclosures have been mostly cleared, b4 saying bottom Apr 07, 2012
  • Home Prices Seen Dropping 10% in US on Foreclosures http://t.co/BBjzxKiU Once f/cs clear out, the market will normalize maybe even rise $$ Apr 03, 2012
  • McClellan on Lumber?s tendency to leading housing stocks http://t.co/cevWyVTs If past is prologue, housing prices are set for another dip $$ Apr 01, 2012

 

Funds

 

  • I’ve owned this in the past, but not now.? It’s been around for 19 years as a CEF — just have to watch the premium/d? http://t.co/XMVs6RBS Apr 06, 2012
  • Why I Won?t Be Buying TAGS http://t.co/2S8bqcQJ Expense ratio does not include the expenses paid on underlying ETFs owned by $TAGS $$ Apr 04, 2012

?

Financial Distress

 

  • Reddy Ice Considers Filing for Bankruptcy http://t.co/IgpYjHue Is it just me, or are we seeing an uptick in insolvencies? $$ Apr 04, 2012
  • Hostess Serves Up New Batch of Cuts http://t.co/fHBXwHes Future failure as people don’t buy so many of the “sugar fat bombs” 4 kids $$ Apr 02, 2012
  • Failures: Pinnacle Airlines http://t.co/BXkJ8v9j AFA Foods http://t.co/xs4wsFEE Airlines & Meat renderers r born 2 fail $$ Apr 02, 2012
Book Review: The Indomitable Investor

Book Review: The Indomitable Investor

Posted on by David Merkel

Most books that I don’t ask for are lousy.? This one isn’t, and I love the title, because it indicates the long hard slog that it is to persevere in investing. IT IS A BUSINESS!!? Without hard work it will not yield good results.? Indomitable means persistence, and a lack of persistence will give a bad result.

Steven Sears has been a columnist for Barron’s for many years.? He has read a lot of analyses, and written a lot of columns.? In this book he attempts to explain why many investors are the dumb money that clever investors profit from.? Or, why many investors get sucked dry by brokers, funds with high loads, other illiquid investments, etc.

There is a constant in investing and it frustrates me, because I try to educate retail investors.? People panic as a crisis unfolds, and they sell near the bottom.? Conversely, people buy as a trend nears its peak, because they conclude that they have missed out.

What would it take to educate these people, which are many among us?? Losses for one.? Second, a willingness to read historical finance, which few will do, because it doesn’t seem relevant.? If you will not learn from history, you will not learn.

As is sometimes said, “Wise men learn from the errors of others.? Average men learn from their own errors.? Dumb men never learn.”

Financial markets have more than their share of average and dumb men.? They get fleeced, and rapidly.? That dichotomy is key to investment markets.? Think about it — if you were going into a war, would you spend more to make sure you had the best armaments?? I think you would.? If so, why do you go virtually undefended in contention against Wall Street?

There are two ways to do this.? First, go passive and index.? Safe, reasonable, good.? Second, do a lot of research and find managers that eat their own cooking (like me), and invest with those that have a good long-term track record.? They should be managers with fixed principles regardless of the environment.

What it gets right

More data does not mean things are better.? For most people more data confuses them.? Giving long explanations in prospectuses is a hindrance for most, not an aid.? Maybe there should be a law that says, “Prospectuses can only be 1000 words long.? If you can’t get the risks in that amount of words, you deserve to be sued.”

It takes three years for the average investor to note that the trend has changed.? Is there any surprise then about “dumb money?”? Would it get any better if we told them this?

Quibbles

Ted Benna was a benefits consultant, not a tax consultant (P.5). Maybe they were the same back then.

Regarding Diogenes, he was a skeptic, and did not believe that there were any honest men.? That’s not a bad way to view Wall Street, butthat was not the sense I got from this book.

The author makes a lot out of calender anomalies, bu most of the research I have reviewed does not support them.

He makes a lot of the ISM, but if you aggregate his numbers, they seem higher than market returns have been over the the last 80+ years.? I find the data questionable.? Maybe he didn’t correctly describe what he cited, or maybe those he cited deceived him.

If you can discern consumer spending trends in advance of the market, you will do well, but can you do it?? This is a non-insight.

At the end of the book, page 195, he asks for new relative measures of risk.? If only it were that simple.? We all wish we had those.? They change over time, and asset classes may shift in relative riskiness due to overvaluation.? Oh to have bought bonds in 1987, and in 2000. Oh, to have bought equities in 1982, 1995 and 2003.

Who would benefit from this book: If you ae willing to be patient and following long-term strategies (like me) you might benefit from this book.? It is only meant for those willing to take a long-term view, because it tends to work.? If you want to, you can buy it here: The Indomitable Investor: Why a Few Succeed in the Stock Market When Everyone Else Fails.

Full disclosure: This book was sent to me without me asking for it.

If you enter Amazon through my site, and you buy anything, I get a small commission.? This is my main source of blog revenue.? I prefer this to a ?tip jar? because I want you to get something you want, rather than merely giving me a tip.? Book reviews take time, particularly with the reading, which most book reviewers don?t do in full, and I typically do. (When I don?t, I mention that I scanned the book.? Also, I never use the data that the PR flacks send out.)

Most people buying at Amazon do not enter via a referring website.? Thus Amazon builds an extra 1-3% into the prices to all buyers to compensate for the commissions given to the minority that come through referring sites.? Whether you buy at Amazon directly or enter via my site, your prices don?t change.

A Brief Note on Earnings Yields

A Brief Note on Earnings Yields

Posted on by David Merkel

I debated briefly (between my ears) how to present this data.? I settled on this method, because if you want to play with it you can do so without too much trouble.

Here are the earnings yields, dividend yields, and payout ratios (what percentage of trailing 12-month earnings have been paid out as dividends) by industry and sector:

Industry E Yield D Yield Payout %
0124 – Metal Mining

18.24%

3.49%

19%
0606 – Oil & Gas – Integrated

13.40%

3.76%

28%
0412 – Auto & Truck Manufacturers

12.61%

1.69%

13%
0709 – Insurance (Life)

11.73%

2.44%

21%
0215 – Construction Services

11.71%

1.83%

16%
0603 – Coal

11.33%

2.89%

25%
0121 – Iron & Steel

10.41%

2.49%

24%
0957 – Retail (Grocery)

10.36%

3.00%

29%
1209 – Water Utilities

9.77%

3.51%

36%
0512 – Fish/Livestock

9.40%

1.74%

18%
0915 – Communications Services

9.03%

4.72%

52%
0706 – Insurance (Accident & Health)

8.98%

1.22%

14%
0609 – Oil & Gas Operations

8.94%

2.06%

23%
0727 – Regional Banks

8.94%

2.85%

32%
0518 – Office Supplies

8.30%

2.47%

30%
0203 – Aerospace and Defense

8.00%

2.12%

26%
0415 – Auto & Truck Parts

8.00%

1.41%

18%
0969 – Schools

7.84%

0.56%

7%
0809 – Major Drugs

7.77%

3.92%

50%
0103 – Chemical Manufacturing

7.74%

2.16%

28%
1103 – Air Courier

7.43%

2.17%

29%
0106 – Chemicals – Plastics and Rubbers

7.36%

2.12%

29%
0524 – Tobacco

7.30%

3.94%

54%
0130 – Non-Metallic Mining

7.28%

0.48%

7%
0206 – Construction & Agricultural Machinery

7.17%

1.62%

23%
0724 – Money Center Banks

7.16%

2.38%

33%
0903 – Advertising

7.00%

1.57%

22%
0218 – Misc. Capital Goods

6.92%

1.76%

25%
0403 – Apparel/Accessories

6.91%

1.41%

20%
1112 – Railroads

6.90%

1.74%

25%
0436 – Tires

6.81%

1.00%

15%
0406 – Appliances & Tools

6.71%

1.90%

28%
0509 – Crops

6.65%

0.62%

9%
0924 – Personal Services

6.61%

1.72%

26%
1006 – Computer Hardware

6.60%

0.28%

4%
0954 – Retail (Drugs)

6.45%

1.13%

17%
1203 – Electric Utilities

6.32%

3.83%

61%
0127 – Misc. Fabricated Products

6.18%

1.86%

30%
1024 – Electronic Instruments & Controls

6.01%

2.08%

35%
0503 – Beverages (Alcoholic)

5.88%

2.34%

40%
0906 – Broadcasting & Cable TV

5.75%

1.50%

26%
0109 – Containters & Packaging

5.67%

2.17%

38%
0806 – Healthcare Facilities

5.58%

0.26%

5%
1106 – Airline

5.52%

0.33%

6%
0715 – Insurance (Property & Casualty)

5.51%

1.71%

31%
1003 – Communications Equipment

5.49%

1.46%

27%
0963 – Retail (Specialty Non-Apparel)

5.49%

0.70%

13%
0506 – Beverages (Non-Alcoholic)

5.47%

2.41%

44%
0515 – Food Processing

5.46%

2.23%

41%
0912 – Casinos & Gaming

5.43%

0.88%

16%
1015 – Computer Peripherals

5.31%

2.32%

44%
0927 – Printing & Publishing

5.21%

2.21%

42%
0951 – Retail (Department & Discount)

5.20%

1.76%

34%
1027 – Office Equipment

5.09%

2.89%

57%
0942 – Restaurants

5.09%

2.02%

40%
0430 – Recreational Products

5.07%

1.57%

31%
1030 – Scientific & Technical Instruments

5.07%

1.27%

25%
0712 – Insurance (Miscellaneous)

5.04%

1.90%

38%
0118 – Gold & Silver

5.03%

1.78%

35%
0939 – Rental & Leasing

4.96%

0.73%

15%
0521 – Personal & Household Products

4.95%

2.64%

53%
1021 – Computer Storage Devices

4.80%

0.22%

5%
1036 – Software & Programming

4.76%

0.96%

20%
0960 – Retail (Home Improvement)

4.73%

1.89%

40%
0418 – Footwear

4.66%

1.09%

23%
0612 – Oil Well Services & Equipment

4.64%

1.64%

35%
0421 – Furniture & Fixtures

4.64%

1.70%

37%
0945 – Retail (Apparel)

4.58%

1.17%

26%
0921 – Motion Pictures

4.58%

0.82%

18%
0209 – Construction – Supplies and Fixtures

4.56%

2.02%

44%
0812 – Medical Equipment & Supplies

4.48%

1.25%

28%
0909 – Business Services

4.47%

1.23%

28%
0803 – Biotechnology & Drugs

4.45%

2.39%

54%
0936 – Recreational Activities

4.45%

2.36%

53%
0303 – Conglomerates

4.29%

1.33%

31%
0918 – Hotels & Motels

4.21%

0.93%

22%
0133 – Paper & Paper Products

4.03%

2.63%

65%
0424 – Jewelry & Silverware

4.03%

0.04%

1%
1109 – Misc. Transportation

3.99%

1.27%

32%
1206 – Natural Gas Utilities

3.87%

3.81%

99%
1018 – Computer Services

3.85%

0.66%

17%
0718 – Investment Services

3.77%

1.84%

49%
0730 – S&Ls/Savings Banks

3.39%

1.93%

57%
0933 – Real Estate Operations

3.00%

3.89%

129%
1033 – Semiconductors

2.81%

1.86%

66%
0112 – Fabricated Plastic & Rubber

2.59%

1.42%

55%
0948 – Retail (Catalog & Mail Order)

2.56%

0.01%

0%
0433 – Textiles – Non-Apparel

2.56%

0.09%

3%
0975 – Waste Management Services

2.55%

2.63%

103%
1115 – Trucking

2.34%

0.61%

26%
0115 – Forestry & Wood Products

2.03%

2.48%

122%
0212 – Construction – Raw Materials

1.62%

1.55%

95%
0427 – Photography

1.00%

0.26%

26%
0221 – Mobile Homes & RVs

0.72%

1.64%

228%
1012 – Computer Networks

-0.57%

0.28%

-48%
0703 – Consumer Financial Services

-3.68%

1.96%

-53%
0972 – Security Systems & Services

-5.04%

1.17%

-23%
0930 – Printing Services

-5.06%

3.58%

-71%
1118 – Water Transportation

-7.14%

3.28%

-46%
0966 – Retail (Technology)

-9.39%

2.52%

-27%
0409 – Audio & Video Equipment

-24.98%

1.32%

-5%

 

Sector E Yield D Yield Payout %
01 – Basic Materials

11.29%

2.62%

23%
06 – Energy

10.46%

2.79%

27%
04 – Consumer Cyclical

8.00%

1.53%

19%
02 – Capital Goods

7.52%

1.86%

25%
Grand Average

6.97%

2.34%

34%
07 – Financial

6.34%

2.28%

36%
09 – Services

6.34%

2.79%

44%
05 – Consumer Non-Cyclical

5.80%

2.64%

46%
12 – Utilities

5.62%

3.82%

68%
08 – Health Care

5.39%

2.49%

46%
11 – Transportation

5.17%

1.62%

31%
10 – Technology

4.82%

1.12%

23%
03 – Conglomerates

4.29%

1.33%

31%

Now, remember that the earnings yields here are backward-looking.? To give you an example, property-casualty insurers and reinsurers lost a lot over the last 12 months, but still managed to have P/E ratios of around 18 (5.5% earnings yield).? When you look at these tables, ask yourself how good current prospects might be relative to the last 12 months.

Also remember that cyclical companies tend to have low valuations before their sales slump.? As sectors go, I think Energy has a lot to commend it in this environment.? Could have a lot of upside, and not much downside.

The tables above cover the whole market, 8800+ companies weighted by their market capitalizations.? I could do a second version to these tables for a subset of the markets, forward-looking, which used the earnings estimates of the sell-side.? I suspect that would cover the larger half of the companies, and roughly 99% of the total market cap.? Let me know if you would like that, it wouldn’t be that hard to do.

PS — Note that everything here is in line with the terms of my data license, because every number here is one that I calculated.? I try to follow that rule in things that I publish, aside from well-known and limited bits of data.

When Correlations Rhyme

When Correlations Rhyme

Posted on by David Merkel

Before I start this piece let me give you a blast from the past, the columnist conversation comment that I most frequently reprint, from this post:


 David Merkel
Make the Money Sweat, Man! We Got Retirements to Fund, and Little Time to do it!
3/28/2006 10:23 AM EST

What prompts this post was a bit of research from the estimable Richard Bernstein of Merrill Lynch, where he showed how correlations of returns in risky asset classes have risen over the past six years. (Get your hands on this one if you can.) Commodities, International Stocks, Hedge Funds, and Small Cap Stocks have become more correlated with US Large Cap Stocks over the past five years. With the exception of commodities, the 5-year correlations are over 90%. I would add in other asset classes as well: credit default, emerging markets, junk bonds, low-quality stocks, the toxic waste of Asset- and Mortgage-backed securities, and private equity. Also, all sectors inside the S&P 500 have become more correlated to the S&P 500, with the exception of consumer staples.

In my opinion, this is due to the flood of liquidity seeking high stable returns, which is in turn driven partially by the need to fund the retirements of the baby boomers, and by modern portfolio theory with its mistaken view of risk as variability, rather than probability of loss, and the likely severity thereof. Also, the asset allocators use ?brain dead? models that for the most part view the past as prologue, and for the most part project future returns as ?the present, but not so much.? Works fine in the middle of a liquidity wave, but lousy at the turning points.

Taking risk to get stable returns is a crowded trade. Asset-specific risk may be lower today in a Modern Portfolio Theory sense. Return variability is low; implied volatilities are for the most part low. But in my opinion, the lack of volatility is hiding an increase in systemic risk. When risky assets have a bad time, they may behave badly as a group.

The only uncorrelated classes at present are cash and bonds (the higher quality the better). If you want diversification in this market, remember fixed income and cash. Oh, and as an aside, think of Municipal bonds, because they are the only fixed income asset class that the flood of foreign liquidity hasn?t touched.

Don?t make aggressive moves rapidly, but my advice is to position your portfolios more conservatively within your risk tolerance.

Position: none

This article is motivated by this article from the estimable Morningstar.? Correlations are high among risk assets; the only place to lower correlations are cash and high quality long debt.? Guess what this period reminds me of?? 2006-2008 prior to the crisis.

Now there are differences, though the prime driver is central banking in both cases.? In the earlier period, they were tightening slowly.? The mistake was not tightening rapidly, much earlier.? In this era, the floodgates of monetary excess have been wide open for three years.? The error here is assuming that monetary policy can work miracles when the economy is overlevered from the prior boom.

When the ordinary actors of the economy can’t borrow because they are overindebted, monetary policy has a hard time producing any long-term useful result.?? Yes, it can spur a short-term move to risk assets.? It can twist the Treasury curve in the short-run.

This piece isn’t about monetary policy.? It’s about correlations in asset prices.? When risky assets get very correlated with each other, and the only alternative game to play is buying high quality bonds, it is an unstable situation that portends lower risky asset prices.

Color me neutral now, because the supply of cash to invest in high yield bonds, stock IPOs, and private equity is substantial.? But don’t be surprised if asset class performance reverses one year out from now.

Sorted Weekly Tweets

Sorted Weekly Tweets

Posted on by David Merkel

 

China

 

  • China’s first bond default could be good market medicine http://t.co/8ShFniYM Bond trader: “We don’t really have a credit risk culture.” $$ Mar 31, 2012
  • Is China’s slowdown worse than previously estimated? http://t.co/CkZw8tLK Could b business conditions that are worst since 2009. $$ Mar 31, 2012
  • China Banks Said to Underestimate Local Government Risks http://t.co/qpPicyEe China has a clever bureaucracy; always has; big CYA $$ Mar 25, 2012
  • Chinese capitalism is just another knockoff http://t.co/w2hSozQL China is not Capitalist; it rewards Party members, not citizens. $$ Mar 25, 2012
  • Debating a ?Hard Landing? http://t.co/NMnYk2XX friendly debate – Andrew Batson & Patrick Chovanec over China facing a ?hard landing? in 2012 Mar 25, 2012
  • I Am Jordan’s Complete Lack of Surprise: Chinese Co’s Forced to Falsify Data http://t.co/BMj7ux0T Command & control economy, not free $$ Mar 25, 2012

 

Market Dynamics

 

  • The Nature of a Crowded Trade http://t.co/sf1phJjP A July 2008 article of mine where I reflected on the high correlations of the prior 3 yrs Mar 31, 2012
  • A Market Lacking Diversification http://t.co/khXUVjaL Correlation conditions similar to 2006-2008, only diversifier hi-qual long bonds $$ Mar 31, 2012
  • Pension Deficit for 100 US Company Plans Increased 41% in 2011 http://t.co/FdIZTltW Low long hi-qual rates & cruddy returns on risk assets Mar 31, 2012
  • 2277 Stocks and Still Not Diversified? http://t.co/iu0Pw8Ty Recommended solution is similar 2a levered version of the Permanent Portfolio $$ Mar 31, 2012
  • New from Aleph Blog The Rules, Part XXXI: The offering of liquidity through limit orders is a real service to th… http://t.co/ZiuzWIo5 Mar 30, 2012
  • Passive Aggressive: Index-Linked Securities and Individual Investors http://t.co/ZrjMCKCz Curbs stock picking, encourages factor timing $$ Mar 29, 2012
  • Bankers are telling corporate clients this is their chance to refinance http://t.co/Eh9tHEX6 The window of cheap junk financing is open $$ Mar 28, 2012
  • New from Aleph Blog Replacing Defined Contributions: I think that it is pretty certain that defined contribution… http://t.co/Dis34ql2 Mar 27, 2012
  • What Will Replace the 401(k)? http://t.co/miLAuoYc How about DB pensions where it depends on how much the employee kicks in plus match? $$ Mar 27, 2012
  • US Stocks Advance Following Bernanke?s Comments http://t.co/D7sORuIU Stox react 2 increases in inflation expectations. TIPS & Bonds fall $$ Mar 26, 2012
  • Hedge Funds Capitulating Buy Most Stocks Since 2010 http://t.co/XHwxzxNO Short-term money alert! Will propel mkt 4 a while, then… $$ Mar 26, 2012
  • If Bloomberg Business Week is a better magazine than old Businessweek (I think so), what magazine should we use now 4 a dumb $$ indicator? Mar 26, 2012

 

Asset Management

 

  • Nontraded REITS should be a nonstarter for clients http://t.co/O1ZuMvX8 And here’s one that just announced a 72% loss: http://t.co/la8d29my Mar 31, 2012
  • Oaktree IPO Could Pay 2 Founders $117.2M Each http://t.co/Yufla6Jk The Most Important Thing is getting rewarded 4 building AUM 😉 $$ Mar 31, 2012
  • The Trouble With Exchange Traded Notes http://t.co/ZL7dVpjO Unsecured credit, total return swaps, low level of regulatory protection $$ Mar 31, 2012
  • Good 4 all of us RT @frankvoisin: My interview Research Magazine’s April issue: http://t.co/zioono6R Also features @VitaliyK @alephblog $$ Mar 30, 2012
  • Bain Gave Staff Way to Swell IRAs by Investing in Deals http://t.co/4LlAExBt Letting employees in on the fun shares the wealth. Good $$ Mar 30, 2012
  • Lying By Omission: Mutual Funds, Track Records & Departing Managers http://t.co/4MUyNRYs Track recrds shuld b suspended when critical ppl go Mar 29, 2012
  • New from Aleph Blog A Pox on Promoted Stocks (2): By this time, I would think that it would be worth the the tim… http://t.co/DJkH6E4W Mar 28, 2012
  • The Measured Approach to Value http://t.co/XiZOUMOn Features investors Vitaliy Katzenelson & Croft-Leominster, & smaller Frank Voisin & me Mar 28, 2012
  • GoodHaven Realizes Its Vision http://t.co/zJVmCFMa The CIO of Markel, Tom Gayner showed them favor and invested with them. Good for them. $$ Mar 27, 2012
  • What This Industry Needs is a Good Disruption http://t.co/imKDcElR There r a few areas of the financial industry that justify their fees $$ Mar 27, 2012
  • Found PDF slide presentation: http://t.co/0GfhME7m The Market for Financial Advice: An Audit Study $$ Worth a read, paper not free @ SSRN Mar 26, 2012
  • Treasuries Rise for Fourth Day on Global Growth Concern http://t.co/JYpanHTu Funny how the sentiment has reversed; who is surprised? $$ Mar 25, 2012

 

Monetary Policy

 

  • @kyles09 No, not a believer in MMT, MMR, or neoclassical macro. 2 much aggregation, not everything happens at once, goods/services central + Mar 30, 2012
  • @kyles09 and $$ only facilitates goods/services. Debt is important, but not central, some goods owned outright, w/no liabs. Money is a + Mar 30, 2012
  • @kyles09 creation of a culture, not the government, because @ the edges, FX & commodities will crowd out bad currencies. MMT -> inflation $$ Mar 30, 2012
  • What Does Bernanke Know? http://t.co/LydpOqk1 Introduces “The Guy Rate” http://t.co/zNVeUYmP Unemployment of older guys has hi costs Mar 29, 2012
  • Demand for U.S. Debt Is Not Limitless http://t.co/NWKHcpCD In 2011, the Fed purchased 61% of Treasury issuance. That can’t last. $$ Mar 29, 2012
  • Bitter Money Fights Shaped U.S History http://t.co/36jWnkQq Abandoning Gold Helped Dollar Gain Preeminence http://t.co/QbYMkTNL $$ Mar 28, 2012
  • For the last tweet, those r2 good articles by Simon Johnson & James Kwak, authors of ?13 Bankers? & co-founders of The Baseline Scenario $$ Mar 28, 2012
  • Housing bubbles and interest rates http://t.co/9TfzMpt2 Makes my point that asset price levels should be part of monetary policy $$ Mar 31, 2012

 

Banking & Finance

 

  • FiveBooks Interviews > @Ritholtz on Causes of the Financial Crisis http://t.co/RQQZfHTz Many good perspectives from 6 authors on the crisis Mar 31, 2012
  • Geithner?s Math Puzzle Beyond Numbers for DeMarco http://t.co/Eg9BjcgE Principal forgiveness would have moral hazard impacts. $$ Mar 30, 2012
  • Why not make LIBOR off of binding offers of the banks to borrow/lend to any of their group $10M short-term unsecured? Avg — LIBOR/LIBID $$ Mar 30, 2012
  • Libor Links Deleted as UK Bank Group Backs Away From Rate http://t.co/HOy8TOof British Bankers? Association distances itself from LIBOR $$ Mar 30, 2012
  • Branson?s Virgin Money Seen Disrupting U.K. Retail Banks http://t.co/bPcD8im7 Always been a Branson skeptic; he have audited financials? Mar 30, 2012
  • Why not make LIBOR off of binding bids/offers of the banks to borrow/lend to any of their group 10 million dollars sh? http://t.co/wK3HyopV Mar 29, 2012
  • Is Hartford Financial’s market exit a death knell for the annuity crowd or just more Hartford haplessness? http://t.co/AUEVqxWQ Both. $$ Mar 29, 2012
  • The Birth (and Death) of the Moral Age of Wall Street http://t.co/eStszd7i At one point the moral code of $GS had some meaning, not much now Mar 29, 2012
  • @BarbarianCap More subtle than that; for insurance accounting &the concept of release from risk, it is the conservative side of realistic $$ Mar 27, 2012
  • A Proposal for the Resolution of Systemically Important Assets and Liabilities: The Case of the Repo Market http://t.co/WYQGAVVx +1 $$ Mar 26, 2012
  • But, disagree. Would b simpler and more effective to disallow repo financiers unrestricted access to collateral even in counterparty default Mar 26, 2012
  • Obama Relies on Debt Collectors Profiting From Student Loan Woe http://t.co/pYWwgLq2 How independent debt collectors get people 2 pay $$ Mar 26, 2012
  • A Bailout by Another Name http://nyti.ms/GRTNMM GSE writedowns would constitute a direct & sizable gift from taxpayers 2 the largest banks Mar 26, 2012
  • Banks? preemptive strike against Dodd-Frank http://t.co/wjHW0nyv Banks adjusting strategies in order to keep doing as much biz as possible Mar 26, 2012
  • MF?s Corzine Ordered Funds Moved to JP Morgan, Memo Says http://t.co/cYaT9sHy The most likely cause may prove to b correct $$ #corzine Mar 26, 2012
  • BOE’s Tucker: Rehypothecation Consequences ‘Under the Radar’ http://t.co/0X8ZQMMH Good. Rehypothecation should b reviewed, perhaps limited Mar 26, 2012
  • @EpicureanDeal @dsquareddigest I would still lay the blame @ the door of $GS mgmt. Could have grown via retained earnings &stayed private $$ Mar 26, 2012
  • @EpicureanDeal @dsquareddigest Also, there r real advantages 2 partnership culture in an investment bank; risk control works a lot better $$ Mar 26, 2012
  • The Age of the Shadow Bank Run http://t.co/deJRQGgy Borrow short, lend long; clip a spread. Surprise! During the crisis you lose big! $$ Mar 25, 2012
  • The Interest Rate Swaps that Are Bankrupting Local Governments http://t.co/yHQZ1r3u Not true. Gov’ts tried to minimize taxes w/swaps, failed Mar 25, 2012
  • Three?s a Crowd http://t.co/KHtbrqpe Disagree w/the conclusion, because $GS did not have to go public; problem is mgmt, not shareholders $$ Mar 25, 2012

 

Pensions

 

  • Brazil?s pension system http://t.co/90O97tQ4 They allow people to retire too early & offer too much. More unsustainable than Medicare $$ Mar 30, 2012
  • @AlexRubalcava Perhaps a cash balance plan would do that. DB plans are not expensive because of explicit costs. They r expensive b/c + Mar 28, 2012
  • @AlexRubalcava during boom times benefits look free and get set too high, leading to high costs in the bust phase & plan terminations. $$ Mar 28, 2012

 

Politics

 

  • Obama Is a Loser Who Wins, Like FDR in 1936 http://t.co/K0x9go0T Don’t assume a bad economy insures the defeat of Obama. FDR won in ’36 $$ Mar 31, 2012
  • The Rejection of Austerity Begins http://t.co/CgWKa9x6 Until failure, ppl vote 4 politicians who promise magic prosperity thru govt fiat $$ Mar 30, 2012
  • Germany: The Final Frontier… Whose True Debt/GDP Is Now 140% http://t.co/KgW2d76E When you add up the guarantees, doesn’t look so good. $$ Mar 29, 2012
  • Justices Suggest Parts of Health-Care Law May Be Thrown Out http://t.co/cMvKHR20 B best 2 throw the whole law out; let Congress start over Mar 29, 2012
  • Contra: Court Can?t Let Broccoli Get in Way of Health Care Law http://t.co/5Yp2o8tB Sup Ct is moving 2 define interstate commerce better Mar 26, 2012
  • Death Tax Defying http://t.co/FrkL5yLB Eliminate the estate tax; Tax everyone on unrealized capital gains. $$ Same result. Mar 25, 2012
  • Intelligence community can keep data on Americans with no ties to terrorism for up to 5 years http://t.co/PCM7ldiG Stinks; call the ACLU $$ Mar 25, 2012

 

US Economy

 

  • Why Natural-Gas Prices Could Fade to Red http://t.co/GApb0xie When everyone tries 2 frack @ once, there is too much natgas, price falls Mar 30, 2012
  • US coal production declines as industry faces further stress http://t.co/l3WpZtDC Fracking has unpredictable consequences; affects energy $$ Mar 29, 2012
  • Bidding Wars Erupt as U.S. Supply of Homes for Sale Falls http://t.co/JsgIdewr In certain locales, & on the low end, there r bidding wars Mar 29, 2012
  • The Biggest Bellwether In The World Is Giving Some Ominous Comments About Growth http://t.co/vHWs9lwB $FDX says things r slowing down $$ Mar 29, 2012
  • Planned Pipelines to Rival Keystone XL http://t.co/qQZ1Dsj2 Enterprise Products Partners & Enbridge may build competing pipelines $$ Mar 28, 2012
  • ‘Pink slime’ producer suspends operations http://t.co/CvptYPhU Goes from 4 factories to 1. 600 people will probably lose their jobs $$ Mar 28, 2012
  • @valuewalk @The_Analyst It is better for students to start small businesses. Forget economics, it is a waste. Profit/loss best teacher $$ Mar 27, 2012
  • The Economic Surprise Index is now trending down http://t.co/eJCEEdvy @soberlook reminds us that not everything is going well $$ Mar 27, 2012

 

Miscellaneous

  • Like it? I’ve actually bought cars that way! RT @mprobertson: http://t.co/UHdFL0Eu How to buy a car using game theory. very interesting. $$ Mar 31, 2012
  • Eating Chocolate Regularly May Make You Leaner, Survey Suggests http://t.co/l8c6MMpA This means one dark chocolate Dove promise/day $$ Mar 27, 2012
  • The second most dangerous people in the world are smart people with wrong postulates. Mar 25, 2012
  • The most dangerous people in the world are politicians who peddle the views of the smart people with wrong postulates. $$ Mar 25, 2012
  • Madoff FBI Files Reveal How He Fooled His Own Employees http://t.co/lmq2AoZG Gives hope to those accused; Madoff controlled data tightly. Mar 25, 2012
The Rules, Part XXXI

The Rules, Part XXXI

Posted on by David Merkel

The offering of liquidity through limit orders is a real service to the market, and on average gets rewarded in lower overall execution costs.? In choppy markets, it can really add value.

I urge all investors to place limit orders as a normal practice.? Better not to get filled on a few orders every now and then, than to get ripped off by market makers when a market order hits a thin market and you end up with a lousy fill.

Patience is a virtue in trading.? Don’t insist that you will get a full position on a stock you you want to own.? Rather, have multiple companies that you might want to own at their respective prices, and own the ones that the market is willing to sell to you.

When you think about “flash crashes” and what drove them, there are many factors involved, but one thing is clear: someone placed a market order at the wrong time, asking to buy or sell, no matter what.

Personally, anytime I place orders that are large relative to the ordinary volume of the market, and/or where the bid/ask spread is wide, I use discretionary reserve orders.? Say the bid is 20.50 for 200 shares, and the ask is 21.31 for 300 shares, and I am looking to buy. I would place a discretionary reserve order showing 100 shares at 20.49, but offer 41 cents of latitude, but with 2000 shares available to be bought.? In doing this, the bid/ask does not change, but if a program trade sweeps through the market seeking to sell at less than 20.90, my trade executes, and some will wonder, “Where did that come from?”

My view is that with high frequency trading, managers must adopt tactics, particularly on less liquid stocks, that we become invisible liquidity providers.? We match stealth with stealth, but look to get good fills on solid companies at very good prices.? We become market makers in a sense, up to the level of our price limits.

If I have done my fundamental homework right, putting out limit orders, even those that are “good till cancelled” offer value to me and my clients, because we get shares at prices that offer good value, and and sell shares at prices that represent full value or more.

Theme: Overlay by Kaira.