The Aleph Blog – Page 113 – Helping Institutions and Ordinary People Invest Better by Focusing on Risk Control

Wall Street Hates You

Posted on 3 February 2013 by David Merkel

I have a saying, “Don’t buy what someone wants to sell you. Buy what you have researched.”

And so I would tell everyone: don’t give brokers discretion over you accounts, and don’t let them convince you to buy unusual bonds, or obscure securities of any sort.? By unusual bonds, I mean structured notes, and eminent men like Joshua Brown and Larry Swedroe encourage the same thing: Don’t buy them.

To the extent that it can, Wall street tries to sell retail investors the exposures that they don’t want.? They offer a higher yield, but take it away and then some if the things that they want to hedge go wrong.? They sell you their problems, and if things go well you are unharmed, but woe betide your capital if things go wrong.

Trust is not owed to financial advisers or brokers.? You need to treat them skeptically; if possible, you need to understand? how they are compensated.? They tend to earn more from securities that are less in the interest of buyers.? (It is not much different from insurance salesmen.)

Wall Street exists to sell promises.? That can take several forms, two of which are:

1) Buy an ownership interest in this promising company.? It’s the wave of the future.

2) Buy a promise to pay from this company under these conditions, and we will pay you an above average yield.

Wall Street knows more than you.? They may make occasional mistakes, some of them big, but compared to retail investors, they know far more.? They profit off of retail investors.? You are the natural resources that they mine.

So why play with them?? If you are using a broker, it is time to end your relationship there, and work with someone who has to put your interests first.? Look for someone who is required to put your interests first.

It’s not as if investment advisors like me always succeed; we don’t.? But the best of us do avoid greed and fear, and so protect investors from their worst instincts — selling low, and buying high.

Take control of your investing, and if you can’t do it yourself, find a talented person with self control who can.

Four Sources of Buy Ideas

Posted on 3 February 2013 by David Merkel

Presently, I have four ways of sourcing buy ideas in the stock market.? Here they are:

1) I read widely, and when I see something interesting, I either jot it down, or hit the “print” button.? I put it in the pile for the quarterly portfolio reshaping.

2) Preston Athey gave me this idea.? I set up a bunch of Googlebots to let me know when a CEO leaves a firm.? For companies with a lot of underused assets, that can be an incredible catalyst to unlock value.? Print, add to pile.

3) My industry studies produce a list of out of favor companies with better prospects than most — the challenge is to separate out the “buggy whip” industries, from those that are genuinely cheap.

4) Finally, I study 13Fs, and try to understand what bright investors are holding and buying.

After I assemble all of the companies that might be worthy investments, I try to forget where I got the idea from.? That forces me to analyze the company my own way, and not merely trust someone or some method that I think is bright.

After that, I engage Portfolio Rule Eight, and make my current portfolio holdings compete against the new ideas.? This is a much better way, a more businesslike way to choose companies to buy.? It forces managers to make explicit decisions that improve the characteristics of the portfolio, improving the probability of winning.

Do you have better ways of sourcing ideas?? If so, leave them in the comments.

On Investing Games & Contests

Posted on 2 February 2013 by David Merkel

I am not a fan of investing games and contests.? Here are my reasons:

They are too fast.? Investing is a slow process; games make money far more quickly than markets do.
They are biased toward winning.? Many games have a positive bias built into them, returns are far higher than are commonly attainable.
Contests encourage undiversified portfolios.? The only contest I have seen that did not do that was the Value Line Contest in 1984, where everyone had to pick ten stocks from ten buckets going form low to high price volatility.? Great contest — I was in the top 1%, but did not win.
Good investing is boring.? It is work.? Most of it is not a game, though I will admit there is some game in buying and selling — gotta beat the algorithms at their game.
Games are not as robust as the markets.? The markets serve up all manner of surprises, while games typically mimic the past.

Here’s what I can endorse, if done fairly: paper-trading.? As with any sort of self study, if you want it to be valuable, you have to be a strict cop on yourself.? I papertraded a number of times in the 80s, and I always did well vs the market.? My porfolios typically had 40-60 companies, but they always did well.? As a TA in Corporate Financial Management, I would share my ideas with students, who liked my enthusiasm.? The professor was a EMH devotee, who when he heard that my paper portfolio was up 40% while the broad market was up 20%, said, “Oh, you pick stocks that have a beta of two.”? I tried to show him that was not the case, but “you can’t teach a Sneech.”

Paper-trading moves at the speed of the market.? It is close to real.? It shows you how difficult it is to make money.? I recommend it to all of my readers.

Sorted Weekly Tweets

Posted on 2 February 2013 by David Merkel

God gave proverbs to the Jews; Epigrams were of the Romans. Now we do the same through tweets, why do I sense bad omens? #badpoetry Feb 02, 2013

Credit

One of Warren Buffett’s Greatest Trades http://t.co/wnU2g1z4 Comparing Buffett winding up his partnership to lack of distressed opps now $$ Feb 01, 2013
Be Very Afraid When Fear Disappears From Markets http://t.co/t8wKalsQ Low implied vols, low yields, High Q-ratio & CAPE10 $$ Feb 01, 2013
How a $91 million loan on the Marlins ballpark will cost Miami-Dade $1.2B http://t.co/F2u2rZbP Poway-style debt in Florida $$ cc @munilass Jan 31, 2013
Big, Rich, and Wobbly: Wall Street Banks Are Still Sicker Than You Think http://t.co/irKmQqLy Mohamed A. El-Erian explains the problems $$ Jan 30, 2013
In US Debt We Trust- The Transfer from Private to Public Debt http://t.co/2nq1pGCn Total debt hasn’t declined much from peak, gov debt up $$ Jan 30, 2013
Chavez?s 681% Returns Mean Socialism Buoys Goldman http://t.co/IYPD6fEJ Give Chavez credit, at least his country paid what they owed $$ Jan 30, 2013
4 Reasons the Junk Bond Rally Will Continue in 2013 http://t.co/r7SF05NJ Check my comments. I like this site, but disagree w/the thesis $$ Jan 30, 2013
Pimco to DoubleLine Leveraging as Yields Retreat http://t.co/LBUsmfQ6 Here comes leverage; PIMCO and Doubleline gear up to get returns $$ Jan 30, 2013
US Not So High Yield Bonds : “It’s Starting To Feel A Lot Like 2007” http://t.co/PZ0dOyzC More like 2005-6, we need more leverage 4 2007 $$ Jan 30, 2013
The US High-Yield Corporate Bond Conundrum http://t.co/w0wlsn7s & this leads to buybacks & M&A. It all depends on how aggressive it gets $$ Jan 30, 2013
Investors Pivot Back to Banks http://t.co/ixvSSGf8 Bank bonds are likely safe, the stocks r another matter $$ Jan 30, 2013
Too Soon to Celebrate for Europe’s Banks http://t.co/cKT6OXli Let them deal with the mountains of bad debt & restructure them $$ Jan 30, 2013
Can anyone tell me why HY loan defaults are up, while HY bond defaults are down? http://t.co/gxfVA5za Usually they move in tandem $$ Jan 29, 2013
And very few LP CEFs at discounts, which is also true for HY bond CEFs. Preferred funds look a little more promising, but still pricey $$ Jan 29, 2013
Looking at bank floating rate closed end funds, a few r at high prems 2 NAV, such that if u bot the trust 2 liquidate would get 0% return $$ Jan 29, 2013

Companies

Newell Rubbermaid Goes After $127B Health Market http://t.co/lcarSSmS Interesting 2c consumer prods comps go after the healthcare mkt $$ Feb 01, 2013
Chevron Realigns Its Gas and Midstream Organization http://t.co/u1WoIl2Y Sort of thing u do, prior to splitting co into 2 | FD: + $CVX $$ Jan 31, 2013
Good 4 refiners $$ http://t.co/q3lVpoI5 US crude oil inventories are well above the upper limit of the average range for this time of year Jan 31, 2013
Container Shipping Faces Merger Urge as Money Dries Up http://t.co/7Kur08t6 Capital-intensive biz is tough when financing not plentiful $$ Jan 31, 2013
Oh, Full disclosure two tweets ago, I am long Valero, $VLO Jan 30, 2013
$ACE ?s Greenberg Asks ?Why R We Doing Guidance?? http://t.co/dKtvopDX Evan has impressed me after leaving $AIG | Chip off the ol block $$ Jan 30, 2013
Valero Looking at Rail, Barges to Ship Canadian Crude to Gulf http://t.co/diLQGBZC Cheap oil in middle of N. America wants2get2the Gulf $$ Jan 30, 2013
Singer Chases Icahn With Stake in Cheapest Oil Company Hess http://t.co/Hk4ynp6q Worth reading 2 understand activist investors $$ Jan 30, 2013
Fund Outflows? Blame the ‘Cliff’ http://t.co/QOq13Jn8 $TROW is a good firm. If anyone should not get fund outflows, they would b one $$ Jan 30, 2013
Fannie To Allow Walkaways by On-Time Borrowers http://t.co/Nnx00VfR & so taxpayers will pick up the losses for walkaways on FNMA mtges $$ Jan 30, 2013
Software Firms Find Tax Advantages http://t.co/5G2QXmmD A good transfer-pricing accountant is worth his weight in gold. $$ Jan 30, 2013
Apple Reverse Convertibles: How Brokerage Firms Pervert Everything http://t.co/4ugTpgTe Don’t buy structured notes. Listen2 @reformedbroker Jan 29, 2013
How Apple’s Fall Bit Bondholders, Too http://t.co/60fmfhle Structured notes: Wall St. gives u a small increase in yield & lots more risk $$ Jan 27, 2013

Central Banking

Japan’s lessons for America’s budget warriors http://t.co/ftUKEJPa Think this might be the start of unsterilized monetary policy globally $$ Feb 01, 2013
What finally convinced me to sell my long bonds 30 bps lower than now was market’s reaction to the Fed in December. http://t.co/vQONtgBC $$ Feb 01, 2013
The Fed?s Actions Are Counterproductive http://t.co/THDwyijc If printing $$ or issuing credit could bring prosperity, it would be here now Jan 31, 2013
2 early to celebrate ECB’s balance sheet reduction http://t.co/srQiQJ4Q @soberlook right again: off-Bal Sheet gtees dwarf BS improvement $$ Jan 31, 2013
Fed Policy Is a Drag on the Economy http://t.co/T3Wx0ezh I have argued the same here: http://t.co/l7MyjNLM John Taylor 4 Fed Chairman $$ Jan 30, 2013
Anyone else notice that all FOMC meetings are now 2 days long? Gives them more time to come up with creative errors in monetary policy $$ Jan 30, 2013
The Ghosts of 1994 http://t.co/Hdf2UFLi 2 things are different now: Fed was hawkish in ’94, few expected prepays 2 decrease so much then $$ Jan 30, 2013
What Happened To Markets The Last 15 Times The Fed Tightened… http://t.co/zq4TRGxg Long article, but instructive on tightenings $$ Jan 30, 2013
With Each Central Bank Move, Nations Are Impoverished More http://t.co/70lBSDeQ Combined actions of Central banks create global infation $$ Jan 30, 2013
USD-JPY: Short Term Reversal? – Hara-kiri http://t.co/K9N3Viom Japan leads the race to the bottom. Will they stop sterilizing asset buys? $$ Jan 30, 2013
There are two things lacking that were present in 1994: a hawkish Fed, and expectations that RMBS prepays… http://t.co/DHekaqIN Jan 29, 2013
The Unintended Consequences Of The Greatest Economic Experiment http://t.co/0hEH3VS1 The Fed won’t admit it, but it is flying blind $$ Jan 28, 2013

Rest of the World

Greek Companies Test Bond Waters as Exit Risks Fade http://t.co/fOgUn41S I guess every dog has its day. Sleep w/dogs, wake up w/fleas $$ Feb 01, 2013
Best Stock Pickers Trawl Frontier Markets as US Funds Lose http://t.co/yfAKqI7t When mgrs seek unusual venues 4 investing, risk is up $$ Feb 01, 2013
Deutsche Bank Improved Its Capital Ratio By Changing Risk Measures http://t.co/jWTc73pR Risk mgmt is easy when you can alter standards $$ Feb 01, 2013
Spain’s crisis strategy under fire as economy buckles again http://t.co/Qeaeotx0 The ECB?s Mario Draghi is ?itching? 2buy Club Med bonds $$ Jan 31, 2013
Japan?s Government Proposes First Spending Cut in 7 Years http://t.co/DHpOH3II The journey to fiscal sanity begins w/a single cut $$ Jan 30, 2013
Canadian Mega Housing Bubble http://t.co/GwbpWMGs Quietly, the average Canadian HH has accumulated more debt than US & UK HHs. Who knew? $$ Jan 30, 2013
Chinese currency 2 loosen exchange rate: business chief http://t.co/q6zNLSGh Easier said than done; is China willing 2 absorb volatility $$ Jan 30, 2013
Scandal of Italy’s Monte Paschi means questions for Draghi http://t.co/mufcYFkI Had some reg oversight over Monte dei Paschi solvency $$ Jan 30, 2013
The Super Bowl, Chicken Wings and the FED – a Risky Mix ? http://t.co/EDCV958k The Fed has no idea what it is doing, the same as in 2007 $$ Jan 30, 2013
Why We?re at the End of Cheap China http://t.co/kSW2tbWG Argues there is more consumption going on in China, hidden in coprporate perks $$ Jan 26, 2013
The Biggest Housing Bubble in the World Is in … Canada? http://t.co/GgUfyM74 Interesting 2c France, Sweden, HK, & Singapore on the list $$ Jan 26, 2013

Speculation

Forget the ‘Rotation’, Here’s the Source of the Money Pouring Into Stocks http://t.co/tn4Dxs39 ~$30B of special dividends get reinvested $$ Feb 01, 2013
ML Fund Managers Survey – Jan 2013 http://t.co/GR19wML6 Professionals r hedging less equity risk, flexible capital increasingly committed $$ Feb 01, 2013
Bill Gross: Be very afraid of the markets http://t.co/k7Ouhax3 Favors: Currencies of creditworthy countries, short bonds, gold, HQ debts $$ Jan 31, 2013
Whan financial institutions start buying gold as an inflation hedge, only 2 possibilities remain: a top in gold prices, or hyperinflation $$ Jan 30, 2013
SP500 Earnings Optimisim : But let’s revise them lower! http://t.co/bPXqFSos We should expect actual earnings 2 come in below projections $$ Jan 30, 2013
Upside Risks http://t.co/AuT58IEC @reformedbroker gives us the bull’s case; I’m agnostic on market direction; think long yields will rise $$ Jan 29, 2013

Market Dynamics

Goodwill Is Bad News for US Assets http://t.co/8ctt5UeQ Not all goodwill is bad; if it produces extra cash deserves 2b treated as asset $$ Feb 01, 2013
It’s the Stocks You Don’t Own That Matter http://t.co/M3pDaeFl @herbgreenberg talks about new Forensic Accounting ETF $FLAG | Good idea $$ Jan 31, 2013
Your ETF Owns Too Little Amazon, &Other Index Quirks http://t.co/UOZINiEc Float-weighting underweights ?owner-operators? which do better $$ Jan 31, 2013
Asset Allocation & Rebalancing: (Still) Competitive Together http://t.co/FrLCygAY Rebalancing global value-weighted index: good strategy $$ Jan 31, 2013

US Economics

US GDP Q4 2012 Weaker with a Strong Mix http://t.co/ZmVlZZ52 In Q3, few talked about the weak mix, but yes, result better than headline # $$ Jan 31, 2013
U.S. Economy Unexpectedly Contracts in Fourth Quarter http://t.co/dmKSsHlf After getting upside surprises, shouldn’t we get one down? $$ Jan 30, 2013

US Politics

US government warns of hack threat 2 network gear http://t.co/lZvMgyOe Disable feature known as Universal Plug & Play on your network $$ Jan 30, 2013
How President Obama Lost His Shirt to John Boehner http://t.co/VZwfxqiw Interesting argument; not sure it’s correct. Seemed like a tie $$ Jan 28, 2013
Women?s Path to Ground Combat Strewn With Obstacles http://t.co/DkVG9UDM Only the strongest ~5% of women will be able 2b in combat $$ Jan 28, 2013
Bipartisan Immigration Plan Counters Republican Orthodoxy http://t.co/nL9Q8RFp Has some chance of passing 4 the 1st time in 6 years $$ Jan 28, 2013

Other

Psst…This Is What Your Co-Worker Is Paid http://t.co/3lUOLmT9 I’m not sure this is a good idea. What someone is paid is personal $$ Jan 31, 2013
Bombarded by Ads, Few Drivers Switch Car Insurer http://t.co/LsyjydyM Average ppl have an agent they trust until they get burned $$ Jan 30, 2013
Backyard Farming Gets Fancy http://t.co/0FqwgxRr High-End ‘Homesteaders’ Want Pricey, Stylish Tools; The $1,300 Chicken Coop $$ #noway Jan 30, 2013
15-Year-Old Creates Test for Pancreatic Cancer http://t.co/qrRalNtv This fellow beat the child of a friend of mine who came in third $$ Jan 30, 2013
Derivatives trader: ‘The trouble is, regulators are idiots’ http://t.co/PTJpQe9G In general, true. This is why dumb regulation is better $$ Jan 30, 2013
Liability Issues Create Potholes on the Road to Driverless Cars http://t.co/VDVux7vV If a driverless car has an accident who pays? $$ Jan 28, 2013

Wrong

Wrong:Piracy and Fraud Propelled the US Industrial Revolution http://t.co/JONyDRPd Doubt that explains more than 3% of American Success $$ Feb 01, 2013
Wrong: Alan Blinder:Everything You Think You Know About the Crisis Is Wrong http://t.co/gTVjTm4t TARP a failure; encourages moral hazard $$ Jan 31, 2013
Wrong: Morgan Stanley Buys Argentine Stocks as YPF Deal Lures BlackRock http://t.co/MdXXq1uu Until expropriation ends, avoid Argentina $$ Jan 31, 2013
Wrong: Bitcoin?s Gains May Fuel Central Bank Concerns http://t.co/bXNdgp9c Chart here: http://t.co/Xaz8cxbh Thin speculative market $$ Jan 28, 2013

Comments & Retweets

RT @japhychron: The Real, and Simple, Equation That Killed Wall Street | Guest Blog, Scientific American Blog Network http://t.co/9YDmZu … Feb 02, 2013
RT @BankersUmbrella: @AlephBlog …buying on margin at 5y high in NYSE, fund inflows higher than just before techbubble burst, net sales … Feb 01, 2013
You can say that again $$ RT @paulnovell: @AlephBlog unless you own an east coast refinery. Mid continent refiners are killing it Jan 31, 2013
@GlennBusch I almost moved to Poway to work for the last remaining large life insurer in San Diego; Offer fell through, company failed later Jan 31, 2013
@steve13smith So how are you doing at Minyanville & otherwise? Jan 31, 2013
@steve13smith Are you my friend from RealMoney days? Good to hear from you. Yes, I signed up on a Wednesday. It’s a useful summary to me. Jan 31, 2013
You can say that again RT @credittrader: $SPY vs $VIX – oops – http://t.co/ARvpNfRP Jan 30, 2013
Feels like it to me. RT @StockTwits: Has Value Turned a Corner? http://t.co/GQnUMCcw via @eddyelfenbein $$ Jan 30, 2013
@RossJaklik I don’t market. People ask me to manage their money. They get a clone of how I invest my own money. If that is not legitimate… Jan 30, 2013
@RossJaklik @faithmight @abnormalreturns In order to receive fees for investing OPM, you must pass the regulatory hurdles Jan 30, 2013
@RossJaklik @faithmight @abnormalreturns And to manage OPM legitimately, u have to start a firm like $TROW $LM $JNS $BEN $$ Jan 30, 2013
@wesbury @cabaum1 I want to get rid of the neoclassical economics monoculture at the Fed, & replace w/Actuaries & Value Investors $$ #dreams Jan 30, 2013
@prchovanec Enjoy it, friend. I have 8 kids, 5 adopted. Every age is fun, & has sorrows. Enjoy your kids while u can; they grow up fast $$ Jan 30, 2013
Little kids r so cute $$ RT @prchovanec: 3-year-old son William on new twin baby sisters: “Can they talk? What did they say?” Jan 30, 2013
Thanks, have ~3 more to go $$ RT @BarbarianCap: Great “101-level” series in the last few days on insurance investing over on @AlephBlog #ff Jan 30, 2013
+2 RT @niubi: ?@prchovanec: Twin baby girls Alice and Rachel Chovanec born at Amcare hospital in Beijing at 6:45am this morning!? Congrats Jan 30, 2013
premiums r so migh my nose is bleeding! $$ The RT @groditi: HY and Levered Loan CEF discount snapshot http://t.co/HH8tyX7x Jan 29, 2013
“You are not going to get as much from me, then. Not going 2 use Stocktwits as my Twitter client.” ? David_Merkel http://t.co/78eWsIVF $$ Jan 29, 2013
+1 RT @allstarcharts: Here is one chart that bothers me: $IWM vs $DJIA spread peaked weeks ago as $SPY makes new highs http://t.co/Bt9c6mlB Jan 29, 2013
@aenbrnood @GuldbergPeter I think both of your ideas have merit, thanks Jan 29, 2013
“”As for the part of the budget that won’t take care of itself, President Obama fought an ugly and?” ? David_Merkel http://t.co/ueQBGOkp $$ Jan 29, 2013
@prchovanec Leverage at each point in the chain of lending amplifies the impact of dodgy nonbank lending, esp when loans r short-dated Jan 29, 2013
A weakness in investment grade bonds RT @Convertbond: $DELL 5 Year CDS, Lesson on what an LBO can do to a credit.. http://t.co/foe7W2gf $$ Jan 28, 2013
@Danny_5079 That covenant is only common with junk bonds, though a few BBB bonds have it. That’s all. Jan 28, 2013
@Danny_5079 via arbitrage. Should have no effect on the deal, unless the bonds had a covenant requiring buying the bonds @ 101% in a buyout Jan 28, 2013
@Danny_5079 of the company & its pre-existing debt, thus leading to a decline in the value of debt, raising yield spreads. CDS reacts to it Jan 28, 2013
@Danny_5079 In a buyout debt is issued to finance the purchase that is equal or senior in terms of claim priority, reducing creditworthiness Jan 28, 2013
“They have to lure retail back in before the next bear?” ? David_Merkel http://t.co/lCQ1ex1c Jan 27, 2013
“If the risk parity players r still levered long credit, then they r the CDO equity of this cycle. End will b ugly” http://t.co/uR8ji9Ty $$ Jan 26, 2013
My problem is this: we have a dysfunctional credit market where yields are too low, and protections are… http://t.co/7mYgP0VQ Jan 26, 2013

FWIW

My week on twitter: 46 retweets received, 7 new listings, 87 new followers, 32 mentions. Via: http://t.co/SPrAWil0 Jan 31, 2013

Industry Ranks February 2013

Posted on 1 February 20131 February 2013 by David Merkel

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

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

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

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

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

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

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

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

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

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

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

The Red Zone has a Lot of Noncyclicals

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

So, as I considered the green and red zones, I chose areas that I thought would be interesting. In the red zone, I picked IT services and beverages. Stable industries.

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

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

But what would the model suggest?

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

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

Full disclosure: long SPLS, TOT, INTC, VOD

The Product that Never saw the Light of Day, Redux

Posted on 1 February 2013 by David Merkel

I love my readers.? How many Variable Annuity [VA] products got mentioned to me as a result of yesterday’s article? Four, out of 2 emails, 3 comments, and one clever guy who figured out my phone number (no, I don’t keep it secret).

In my opinion these are some of the better VA options out there.? It’s not quite what I proposed in my article, where every major mutual fund would offer T-shares, but they are close.

My main differences with these products is that:

the expense charges going from taxable to annuity should be smaller.
there should be more choices, aside from Jefferson National.
it would be better if the mutual fund companies took the lead in these matters.

As an aside, I pushed for products like this from 1996-2006.? By the time I gave up, I concluded that there was no one willing to offer variable annuity products that were truly cost-efficient.? Now we have at least four contenders, though I think my product idea would be better still.

But incremental improvement is a good thing.? Thanks to those who commented, emailed, and called.

The Product that Never saw the Light of Day

Posted on 31 January 2013 by David Merkel

I have never particularly liked individual variable life and annuity products.? But one day, I came up with an individual variable annuity product idea.? I don’t think it has ever been done.? If it has been done, please note it in the comments below.

Most individual variable annuity products offer some hard to price guarantee:

Guaranteed Minimum Death Benefit
Guaranteed Minimum Accumulation Benefit
Guaranteed Minimum Income Benefit
Guaranteed Minimum Withdrawal Benefit

This product would have no such guarantees.? It would also be sold by agents inside the mutual fund companies, and carry no commission.? I call it T-shares, for deferred TAX shares.? The insurance company offering this would go to mutual fund companies, and offer to train mutual fund company representatives to be insurance agents.? The T-shares would have the same annual fee as the “no load” C-shares, plus 0.2%/year for the insurance company.? The T-share buyer gets the option of having a tax-deferred mutual fund for the price of 0.2% extra per year.

Considering the ease of not having to track your cost basis on a mutual fund, and the additional growth from compounding what is not taxed, this could be a very attractive proposition.? It would be interesting to have contractual provisions that allow the annuitant to be changed during the deferral period, even after death, so that the tax savings could continue.

There has to be a loser here, but who?

The obvious one is the taxman.? Much of the mutual fund industry could end up issuing T-shares, instead of C-shares.

But the other one is not so obvious.? I pitched this idea to a number of insurers.? One said, “Great idea, but why should we cannibalize our existing block of variable annuity policies to make less?”? That told me I needed to approach large life companies that had no variable products.? So I spoke to one of the few that was like that, and the CEO was interested, but nothing came of it, because he left soon afterward.

As a buy-side analyst of insurers, I tossed the idea out to most of the life insurance CEOs I met that I knew had no individual variable annuity block of policies.? No one bit.? Maybe it would be the complexity of making the policy work across a large number of mutual fund companies.? The IT expertise needed would be considerable.? So would the legal documents.

But no one grabbed the idea and ran with it.? Personally, I think a lot of people would like this product, but it never saw the light of day.? Mmmm… I never talked to Assurant about this one….

On the other hand, maybe the place to start is with the mutual fund companies… they might have the greater interest.

PS — to those who are receiving buyout offers some life insurers on variable annuities with guarantees, turn them down.? They are not offering you what the guarantees are truly worth.? Unless you know something critical that they don’t, don’t take the buyout offer.

Full Disclosure: long AIZ, and many other insurers

Redacted Version of the January 2013 Version of the FOMC Statement

Posted on 30 January 2013 by David Merkel

Comments

I really think the FOMC lives in a fantasy world.? The economy is not improving materially, and inflation is rising. Note that the CPI is close their 2.5% line in the sand.? TIPS-implied inflation 1X1 (one year ahead for one year) is 2.41%, and 5X5 is 2.86% annualized.
Current proposed policy is an exercise in wishful thinking.? Monetary policy does not work in reducing unemployment, and I think we should end the charade.
In my opinion, I don?t think holding down longer-term rates on the highest-quality debt will have any impact on lower quality debts, which is where most of the economy finances itself. When this policy doesn?t work, what will they do?
Also, the investment in Agency MBS should have limited impact because so many owners are inverted, or ineligible for financing backed by the GSEs, and implicitly the government, even with the recently announced refinancing changes.
The key variables on Fed Policy are capacity utilization, unemployment, inflation trends, and inflation expectations.? As a result, the FOMC ain?t moving rates up, absent increases in employment, or a US Dollar crisis.? Labor employment is the key metric.
GDP growth is not improving much if at all, and the unemployment rate improvement comes more from discouraged workers.

A Statement to Dr. Bernanke:

More debt will not get us out of this crisis.? The Great Depression ended when enough debts were compromised, paid off, or cancelled, which from my study is 1941, before World War two started.

Your policies further aid the growth of the budget deficit, and encourage malinvestment in housing and banking, two things in a high degree of oversupply.? The investments in MBS only help solvent borrowers on the low end of housing, who don?t really need the help.? Holding down longer-term rates on the highest-quality debt does not have any impact on lower quality debts, which is where most of the economy finances itself.

The problems with unemployment are structural, not cyclical.? Labor force participation rates continue to decline.? There is greater labor competition around the world, forcing down wages on the low end.? There is nothing that monetary policy can do to change this.? You can create stagflation through your policies, but not prosperity.

When inflation does arrive, the FOMC is going to find it very hard to raise Fed Funds or shrink its balance sheet.? The banks will not react well as you try to shrink, and the long rates that you have held down will react violently.

You haven?t thought through all of the ?second order? effects of your policy.? Even the ?first order? effects, which favor the rich over the poor, seem to elude you.? Assets rise, helping the rich.? Interest rates fall, helping the rich who can borrow.? Commodity prices rise, harming the poor.

Insanity is doing the same thing over and over, and expecting a different result.? When will you realize that the policies of the Fed aren?t helping, and need to be abandoned?

How to Become Super-Rich?

Posted on 30 January 201330 January 2013 by David Merkel

My main goal this evening is to discredit those who tell you that you can get rich quick by investing in the secondary markets. That won’t work.? It sort of worked for Buffett, but a lot of his success came from creating a holding company, and buying entire businesses, not just fractions of companies that he would not control.

Even the top entertainers and sports stars rarely become super-rich unless they have an iron discipline, and hand over their excess assets to an honest and talented advisor, who shepherds them and grows them, and gives the client personal advice as needed.? That’s what I do, though I have no famous clients.

As with so many things, it comes down to self-control.? Can you defer self-gratification?? Will you seek talented advisors who are honest?? They aren’t easy to find.

Those that become super-rich form their own firms, and use them to further their wealth.? They hire talented people to grow their wealth.? It can be a purely industrial firm.? It can be part industrial and investing, like Loews, Berkshire Hathaway, Leucadia, Icahn, etc.? It can be a private firm, whether private equity, a hedge fund, or an industrial firm.

The main idea here is that great wealth typically comes through running a large firm that is very profitable, which concentrates the efforts of others.? Significant wealth never comes through your own labors or secondary-market investing.? It comes through creating a very profitable firm.

Now, I want to add one more tangential observation here.? It’s easier to make a lot of money by offering investment advice, than by investing your own money yourself.? Why?? In offering advice, your margins are virtually unlimited.? Every new subscriber is gravy.? Your own capital is limited, so your returns are limited.

But the record of newsletters is poor; that’s why I have never considered a newsletter.? I buy no newsletters because they have no value.? I sell no newsletters because my best insights should go to my clients.? I have never seen a newsletter in my life that genuinely offered value.

Far better that you build your own firm with your valuable differential insights, than that you try to make money in the public markets.? Those who are very rich managed large firms that became dominant.

-=-==-=-=–==-=-=-=-=-=-=-=-=-=–==-=-=-=-=-=-=-=-=-

Now, few of us can do that.? That’s the way the world works.? And most who try it will fail. Far better to aim lower and achieve a happy outcome, than strain after riches that never come.

Full Disclosure: long BRK/B, L

On Insurance Investing, Part 3

Posted on 26 January 201329 January 2013 by David Merkel

Subtitle: The Value of Momentum and Mean-Reversion

In the extreme short-run, mean-reversion dominates.? Over a year, momentum dominates.? Over a four year period mean-reversion returns.

The same applies to insurance stocks.? This is perhaps more true of insurance stocks, because the accounting is so opaque.? When accounting is opaque, it takes a longer period of time for market prices to catch up with the underlying reality.

I do not trust momentum naively.? I compare it to fundamentals and ask if it has more room to run or fall.? Remember, insurance is a mature industry… there are few sustainable competitive advantages here.? Near turning points, valuations are stretched or in the dumps.

That said, here is my table of momentum for the insurance industry:

company	ticker	img_desc	mktcap	prchg_52w
Radian Group Inc.	RDN	0715 – Insurance (Property & Casualty)	?????????????? 882.0	155%
Homeowners Choice, Inc.	HCI	0715 – Insurance (Property & Casualty)	?????????????? 241.1	146%
Stewart Information Services C	STC	0715 – Insurance (Property & Casualty)	?????????????? 528.1	100%
Imperial Holdings, Inc.	IFT	0712 – Insurance (Miscellaneous)	???????????????? 89.7	86%
Kingsway Financial Services In	KFS	0715 – Insurance (Property & Casualty)	???????????????? 54.0	68%
Atlantic American Corporation	AAME	0709 – Insurance (Life)	???????????????? 69.7	63%
eHealth, Inc.	EHTH	0712 – Insurance (Miscellaneous)	?????????????? 506.9	59%
Investors Title Company	ITIC	0715 – Insurance (Property & Casualty)	?????????????? 135.2	59%
First American Financial Corp	FAF	0715 – Insurance (Property & Casualty)	?????????? 2,522.8	58%
Coventry Health Care, Inc.	CVH	0706 – Insurance (Accident & Health)	?????????? 6,239.6	57%
Hilltop Holdings Inc.	HTH	0715 – Insurance (Property & Casualty)	?????????????? 753.0	55%
CNO Financial Group Inc	CNO	0709 – Insurance (Life)	?????????? 2,315.5	52%
Allstate Corporation, The	ALL	0715 – Insurance (Property & Casualty)	???????? 21,154.9	51%
Symetra Financial Corporation	SYA	0709 – Insurance (Life)	?????????? 1,629.6	50%
American International Group,	AIG	0715 – Insurance (Property & Casualty)	???????? 54,180.4	46%
Sun Life Financial Inc. (USA)	SLF	0709 – Insurance (Life)	???????? 17,505.2	46%
Platinum Underwriters Holdings	PTP	0715 – Insurance (Property & Casualty)	?????????? 1,595.2	43%
Hartford Financial Services Gr	HIG	0715 – Insurance (Property & Casualty)	???????? 10,829.2	41%
Lincoln National Corporation	LNC	0709 – Insurance (Life)	?????????? 8,005.7	41%
Amtrust Financial Services, In	AFSI	0715 – Insurance (Property & Casualty)	?????????? 2,232.4	40%
HCC Insurance Holdings, Inc.	HCC	0715 – Insurance (Property & Casualty)	?????????? 3,989.2	39%
Fidelity National Financial In	FNF	0715 – Insurance (Property & Casualty)	?????????? 5,669.5	38%
Horace Mann Educators Corporat	HMN	0715 – Insurance (Property & Casualty)	?????????????? 847.4	38%
Montpelier Re Holdings Ltd.	MRH	0715 – Insurance (Property & Casualty)	?????????? 1,341.4	37%
Seabright Holdings Inc	SBX	0715 – Insurance (Property & Casualty)	?????????????? 249.3	37%
Verisk Analytics, Inc.	VRSK	0712 – Insurance (Miscellaneous)	?????????? 9,172.3	37%
AEGON N.V. (ADR)	AEG	0709 – Insurance (Life)	??? ?????13,026.1	36%
Fortegra Financial Corp	FRF	0712 – Insurance (Miscellaneous)	?????????????? 179.3	35%
XL Group plc	XL	0715 – Insurance (Property & Casualty)	?????????? 8,353.8	35%
Primerica, Inc.	PRI	0709 – Insurance (Life)	?????????? 1,877.3	34%
Allied World Assurance Co Hold	AWH	0715 – Insurance (Property & Casualty)	?????????? 2,946.7	34%
Travelers Companies, Inc., The	TRV	0715 – Insurance (Property & Casualty)	???????? 29,569.3	33%
Everest Re Group Ltd	RE	0715 – Insurance (Property & Casualty)	?????????? 5,944.0	33%
Prudential Public Limited Comp	PUK	0709 – Insurance (Life)	???????? 38,254.3	33%
CIGNA Corporation	CI	0706 – Insurance (Accident & Health)	???????? 16,718.9	33%
United Insurance Holdings Corp	UIHC	0715 – Insurance (Property & Casualty)	???????????????? 91.9	32%
Partnerre Ltd	PRE	0715 – Insurance (Property & Casualty)	?????????? 5,236.2	32%
Cincinnati Financial Corporati	CINF	0715 – Insurance (Property & Casualty)	?????????? 6,959.7	29%
Protective Life Corp.	PL	0709 – Insurance (Life)	?????????? 2,500.8	29%
Argo Group International Holdi	AGII	0715 – Insurance (Property & Casualty)	?????????????? 926.7	29%
Hallmark Financial Services, I	HALL	0715 – Insurance (Property & Casualty)	?????????????? 171.6	26%
Aspen Insurance Holdings Limit	AHL	0715 – Insurance (Property & Casualty)	?????????? 2,380.3	26%
Alterra Capital Holdings Ltd	ALTE	0715 – Insurance (Property & Casualty)	?????????? 2,911.1	25%
Torchmark Corporation	TMK	0709 – Insurance (Life)	?????????? 5,314.2	24%
Alleghany Corporation	Y	0715 – Insurance (Property & Casualty)	?????????? 6,048.5	24%
Eastern Insurance Holdings Inc	EIHI	0709 – Insurance (Life)	?????????????? 135.2	24%
Berkshire Hathaway Inc.	BRK.A	0715 – Insurance (Property & Casualty)	????? 242,512.2	23%
Manulife Financial Corporation	MFC	0709 – Insurance (Life)	???????? 26,899.6	23%
Arch Capital Group Ltd.	ACGL	0715 – Insurance (Property & Casualty)	?????????? 6,188.5	22%
Enstar Group Ltd.	ESGR	0715 – Insurance (Property & Casualty)	?????????? 2,006.2	22%
Axis Capital Holdings Limited	AXS	0715 – Insurance (Property & Casualty)	?????????? 4,664.5	22%
Genworth Financial? Inc	GNW	0709 – Insurance (Life)	?????????? 4,647.8	21%
Aon PLC	AON	0712 – Insurance (Miscellaneous)	???????? 18,361.6	21%
American Equity Investment Lif	AEL	0709 – Insurance (Life)	?????????????? 862.9	20%
White Mountains Insurance Grou	WTM	0715 – Insurance (Property & Casualty)	?????????? 3,585.0	20%
ACE Limited	ACE	0715 – Insurance (Property & Casualty)	???????? 28,999.2	20%
Markel Corporation	MKL	0715 – Insurance (Property & Casualty)	?????????? 4,581.2	19%
United Fire Group, Inc.	UFCS	0715 – Insurance (Property & Casualty)	?????????????? 595.0	19%
Employers Holdings, Inc.	EIG	0715 – Insurance (Property & Casualty)	?????????????? 658.7	18%
W.R. Berkley Corporation	WRB	0715 – Insurance (Property & Casualty)	?????????? 5,643.1	18%
Amerisafe, Inc.	AMSF	0715 – Insurance (Property & Casualty)	?????????????? 517.4	18%
National Interstate Corporatio	NATL	0715 – Insurance (Property & Casualty)	???????? ??????592.7	18%
Old Republic International Cor	ORI	0715 – Insurance (Property & Casualty)	?????????? 2,906.0	17%
Kansas City Life Insurance Co	KCLI	0709 – Insurance (Life)	?????????????? 418.7	17%
Brown & Brown, Inc.	BRO	0712 – Insurance (Miscellaneous)	?????????? 3,901.8	17%
Aetna Inc.	AET	0706 – Insurance (Accident & Health)	???????? 16,644.7	17%
Crawford & Company	CRD.B	0712 – Insurance (Miscellaneous)	?????????????? 305.5	16%
Universal Insurance Holdings,	UVE	0715 – Insurance (Property & Casualty)	?????????????? 182.4	16%
Chubb Corporation, The	CB	0715 – Insurance (Property & Casualty)	???????? 21,220.1	15%
National Western Life Insuranc	NWLI	0709 – Insurance (Life)	?????????????? 593.0	15%
American Financial Group	AFG	0715 – Insurance (Property & Casualty)	?????????? 3,862.0	15%
Loews Corporation	L	0715 – Insurance (Property & Casualty)	???????? 17,109.9	15%
Endurance Specialty Holdings L	ENH	0715 – Insurance (Property & Casualty)	?????????? 1,839.7	14%
China Life Insurance Company L	LFC	0709 – Insurance (Life)	???????? 91,295.3	14%
State Auto Financial	STFC	0715 – Insurance (Property & Casualty)	?????????????? 602.7	14%
Principal Financial Group Inc	PFG	0706 – Insurance (Accident & Health)	?????????? 9,036.6	13%
EMC Insurance Group Inc.	EMCI	0715 – Insurance (Property & Casualty)	?????????????? 324.6	13%
Maiden Holdings, Ltd.	MHLD	0715 – Insurance (Property & Casualty)	?????????????? 758.2	13%
RenaissanceRe Holdings Ltd.	RNR	0715 – Insurance (Property & Casualty)	?????????? 3,982.5	13%
Validus Holdings, Ltd.	VR	0709 – Insurance (Life)	?????????? 3,340.1	12%
Selective Insurance Group	SIGI	0715 – Insurance (Property & Casualty)	?????????? 1,106.6	12%
UnitedHealth Group Inc.	UNH	0706 – Insurance (Accident & Health)	???????? 57,244.5	11%
Hanover Insurance Group, Inc.,	THG	0715 – Insurance (Property & Casualty)	?????????? 1,821.7	11%
Cna Financial Corp	CNA	0715 – Insurance (Property & Casualty)	?????????? 8,351.3	11%
ProAssurance Corporation	PRA	0715 – Insurance (Property & Casualty)	?????????? 2,752.6	11%
Assured Guaranty Ltd.	AGO	0715 – Insurance (Property & Casualty)	?????????? 3,264.4	11%
Marsh & McLennan Companies, In	MMC	0712 – Insurance (Miscellaneous)	???????? 19,053.5	10%
Safety Insurance Group, Inc.	SAFT	0715 – Insurance (Property & Casualty)	?????????????? 728.8	10%
Unico American Corporation	UNAM	0715 – Insurance (Property & Casualty)	???????????????? 68.2	10%
Progressive Corporation, The	PGR	0715 – Insurance (Property & Casualty)	???????? 13,682.1	10%
Independence Holding Company	IHC	0709 – Insurance (Life)	?????????????? 167.3	10%
AFLAC Incorporated	AFL	0706 – Insurance (Accident & Health)	???????? 25,077.1	10%
Navigators Group, Inc, The	NAVG	0715 – Insurance (Property & Casualty)	?????????????? 751.0	10%
Metlife Inc	MET	0709 – Insurance (Life)	???????? 41,077.8	9%
Kemper Corp	KMPR	0715 – Insurance (Property & Casualty)	?????????? 1,874.3	8%
ING Groep N.V. (ADR)	ING	0709 – Insurance (Life)	???????? 37,707.5	7%
Arthur J. Gallagher & Co.	AJG	0712 – Insurance (Miscellaneous)	?????????? 4,502.5	7%
American National Insurance Co	ANAT	0715 – Insurance (Property & Casualty)	?????????? 2,070.2	7%
Prudential Financial Inc	PRU	0709 – Insurance (Life)	???????? 27,417.8	6%
StanCorp Financial Group, Inc.	SFG	0706 – Insurance (Accident & Health)	?????????? 1,776.7	4%
Global Indemnity plc	GBLI	0715 – Insurance (Property & Casualty)	?????????????? 535.1	4%
WellPoint, Inc.	WLP	0706 – Insurance (Accident & Health)	???????? 20,092.9	3%
FBL Financial Group	FFG	0709 – Insurance (Life)	?????????????? 902.6	2%
Unum Group	UNM	0709 – Insurance (Life)	?????????? 6,407.6	2%
Infinity Property and Casualty	IPCC	0715 – Insurance (Property & Casualty)	?????????????? 684.9	2%
Baldwin & Lyons, Inc.	BWINB	0715 – Insurance (Property & Casualty)	?????????????? 340.7	1%
Molina Healthcare, Inc.	MOH	0706 – Insurance (Accident & Health)	?????????? 1,357.9	-2%
Reinsurance Group of America I	RGA	0706 – Insurance (Accident & Health)	?????????? 4,098.1	-2%
Assurant, Inc.	AIZ	0709 – Insurance (Life)	?????????? 3,039.7	-3%
RLI Corp.	RLI	0715 – Insurance (Property & Casualty)	?????????? 1,439.5	-6%
Erie Indemnity Company	ERIE	0715 – Insurance (Property & Casualty)	?????????? 3,283.2	-7%
Citizens, Inc.	CIA	0709 – Insurance (Life)	?????????????? 459.8	-8%
American Safety Insurance Hold	ASI	0715 – Insurance (Property & Casualty)	?????????????? 196.8	-8%
Tower Group Inc	TWGP	0715 – Insurance (Property & Casualty)	?????????????? 740.9	-10%
Willis Group Holdings PLC	WSH	0712 – Insurance (Miscellaneous)	?????????? 6,032.0	-10%
Mercury General Corporation	MCY	0715 – Insurance (Property & Casualty)	?????????? 2,183.3	-11%
OneBeacon Insurance Group, Ltd	OB	0715 – Insurance (Property & Casualty)	?????????? 1,308.7	-12%
Greenlight Capital Re, Ltd.	GLRE	0715 – Insurance (Property & Casualty)	?????????????? 835.9	-12%
Donegal Group Inc.	DGICA	0715 – Insurance (Property & Casualty)	?????????????? 371.4	-12%
Universal American Corporation	UAM	0706 – Insurance (Accident & Health)	??? ???????????801.3	-13%
Humana Inc.	HUM	0706 – Insurance (Accident & Health)	???????? 11,855.7	-14%
CNinsure Inc. (ADR)	CISG	0712 – Insurance (Miscellaneous)	?????????????? 330.1	-17%
Health Net, Inc.	HNT	0706 – Insurance (Accident & Health)	?????????? 2,204.9	-24%
MGIC Investment Corp.	MTG	0715 – Insurance (Property & Casualty)	?????????????? 581.9	-26%
MBIA Inc.	MBI	0715 – Insurance (Property & Casualty)	?????????? 1,631.2	-30%
Meadowbrook Insurance Group, I	MIG	0715 – Insurance (Property & Casualty)	?????????????? 318.1	-36%
Phoenix Companies, Inc., The	PNX	0709 – Insurance (Life)	?????????????? 156.1	-36%
Life Partners Holdings, Inc.	LPHI	0712 – Insurance (Miscellaneous)	???????????????? 50.3	-40%

I note that the basement contains a lot of funky companies with issues.? The penthouse contains a lot of credit-sensitive companies that have rallied off of the strong equity market, and moderately strong housing market.

I do not have much trust in the momentum now, because many are trusting in the rosy scenario where losses have been normalized.? I do not think that is the case, and think that there will be additional losses from credit risk coming soon.

December 2012	January 2013	Comments
Information received since the Federal Open Market Committee met in October suggests that economic activity and employment have continued to expand at a moderate pace in recent months, apart from weather-related disruptions.	Information received since the Federal Open Market Committee met in December suggests that growth in economic activity paused in recent months, in large part because of weather-related disruptions and other transitory factors.	Shades GDP view down, finally. Remember when the FOMC cited the Tsunami in Japan for economic weakness that would soon go away?? More grasping at straws.
Although the unemployment rate has declined somewhat since the summer, it remains elevated.	Employment has continued to expand at a moderate pace but the unemployment rate remains elevated.	No real change. So long as discouraged workers increase, this is a meaningless statement.
Household spending has continued to advance, and the housing sector has shown further signs of improvement, but growth in business fixed investment has slowed.	Household spending and business fixed investment advanced, and the housing sector has shown further improvement.	Shades up their of business investment
Inflation has been running somewhat below the Committee?s longer-run objective, apart from temporary variations that largely reflect fluctuations in energy prices. Longer-term inflation expectations have remained stable.	Inflation has been running somewhat below the Committee?s longer-run objective, apart from temporary variations that largely reflect fluctuations in energy prices. Longer-term inflation expectations have remained stable.	No change.? TIPS are showing rising inflation expectations since the last meeting. 5y forward 5y inflation implied from TIPS is now at 2.86%. The FOMC is wrong on inflation.
Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability.	Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability.	No change. Any time they mention the ?statutory mandate,? it is to excuse bad policy.
The Committee remains concerned that, without sufficient policy accommodation, economic growth might not be strong enough to generate sustained improvement in labor market conditions.	The Committee expects that, with appropriate policy accommodation, economic growth will proceed at a moderate pace and the unemployment rate will gradually decline toward levels the Committee judges consistent with its dual mandate.?	Emphasizes that the FOMC will keep doing the same thing and expect a different result than before. Monetary policy is omnipotent on the asset side, right?
Furthermore, strains in global financial markets continue to pose significant downside risks to the economic outlook.	Although strains in global financial markets have eased somewhat, the Committee continues to see downside risks to the economic outlook.	Shades up their views of the financial markets.
The Committee also anticipates that inflation over the medium term likely will run at or below its 2 percent objective.	The Committee also anticipates that inflation over the medium term likely will run at or below its 2 percent objective.	No change. CPI is at 1.7% now, yoy, so that is quite a statement.
To support a stronger economic recovery and to help ensure that inflation, over time, is at the rate most consistent with its dual mandate, the Committee will continue purchasing additional agency mortgage-backed securities at a pace of $40 billion per month.	To support a stronger economic recovery and to help ensure that inflation, over time, is at the rate most consistent with its dual mandate, the Committee will continue purchasing additional agency mortgage-backed securities at a pace of $40 billion per month	No change. Does not mention how the twist will affect those that have to fund long-dated liabilities. Wonder how long it will take them to saturate agency RMBS market?
The Committee also will purchase longer-term Treasury securities after its program to extend the average maturity of its holdings of Treasury securities is completed at the end of the year, initially at a pace of $45 billion per month. The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and, in January, will resume rolling over maturing Treasury securities at auction.	and longer-term Treasury securities at a pace of $45 billion per month. The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction.	No real change.? Operation Twist continues.? Additional absorption of long Treasuries commences.? Fed will make the empty ?monetary base? move from $3 to 4 Trillion by the end of 2013.
Taken together, these actions should maintain downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative.	Taken together, these actions should maintain downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative.	No change.
The Committee will closely monitor incoming information on economic and financial developments in coming months.	The Committee will closely monitor incoming information on economic and financial developments in coming months.	No change. Useless comment.
If the outlook for the labor market does not improve substantially, the Committee will continue its purchases of Treasury and agency mortgage-backed securities, and employ its other policy tools as appropriate, until such improvement is achieved in a context of price stability.	If the outlook for the labor market does not improve substantially, the Committee will continue its purchases of Treasury and agency mortgage-backed securities, and employ its other policy tools as appropriate, until such improvement is achieved in a context of price stability.	No change.
In determining the size, pace, and composition of its asset purchases, the Committee will, as always, take appropriate account of the likely efficacy and costs of such purchases.	In determining the size, pace, and composition of its asset purchases, the Committee will, as always, take appropriate account of the likely efficacy and costs of such purchases.	No change.? The FOMC promises what it cannot know or deliver.
To support continued progress toward maximum employment and price stability, the Committee expects that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the asset purchase program ends and the economic recovery strengthens.	To support continued progress toward maximum employment and price stability, the Committee expects that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the asset purchase program ends and the economic recovery strengthens.	No change. Promises that they won?t change until the economy strengthens.? Good luck with that.
In particular, the Committee decided to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that this exceptionally low range for the federal funds rate will be appropriate at least as long as the unemployment rate remains above 6-1/2 percent, inflation between one and two years ahead is projected to be no more than a half percentage point above the Committee?s 2 percent longer-run goal, and longer-term inflation expectations continue to be well anchored.	In particular, the Committee decided to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that this exceptionally low range for the federal funds rate will be appropriate at least as long as the unemployment rate remains above 6-1/2 percent, inflation between one and two years ahead is projected to be no more than a half percentage point above the Committee?s 2 percent longer-run goal, and longer-term inflation expectations continue to be well anchored.	Not a time limit but economic limits from inflation and employment. Just ran the calculation ? TIPS implied forward inflation one year forward for one year ? i.e., a rough forecast for 2014, is currently 2.41%.? Here?s the graph.? The FOMC has only 0.09% of margin in their calculation if they are being honest, which I doubt.
The Committee views these thresholds as consistent with its earlier date-based guidance.		The inaccurate sentence is deleted.
In determining how long to maintain a highly accommodative stance of monetary policy, the Committee will also consider other information, including additional measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial developments.	In determining how long to maintain a highly accommodative stance of monetary policy, the Committee will also consider other information, including additional measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial developments.	New sentence.? Giving yourself an out clause on the hard-and-fast promises made above?
When the Committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2 percent.	When the Committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2 percent.	No change.
Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; Elizabeth A. Duke; Dennis P. Lockhart; Sandra Pianalto; Jerome H. Powell; Sarah Bloom Raskin; Jeremy C. Stein; Daniel K. Tarullo; John C. Williams; and Janet L. Yellen.	Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; James Bullard; Elizabeth A. Duke; Charles L. Evans; Jerome H. Powell; Sarah Bloom Raskin; Eric S. Rosengren; Jeremy C. Stein; Daniel K. Tarullo; and Janet L. Yellen.	No change
Voting against the action was Jeffrey M. Lacker, who opposed the asset purchase program and the characterization of the conditions under which an exceptionally low range for the federal funds rate will be appropriate.	Voting against the action was Esther L. George, who was concerned that the continued high level of monetary accommodation increased the risks of future economic and financial imbalances and, over time, could cause an increase in long-term inflation expectations.	Esther George takes up the thankless task of telling the FOMC that they are doing more harm than good.