The Aleph Blog – Page 108 – Helping Institutions and Ordinary People Invest Better by Focusing on Risk Control

Post 2100

Posted on 20 March 2013 by David Merkel

Every 100 or so posts, I take a step back, and think about blogging itself.? Tonight I want to talk about advertising in blogging.

I now get about 75 requests per month asking:

Can I do a guest post at your blog? (There have never been guest posts, ever)
I want to place link ads at your blog (I tell them it has to be labelled advertising, I will not let my readers be deceived.? They go away.)
Some other advertising that I find objectionable for other reasons.

I write this blog to give something back to society in general.? My reputation is worth more to me than making money.? If I did not care about my reputation and wanted to make money, I would write a newsletter.? I’m a good enough writer, and clever enough with statistics that I could easily dupe people and make a lot of money, but I belong to Jesus Christ.? I can’t engage in the implicit fraud that many newsletter writers do.

I sometimes send the above cartoon to the advertisers. Most think it is a funny rejection notice. ? I’ve worked hard to create a blog with credibility.? I will not sell it out for a few measly bucks on advertising, or allow for posts from substandard writers.? I won’t even do it for writers better than me.? This is my blog; it reflects me, with all the warts and wrinkles.

I know that I am an acquired taste, and that many things I write are not congenial to all of my readers, because I write about too many areas.? But I write to give something back, and fight against those who try to cheat investors, even if the thief is our government.

But thanks to all that read me.? I am grateful that you peel off time for me.? I don”t deserve it, but I will do my best for you.

Your friend,

David

On the CFA Institute’s “Future of Finance”

Posted on 19 March 2013 by David Merkel

All hail the CFA Institute.? They are trying to inject more ethics into the market through their “Future of Finance” initiative.? I largely agree, but think they are overly optimistic in some areas.

Here are their basic ideas: http://www.cfainstitute.org/learning/future/about/Pages/statement_of_investor_rights.aspx

Here are their dreams: http://www.cfainstitute.org/about/vision/serve/Documents/integrity_list.pdf

My main problems are with the dreams.? Yes, I eventually want every investor to work with someone who has a fiduciary interest in his well-being.? But many people don’t want to take the time to find the people who have their best interests at heart.? There are many things we can overcome, but we cannot overcome the laziness of investors, both retail and professional.? This laziness is part of the nature of man; a few cure it through consistent effort, but most don’t.

To that end, some blame belongs to the unintelligent investors who barge into a market without sufficient knowledge.? That’s how it should be, because in many areas of business those that try to compete with insufficient knowledge lose vitality because they don’t know the basics of the business.

You can’t protect people from stupidity.?? Fraud is another matter.? Deception is different from dumb agreement.

But here is my main challenge to the CFA Institute: where do your ethics come from? Why are they right?? Are they God-given, or merely an agreement among men?

This matters a great deal, because if it is merely an agreement among men, many men will say, “So what! Why should I listen to you?”? If they are God-given, even if men argue with them, the answer comes back from God, “You are a sinner in many ways, including this.? When will you humble yourself to me, and trust in the sacrifice of my Son, which was the largest event in history?”

Ethics aren’t neutral; people disagree about what is right and wrong to a high degree.? Even in finance, there are considerable disagreements in what is the correct behavior:

Active vs Passive mangement
Value vs Growth
Does Technical Analysis work?? (Is there truly a single discipline there?? I don’t think so.)

That’s a considerable reason why it would be difficult to enforce the views of the CFA Institute over the markets.? There is no commonly agreed-upon view of how the markets work.? The views of the academics are ridiculous, and do not reflect market realities. But many asset allocators trust them, even though their results are poor.

Don’t get me wrong, I largely favor what the CFA Institute is proposing.? I just think it will be hard to turn it into public policy because of the large disagreements over how finance actually works.? Also, the degree to which neglectful parties buy into the markets through the persuasion of sellers, because they won’t look out for their own best interests directly.

So, look at what the CFA Institute is up to.? They are part of the “White Hats” in the market, like me, who argue for the good of investors.? My only difference with them is that their model of the market is not fully accurate.? Nor do they understand how men can err, even with detailed ethics codes.

Regarding RealMoney

Posted on 16 March 201317 March 2013 by David Merkel

I have some happy news regarding my writings at RealMoney.? Between readers who kept copies of what I wrote, and TheStreet.com republishing at the free site some of my best? pieces, I have regained one-third of the writings that are lost.

Now, if there are other readers who saved some of my RealMoney writings, please send them to me.? As it is, I will start republishing the two dozen classics that I have recovered starting next week.

And, I will ask TheStreet.com if there is any way to recover the old posts… if you have some influence there, let me know.? Thanks.

Trust & Growth

Posted on 16 March 201317 March 2013 by David Merkel

I read John Mauldin’s newsletters.? In the most recent one, he published what Dylan Grice said about trust in economics.? It reflects my own views, so I want to quote the the piece a little bit, and add my own thoughts.

Of the many elemental flaws in macroeconomic practice is the true observation that the economic variables in which we might be most interested happen to be those which lend themselves least to measurement. Thus, the statistics which we take for granted and band around freely with each other measuring such ostensibly simple concepts as inflation, wealth, capital and debt, in fact involve all sorts of hidden assumptions, short-cuts and qualifications. So many, indeed, as to render reliance on them without respect for their limitations a very dangerous thing to do. As an example, consider the damage caused by banks to themselves and others by mistaking price volatility (measurable) with risk (unmeasurable). Yet faith in false precision seems to us to be one of the many imperfections our species is cursed with.

?One such ?unmeasurable? increasingly occupying us here at Edelweiss is that upon which all economic activity is based: trust. Trust between individuals, between strangers, between organizations… trust in what people read, and even people?s trust in themselves. Let?s spend a few moments elaborating on this.

?

First, we must understand the profound importance of exchange. To do this, simply look around you. You might see a computer monitor, a coffee mug, a telephone, a radio, an iPad, a magazine, whatever it is.? Now ask yourself how much of that stuff you?d be able to make for yourself. The answer is almost certainly none. So where did it all come from? Strangers, basically. You don?t know them and they don?t know you. In fact virtually none of us know each other. Nevertheless, strangers somehow pooled their skills, their experience and their expertise so as to conceive, design, manufacture and distribute whatever you are looking at right now so that it could be right there right now. And what makes it possible for you to have it? Exchange. To be able to consume the skills of these strangers, you must sell yours.? Everyone enters into the same bargain on some level and in fact, the whole economy is nothing more than an anonymous labor exchange. Beholding the rich tapestry this exchange weaves and its bounty of accumulated capital, prosperity and civilization is a marvelous thing.

Trust is core to all economic activity.? You only want to act if you think you will not be cheated.? Poor societies are often characterized by a lack of trust, which hampers exchange, and hampers credit as well.? To the degree that you doubt that you will be rewarded for the fruits of your labor, you will face frictional costs in doing business, and you might reduce your business in areas that don’t seem to be worth the risk.

Lying & cheating raises the costs for businessmen, which leads them to reduce activity by spending effort on fraud prevention, or raise prices to cover costs from fraud.? That reduces total economic activity — as prices rise, quantity falls.

But there is another more pervasive way to reduce trust.? It is to move the economic goalposts by changing the value of money.? Why does the Fed think it is doing something good by manipulating interest rates?? First, most central bank governors have not done it well.? They ease far too much, and tighten far too little.? They don’t take away the punchbowl when needed, or to the degree needed when the party gets hopping.

The result is too much debt, and an eventual liquidity trap which we are now in, and which the present Fed intensifies.? From Grice:

So now we know we have a slightly better understanding of who pays: whoever is furthest away from the newly created money. And we have a better understanding of how they pay: through a reduction in their own spending power. The problem is that while they will be acutely aware of the reduction in their own spending power, they will be less aware of why their spending power has declined. So if they find groceries becoming more expensive they blame the retailers for raising prices; if they find petrol unaffordable, they blame the oil companies; if they find rents too expensive they blame landlords, and soon. So now we see the mechanism by which debasing money debases trust. The unaware victims of this accidental redistribution don?t know who the enemy is, so they create an enemy.

The actions of the Fed are not costless, they take purchasing power away from others.? Further, the Fed will find it exceptionally difficult to remove policy accommodation when the time comes to do so.? Why?

It is a constant that the more the Fed eases, the worse the adjustment is when the tightening comes.? This one will be a Lollapalooza.? I have often said that Fed tightening cycles end when something blows up.? But what happens if something significant blows up early in their tightening cycle, and inflation is still running hot?? Or that interest rates have risen enough that there is no way that the US Government can ever repay their debts?

This is the second aspect of trust.? What is my money worth?? Why do we have these worthless bureaucrats with bad economic theories trying to manipulate our actions, when they lead us into overindebtedness?? Yes, in the short-run it looked good, BUT WHO IS LOOKING OUT FOR THE LONG RUN! Where, pray tell, are the statesmen looking out for our long-term well-being?? Ron Paul has retired.? Tom Coburn acts in the shadows.? Rand Paul is new… is there anyone else thinking long-term?? I see little of it in DC, in either party.

Few want to take the political & economic pain necessary to reduce debts and liabilities that we will not be able to pay.? And as such, businessmen limit their activities, because they don’t see benefits to taking risk in an abnormal environment., and growth reduces.

As I said to a friend today:

We live in unusual times.? Long-term valuation measures are flashing red.? Some short-term measures are flashing green.? Marginal productivity of capital is declining, and so firms use excess cash and borrowing capacity to pay dividends and buy back stock, because profitable organic growth opportunities are few.? That is not a great environment to be long stock.?

Further harming the environment is the tight coupling of government policies on monetary policy and the deficit.? Thus, even with bonds, I?m playing it relatively safe.? To me, this is mostly a time to preserve capital.

Economic growth requires trust in society.? Without trust, there is no growth.? That means policies and laws have to be long-term & dependable.? When things change too much, economic actors slow down, because it takes time to work through change.? (And that’s another reason why the PPACA will be a job-killer, and slow down the economy.? It is too big, too complex, too burdensome — it was not designed to extend healthcare, but to destroy the relatively good pre-existing private system.)

I am not surprised that growth has slowed; I am surprised that markets are as high as they are.? When the Fed finally overreaches their abilities, we will painfully learn the governments and central banks are not omnipotent, and that they more often hinder our prosperity than not.

Linear Thinking in a Chaotic World

Posted on 15 March 2013 by David Merkel

If some is good, then more is better.? That’s the way simpleminded people think.

Think of alcohol.? A little is good, but past a certain point, more is bad.

I think about central banking the same way.? Until recently, quantitative easing seemed to stimulate the economy, but each increasing dose has done less.? The last one seemed not to work at all, and long rates rose amid buying of bonds by the Fed.

The same applies to running deficits.? Perhaps the Keynesian solution works when there is adequate borrowing capacity in the private sector, but when many cannot borrow more, running high deficits may scare businessmen and consumers, because they wonder whether the system is stable or not, how the books will eventually balance, etc.? Inflation, deflation, higher taxes, currency depreciation… there are so many possibilities.

The leaders in simple-mindedness are Ben Bernanke, and Shinzo Abe of Japan.? Add in George Bush, Jr., and Barack Obama — deficits don’t matter.? They are like Fat Freddy with a hammer; every problem looks like a nail, and he will whack it with his hammer.? BAM!? It’s better, right?

Economies are complex because people are complex, and groups of people are even more complex.? The simplistic tools of neoclassical macroeconomics do not work in situations where there is too much debt, but the ideologues display confidence to the watching world.

When this pattern breaks it will be ugly, and I don’t know when or how it will be ugly.? It all depends on whether policymakers move to inflate or deflate.? You might say, “Of course they will inflate.”? Many thought that in the Great Depression, and they were wrong.

My main point here is that we all know less than we think about the future.? We have no idea as to what might finally derail the policy monoculture of the dominant nations — large deficits and loose monetary policy, but it will derail, and how it will resolve is a mystery.

So diversify your asset allocation into things that benefit from inflation and deflation — maybe you will keep something after the crisis hits.? After all, the looser monetary policy is, the worse the adjustment when the tightening comes, and monetary policy has never been looser than this since 1790.

Sorted Weekly Tweets

Posted on 15 March 2013 by David Merkel

US Politics & Economic Policy

Employers Blast Fees From New Health Law http://t.co/FfuBRO2HQp Phases in the added costs of covering sick people previously uninsured $$ Mar 15, 2013
Conservative Groups Warn GOP Lawmakers About Deals With Obama http://t.co/vui4GOINCw If this were a 2-player game, would have been solved $$ Mar 15, 2013
Gundlach: Investors are asking the Wrong Question http://t.co/xA1UgvCica ht: @ReformedBroker QE as a permanent affair w/which we have 2 live Mar 15, 2013
New Group Pushes Corporate-Tax Overhaul http://t.co/P3dwgqQON6 Trying 2 End Double Taxation of foreign profits. Hasn’t worked so far $$ Mar 14, 2013
The Almighty Dollar Is Back http://t.co/F3iP3Zblyk Skeptical. Waiting for the Fed to announce increase of QE to send the $$ back down Mar 14, 2013
GIs Fighting Nazis Last Time Factory Workers Toiled Longer http://t.co/pVMlMGFRQ0 This is optimistic for new hiring $$ Mar 14, 2013
Grand Bargain Taxes, Entitlements Cuts Await Deal Makers http://t.co/gJZ2c4Uc17 My sense is that we r heading 4 another deadlock $$ Mar 14, 2013
Refusal to Expand Medicaid May Cost Employers $1 Billion http://t.co/kpxJmCeZvT Pressure is going to grow to eliminate PPACA & Medicaid $$ Mar 14, 2013
US Growth = Inventories http://t.co/dOIp5n9sPH Much of the presumed growth in the US is just rebuilding of inventories to a peak level $$ Mar 12, 2013
GOP Budget Establishes Contrast With Democrats http://t.co/ocLQndOvsP No chance of it being passed, but gives an idea of where 2 sides r $$ Mar 12, 2013
SEC Charges Illinois Over Pension Funding http://t.co/MxEF6hPYPy This is how it should be. No one gets punished in the slightest. $$ Mar 12, 2013
Note from last tweet: a lot of ppl want to punish bankers, what about state officials who lie – they r much bigger, where is the outcry? $$ Mar 12, 2013
Fed mulls putting a ‘not for sale’ sign on its assets http://t.co/uZAcaHmLeO A sign of weakness from the Fed; they know they r trapped $$ Mar 10, 2013

Roman Catholic Church

Jesuits Had Past Struggles With Popes http://t.co/P8Vy8YEifr In the RC church, they have top liberation theologians &their top opposition $$ Mar 14, 2013
Ten things you probably didn?t know about the Jesuits http://t.co/tFijZNMkV9 If the Church have defined anything to be black… amazing $$ Mar 14, 2013
The sins of the Argentine church http://t.co/FTzKlsq1I7 New Pope may have been complicit w/Military Dictators killing their enemies. $$ Mar 14, 2013
The Changing Church http://t.co/mDPol6orR5 Interesting 2c change in locations of Cardinals. Size of RC church overstated, many not active $$ Mar 14, 2013
How Is the Pope Elected? http://t.co/j8p5L9dB5I A little late, but I thought this was an interesting infographic on papal elections $$ Mar 14, 2013
African Catholics Look to Black Pope to Safeguard Tradition http://t.co/vxZrJJDgvv US Media does not get how traditional most Catholics r $$ Mar 13, 2013
Black Smoke Signals No New Pope http://t.co/9qp8nzlbRb More & less unity in RCC than commonly thought. More: Europe, Less: elsewhere $$ Mar 12, 2013

Financial Markets

To all of the fixed income followers out there: someone asked me today to recommend good bond blogs. What would you recommend? Mar 15, 2013
Highest Bond Yield at Auction in a Year Could Be Sign of Things to Come http://t.co/fShhD5iAlp Or it could be a buying opportunity $$ Mar 15, 2013
$OAK Founder Knows How to Get an Edge in Investing http://t.co/TaRQSiK5gI “Experience is what u get when u didn’t get what u wanted.” $$ Mar 14, 2013
Smallcap Stock Volatility Index Hits All-Time Low http://t.co/l6tCXV7VS4 Complacency is the rule of the the day among small cap stocks $$ Mar 14, 2013
5 ways Warren Buffett invests that you don?t http://t.co/AeCs8fqe6g Good job describing what parts of Buffett’s strategies can b mimicked $$ Mar 14, 2013
Team Alpha Retirement Portfolio: Dividend Investing Vs. Annuity Purchasing http://t.co/HNHqI40vDP Example of y I don’t read Seeking Alpha $$ Mar 14, 2013
New Carlyle Group Fund Lowers Bar for Investors http://t.co/xiCTwy07Zk As @reformedbroker aptly put it, “Muppet Bait” Avoid. Avoid. $$ Mar 14, 2013
Fidelity to Expand ETF Relationship With BlackRock http://t.co/d4PIiCb7oh Fidelity says “Me 2,” by partnering with $BLK . No value added $$ Mar 14, 2013
moving down-market http://t.co/qP0YSWKubG @researchpuzzler has it right, inviting small accounts in means opportunities r getting worse $$ Mar 14, 2013
Historical S&P 500 Price to Sales (P/S) Chart http://t.co/dm2ZhDDgtE Useful little chart – around avg now, but profit margins r a record $$ Mar 13, 2013
SP500 Bull and Bear Factors – Not so Fun Damentals! http://t.co/5OjwvLbLPw Bull factors: QE, Buybacks, Yen. Bear: Econ data, Earnings mo $$ Mar 13, 2013
Gold Sales From Soros Reveal 12-Yr Bull Run Decay http://t.co/ze7DSsdIkN Makes me want 2 do a piece on $$ weighted vs time weighted on $GLD Mar 13, 2013
Why (Most) People Hate Good Financial News http://t.co/PZcf1usKD1 Regret is a strong force in psyche of amateur investors: missing out $$ Mar 12, 2013
How Much Of The Stock Market?s Growth Is Caused By Its Shrinking? http://t.co/Kfxipqvr1Y I would be skeptical here; capital changes weak $$ Mar 12, 2013
Securities Lending: Worth The ?Risk? http://t.co/AZxSKFzM2T When done right, sec lending is almost free money, the risks r low. $$ Mar 12, 2013
New ETF Underway for Distressed Debt http://t.co/Wp3ZPwaZqj Bad idea. Creating indexes for distressed bonds will be hard, Won’t attract $$ Mar 12, 2013
Firms Send Record Cash Back to Investors http://t.co/n0vNv0ppei A sign of economic weakness; there are few places to invest for growth $$ Mar 10, 2013

Wrong

Wrong: Amazon Preparing Bid For Barnes And Noble? http://t.co/qYB3yE6u8U Combination would not be allowed by the FTC $$ Mar 13, 2013
Wrong: Why Insurers May Be Unprepared for the Next Big Storm http://t.co/WuJIpvtVBj Most P&C insurers have more than adequate reserves $$ Mar 13, 2013
Wrong: The US can?t afford a Chinese economic collapse http://t.co/9vskptvxvx We can afford it; China won’t affect much in the US $$ Mar 12, 2013

Rest of the World

China s Next Potential Bubble: Hello, Anybody Home? http://t.co/IstgcTQZCN Trapped. Potential sellers need prices 2 stay high, buyers low $$ Mar 15, 2013
Embrace consumption, IMF’s Zhu urges China http://t.co/TAc5toyktZ Easier said than done. Party not ready to give people more freedom. $$ Mar 15, 2013
Nordic Testicular Cancer Mystery Prompts Chemicals Probe http://t.co/LqwH8klTLq Interesting, might be a combo of genetics & environment $$ Mar 15, 2013
Jeffrey ??s Japan Stocks http://t.co/lvhM6LFXAv?s-japan-stocks/?utm_source=dlvr.it&utm_medium=twitter Weak yen drives Japan stocks up $$ Mar 15, 2013
Recent cyberattacks could be part of a Chinese military strategy started nearly 20 years ago http://t.co/NxZ99g2ZKo Explains what is up now Mar 14, 2013
Brazil?s Richest Family Forging $13 Billion Niobium Dream http://t.co/2MHbOkhHPd Stronger flexible steel from a Brazilian tech company $$ Mar 14, 2013
Even Berlusconi Can?t Slow Bulls Boosting Euro View http://t.co/PV2mGvfHRr Great 4 core Eurozone, bad news 4 the fringe Eurozone $$ Mar 13, 2013
Chinese inflation hits 10-month high http://t.co/rGZJHoZsqj The end of the cycle comes when Chinese inflation gets out of control $$ Mar 13, 2013
Snow Causes European Travel Chaos http://t.co/tz3afCLET9 That’s one thing about weather & climate, constantly changing & always will $$ Mar 13, 2013
Should You Bond With Azerbaijan? http://t.co/gpE429eGa8? by @jasonzweigwsj | Emerging market govts are better run than developed govts $$ Mar 12, 2013
Norway Fund Flees Currencies Tainted by Stimulus Addiction http://t.co/X7YasIGkKn Rational response2 depreciating currencies: hail Norway $$ Mar 12, 2013

Banks

JP Morgan’s Jamie Dimon showed too much hubris and too little humility http://t.co/4feQB2Q6Jx @moorehn highlights cultural problem @ $JPM $$ Mar 15, 2013
Bubble Exchange: Technology vs Financials http://t.co/BJKoaFfjdo Suggests that financials, not tech, will do better in the future $$ Mar 15, 2013
EU Said to Plan Concession on Tax Credits as Bank Capital http://t.co/Ss3J4KBGbv Deferred Tax Assets should not be allowed as capital $$ Mar 15, 2013
Deferred Tax Assets r only valuable if a company makes $$ in the future, which for a bank in distress is less likely; should not b capital Mar 15, 2013
Beware of a New Banking Bubble http://t.co/gr5c2S9NaI Three recent deals involved premiums of 32% to 83% above tangible book value $$ #fire Mar 14, 2013
Fisher and Rosenblum: How to Shrink the TBTF Banks http://t.co/pNfzML2A22 Could work, roll back safety net, keep pieces small, holdcos fail Mar 14, 2013
5 Big Questions for the Future of Retail Banking http://t.co/sCKi6QjfCu Branches buy/sell, online/mobile, layoffs, interest margins down $$ Mar 14, 2013

Companies & Industries

Lawmakers Examine Ethanol Credits’ Affect on Gas Prices http://t.co/5RHXnKcuFG Wasteful program doesn’t aid conservation adds 2 pollution $$ Mar 15, 2013
5 beloved tech products that were sentenced to death http://t.co/bg4S90UHlZ Impending death of Google Reader makes writer wax nostalgic $$ Mar 15, 2013
Google and Bing Say the Future of Search Is Conversational http://t.co/mx2gfh6oSr Software improves ability 2 understand contextual data $$ Mar 15, 2013
Herbalife short-seller sues banks, Icahn over alleged fraud http://t.co/NaL4X9aXW3 Losing investor throws good $$ after bad, will not win Mar 14, 2013
Evolv, Making Hourly Workers More Profitable, Lands $15 Million http://t.co/DDEyoCk7Ay Improves retention of the employees u want 2 keep $$ Mar 14, 2013
Lincoln?s Cooper Shuns Shoot-For-Moon Funds After Goldman http://t.co/7PdLGT5TGb This does not make me feel better about $LNC. Avoid. $$ Mar 14, 2013
How Benjamin Franklin Invented the Mail-Order Business http://t.co/TC6DmWsZck A look at the precursors to mail-order retail. Interesting $$ Mar 14, 2013
Lego Builds New Billionaires as Toymaker Topples Mattel http://t.co/jxkqNatzZk Family controls 75% of the operation through Kirkbi A/S $$ Mar 14, 2013
8 Megatrends Defining the Oil & Gas Industry http://t.co/Taz5Dsujwh Nationalization, Ending subsidies, Green, New frontiers, LNG, M&A $$ &c Mar 14, 2013
Blackstone Said to Get $2.1 Billion Loan for Home Purchases http://t.co/qDg7DrSBGk I’m skeptical, don’t think renting homes is scalable $$ Mar 14, 2013
Many hospitals, doctors offer cash discount for medical bills http://t.co/ckLOHxh1TH ht: @dpinsen | Sometimes ucan pay less w/o insurance $$ Mar 13, 2013
Gas Rigs Drop to Fewest Since 1999 as Drilling Declines http://t.co/b3YztqbTqs Almost like the old days when they would flare off natgas $$ Mar 13, 2013
Starr Proceeds With Fight Over $AIG Rescue http://t.co/WPNIOyib7B I don’t think he will win, but Greenberg will get his day in court $$ Mar 13, 2013
Beating The Downturn By Degrees http://t.co/9BT69ix6Fs Good summary article on the for-profit educators $$ Mar 13, 2013
Liberal-Arts Colleges Dangle Deals to Woo Students http://t.co/v3Qd07x8AD Pay for 4 years & never have 2 pay again; u *can* finish 4 free $$ Mar 13, 2013
InTrade Online Betting Site Shuts Down Abruptly http://t.co/Rb0Ppald2u A long shot from the start, current bettors may b stuck w/the loss $$ Mar 12, 2013
Green Cars Have a Dirty Little Secret http://t.co/wk5UfvYiYn Producing and charging electric cars means heavy carbon-dioxide emissions. $$ Mar 12, 2013
Uninsured Americans Get Hit With Biggest Hospital Bills http://t.co/6QeybZMIz8 First value of insurance is buying power lowering prices $$ Mar 12, 2013

Other

Jim Gaffigan Is the King of (Clean) Comedy http://t.co/RhUM30krSU Heartening 2c clean humor getting attention; certainly harder 2 do $$ Mar 15, 2013
The Bearded Man http://t.co/ub5n07UjFZ I’m no trendsetter. If you’re out of fashion long enough, eventually u accidentally get in fashion $$ Mar 15, 2013
Does money taint the sharing economy? http://t.co/yTjd3w8ThO If you want an organization to last, there must be a profit margin $$ Mar 15, 2013
Scientists find how deadly new virus infects human cells http://t.co/YLfoqPbvJ1 Disease is similar to SARS. Infected 15, killed 9 $$ Mar 14, 2013
Former Ravens May Outnumber Ravens http://t.co/SIxpATVmC6 Noticed in Baltimore; curse of the Joe Flacco contract; less $$ for rest of team Mar 14, 2013

Retweets & Replies

‘ @tradewins @moorehn The problems are concealing data from the regulators, & Dimon perhaps concealing what he truly knew at the time $$ Mar 16, 2013
@TWealthMgmt Yeah, they are good, & I mentioned them. Seems many bond blogs have folded; they had a finite maturity Mar 15, 2013
@nelson3748 Railroads r scarce; impossible to replicate; has a big moat w/pricing power; trucking has no moat; scale is needed Mar 14, 2013
I just left a comment in “5 ways Warren Buffett invests that you don?t – Jonathan Burton’s Life Savings – MarketWat?” http://t.co/2tjAaDwkV7 Mar 14, 2013
Yes, but the nice thing about Pi day is that it has been a round RT @EddyElfenbein: Celebrating Pi Day seems so irrational. Mar 14, 2013
@EliHoffmann Don’t get me wrong I *like* dividends & have for a long time. They r more frail than the new advocates assume Mar 14, 2013
@EliHoffmann There r other things he got wrong re insurance, but the faith in dividends is naive. They get cut in bad periods like the ’70s Mar 14, 2013
@EliHoffmann Annuities r guaranteed by state guarantee funds Mar 14, 2013
@DavidSchawel Thanks, but r u bullish on it or neutral? Mar 14, 2013
@DavidSchawel How successful? Mar 14, 2013
No RT @pdacosta: VZ president says Chavez, now close to Christ, had a hand in choice of South American pope http://t.co/WYR2izYIsk Mar 14, 2013
“Pretty cool. Billy Joel took a chance on the student, and it was beautiful. Kid had moxie.” ? David_Merkel http://t.co/YBUfXDNSGH $$ Mar 14, 2013
UCan say that again RT @ReformedBroker:Muppet Bait MT @researchpuzzler:Don’t miss your chance 2 play w/big boys of PE http://t.co/5fg2tLPXS3 Mar 14, 2013
Listening to broadcasters in Rome, it reminds me of the Super Bowl when the power went out; gotta say something, but not much to say… $$ Mar 13, 2013
. @scott_matagrano Also, $AIG’s domestic life companies were BK until rescued b/c of sec lending… long story: http://t.co/EmnSclWqVS $$ Mar 13, 2013
@scott_matagrano Not *quite* riskless. There were some bond trades I could not execute b/c we could not get the shares back. Mar 13, 2013
@merrillmatter I don’t but some of my clients do. Mar 13, 2013
@ReformedBroker Hey Josh, where is that indicator now? Mar 12, 2013
@weelifeworkplay Saw that, but property tends not to vary in value as much as currencies do. Owning land tends to preserve value, mostly $$ Mar 12, 2013
@prchovanec In a word, overvalued. P/E measurements of value fluctuate too much b/c earnings varies more than sales or book $$ Mar 12, 2013
@exMBB I avoid life companies that primarily write variable business; the accounting quality is poor. No opinion on $PNX $$ Mar 12, 2013
@SagittaCapital I’m afraid that one is a ‘No.” I don’t have a lot to say there. Mar 12, 2013
@60Minutes @sherylsandberg That’s dumb. It could just be rudeness, or ego, and the same applies to boys. Will to power <> leadership $$ Mar 11, 2013
@prchovanec P/E is more significant in the short-run. CAPE10 & Q-ratio more significant in the long run. $$ Mar 10, 2013

FWIW

My week on twitter: 48 retweets received, 11 new listings, 51 new followers, 55 mentions. Via: http://t.co/cPSEMLXpb8 Mar 14, 2013

On Insurance Investing, Part 5

Posted on 14 March 2013 by David Merkel

The Squishy Stuff

I think I have just one more post left after this one, and this series ends.? This post deals with qualitative factors, which are harder to ascertain than the quantitative factors, and require more experience in order to learn.? But maybe I can aid my readers with a few pointers so they can learn faster.

Before we go, this series published at The Street.com University is an excellent start for any analyst, and includes many insurance examples.? But now for the rest.

Some products cannot be underwritten.? Anytime the insured knows more than the company, that is not a policy to write.? As an example, I toss out Long-term care policies, where the insurance industry has lost and lost again.? The insureds know their likely claims far better than the insurers do.? I feel the same about credit and mortgage insurance, where losses are so correlated that in a real crisis the insurance company fails, and those relying on the insurance fail as well.

I feel the same way about variable annuity living benefits at present — a rising market sets up the losses for when the market falls.

Avoid investing in companies where the law of large numbers does not apply.? This is true of all financial coverages.? If there is one big macro factor that drives your business it is not a safe place to be.

On Management

Management teams should be reliable.? They should always give complete and consistent answers to all questions, and demonstrate that they are managing the business, with underwriting being profitable.? They also should be willing to let results fall short of analysts’ estimates when it is true.

Though the short-term stock performance will be bad, the honesty will support the stock nearer to book value.? Investors appreciate honest companies, even when they do badly.

Finally if management has any sustainable competitive advantages (rare in insurance) they will use the advantages, and describe them in general terms so hat other insurers don’t reverse engineer them.

Be sure and read my series listed above.? It offers far more than what I have written here.

Neglected Stocks Are Typically in Strong Hands

Posted on 13 March 2013 by David Merkel

Neglected stocks — I measure it by the ratio of market cap to average dollar volume.? 15% of my portfolio is allocated to such stocks, but I would be happy for it to be 50%, if not more. Many of my companies have a single large holder or group — Industrias Bachoco, National Western Life Insurance Company, CVR Energy, and?Berkshire Hathaway.? These companies have few analysts; there is no way for a brokerage to make money off of them.

Yes, there is a control discount for such companies, because they can’t be taken over, except by the dominant owner.? But if they are well-run, they can be great places to invest.? The dominant investor has his interests aligned with yours over the long haul.? This means that in good and bad times, a large amount of the stock is locked up, and is not available to be bought or sold.? Strong hands hold the stock, which is typically a good place to be.

I like holding cheap, illiquid companies, where there is no hint of financial stress, and they are earning decent money.? I don’t care if they are in dull industries.? If they are compounding their earnings at a decent clip, the stock will eventually catch up.

The point is to own good businesses at good prices.? That’s what I aim to do.

Full disclosure: long BRK/B, CVI, IBA & NWLI

Should Brokers Be Fiduciaries?

Posted on 13 March 2013 by David Merkel

From a reader:

As a reader of yours, I find your views always interesting and well thought-out, even when I disagree. Thank you for sharing your thoughts, wisdom, and experience, as I truly believe you raise up the areas of thought you touch.

I have a question that I hope you will address on your blog, though the urgency is low. As a CFA and CFP working in a small RIA, I have been paying close attention to the debate about imposing a uniform fiduciary standard onto RIAs and brokers. I would loved to hear your thoughts about this topic, maybe addressing the following:

Should brokers giving advice be held to the high fiduciary standard of advisers?

Could a two-tier fiduciary standard work (i.e. codification of the Merrill rule)?

The primary broker argument against the fiduciary standard, as I hear it, is that it would make services to retirement accounts unprofitable. Do you agree?

I hope to hear your thoughts on this published on your blog because I know that quite a few people with second or third degree connections (maybe first, but I don’t know) to the policy makers and lobbyists read your blog.

First, thanks — I know my reader base stretches into some lofty places, not that I deserve it.

There should be informed choice when choosing those that advise investors.? I don’t think that brokers should be held to a fiduciary standard, but I do think they should have to state to clients that they have a potential “conflict of interests.”? Clients don’t make money when trades occur, but brokers do.

The trouble is, retail investors are the dumb money.? There is a tension between allowing freedom and letting people get shorn by those that are more skilled.? Some financial products are sold not bought, and it is largely because people will not plan in advance for themselves.? We see that in life insurance all the time.

Here’s the other side of it: we can’t make retail investors smart.? In most transactions of life, the foolish get hosed.? We can’t protect people from being dumb.? If we did that consistently, our economy would probably fail.

The idea of “just prices” does not work.? It’s not flexible enough.? In the end, things work best when we let let markets work, but require extensive disclosure that most will understand, and some won’t.

Perfection is not possible in law or regulation.? If we get “pretty good” we have hit the top.? Enjoy pretty good where it exists, though I would encourage investors to use those that have to put your interests ahead of all else.

PS — there has to be a way to service retirement accounts — as with insurance contracts, some sort of AUM fee or trailer commission would do it, but not something based off of transactions…

On Annuities, Particularly Variable Annuities

Posted on 12 March 2013 by David Merkel

From a Reader:

I read your blog quite frequently and really enjoy the work you put into it.? It helps me to think about other opinions/concepts and always look at things in a different light.?? I’m a financial advisor in St. Louis for a small boutique firm and truly feel your blog helps me be a better financial advisor.
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Anyway, in trying to better myself and feel even more comfortable about recommendations I make for clients, I wanted to get your opinion on annuities.? In short, I used to avoid these things like the plague early in my career.? Now?? I find myself using them quite a bit for a portion of clients money and I find that in the planning process, they are a great tool in which to be able to tell clients exactly how much income they can expect in 5 or 10 years when they retire.? These riders and benefits are actually very useful in my opinion and have come a long way over the years.? I guess where I struggled in the past was during the 2008 crisis when my nice, neat 60/40 allocation for clients still lost them money…..sure, I was charging 1% and that’s cheap compared to the cost of an annuity but I can’t help but think how far ahead of the game clients would be if they had a portion in a product that guaranteed their income.? Of course, their account values might be down but their guaranteed income would still be intact.
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So, with all that in mind and because of your background in the insurance business, I figured you might be the perfect person to fire away a few questions.
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1) What’s your general opinion of guaranteed income riders?? Do you think they are worth it?? I know everything is relative to clients needs but from a pure practical standpoint, do you find that the benefit is still a good one?
2) What’s your opinion on contracts like with Jackson National or Metlife that offer a 5% guaranteed withdrawal AND a minimum death benefit combo of at least your initial contribution?? You have to leave $1 dollar left in the contract for the death benefit to pay but it seems to me to be an attractive option….guaranteed 5% w/d’s with assurance you can pass at least the initial premium on to your spouse or heirs
3) Lastly, what’s your take on this recent article?? Maybe for clients not wishing to pass money to heirs, this might be a good strategy?? Seems smart actually when they lay it out this way…..
http://www.advisorone.com/2013/02/22/milevskys-va-shocker-turn-on-your-living-benefit-n
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I’m sure you are extremely busy.? I appreciate any feedback.? Sorry to ramble, just wanted to get my thoughts across.

When a Variable Annuity is popular, it is because the secondary benefit is underpriced.? Many life insurance companies sell such policies; that is one reason why I don’t invest in them.? The other reason is that GAAP accounting for life insurers is too liberal, particularly with guarantees on variable products.

There are many attractive benefits that have been offered in the past with variable annuities.? If an insurance company offers to buy you out of an annuity with such benefits, refuse them, unless you know better than they do that you will die soon.

There are some attractive benefits out there, and insurers that have underpriced the benefits.? Where you find attractive benefits, have clients invest in them.

Finally, if the living benefit is attractive, exercise the option.? Think in your own interests.? What will give you the best payoff?? At a time like this, where equity values are high, converting asset value into income could be a great idea.