Search Results for “The Education of a Corporate Bond Manager” – Page 5

Post 2500: What is the Aleph Blog About?

Posted on 12 June 201420 June 2017 by David Merkel

Every hundred or so posts, I take a step back, and try to think about broader issues about blogging about finance. ?Tonight, I want to explain to new readers what the Aleph Blog is about.

There have been many new followers added to my blog recently, ?through e-mail, RSS, and natively. ?This is because of this great article at Marketwatch, which builds off of this great article at Michael Kitces’ blog.

I am humbled to be included among Barry Ritholtz, Josh Brown, and Cullen Roche, and am genuinely surprised to be at number 4 among RIAs in social media influence. ?Soli Deo Gloria.

What Does the Aleph Blog Care About?

I’m writing this primarily for new readers, because I’ve written a lot, and over a lot of areas. ?I write about a broader range of topics than almost all finance bloggers do because:

I’m both a quantitative analyst and a qualitative analyst.
I’m an economist that is skeptical about the current received wisdom.
I like reading books, so I write a lot of book reviews.
I’m also a skeptic regarding Modern Portfolio Theory, and would like to see it discarded from the CFA and SOA syllabuses.
I believe in value investing, in both the quantitative and qualitative varieties.
I believe that risk control is a core concept for making money — you make more money by not losing it.
I believe that good government policy focuses on ethics, not results. ?The bailouts were not fair to average Americans. ?What would have been fair would have been to let the bank/financial holding companies fail, while protecting the interests of depositors. ?The taxpayers would have been spared, and there would have been no systematic crisis had that been done.
I care about people not getting cheated. ?That includes penny stocks, structured notes, private REITs, and many other financial innovations. ?No one on Wall Street wants to do you a favor, so do your own research and buy what you want to own, not what someone wants to sell you.
Again, I don’t want to see people cheated, so I write about ?insurance. ?As a former actuary, and insurance buy-side analyst, I know a lot about insurance. ?I don’t know this for sure, but I think this is the blog that writes the most about insurance on the web for free. ?I write as one that invests in insurance stocks, and generally, I buy the stocks because I like the management teams. ?Ethical, hard working insurance management teams do the best.
Oddly, this is regarded to be a good accounting blog, because as a user of accounting statements, I write about accounting issues.
I am a skeptic on monetary and fiscal policy, and believe both of them tend to sacrifice the future to benefit the present. ?Our grandchildren will hate us. ? That brings up another issue: I write about the effects of demographics on the markets. ?In a world where populations are shrinking in developed nations, and will be shrinking globally by 2040, there are significant economic impacts. ?Economies don’t do well when workers are shrinking in proportion to those who are not working. ?(Note: include stay-at-home moms and dads in those who work. ?They are valuable.)
I care about the bond market. ?There aren’t that many good bond market blogs. ?I won’t write about it every day, but I will write about i when it is important.
I care about pensions. ?Most of the financial media knows things are screwed up there, but they do not grasp how bad the eventual outcome will likely be. ?This is scary stuff — choose the state you live in with care.

Now, if you want my most basic advice, visit my personal finance category.

If you want my view of what my best articles have been, visit my best articles category.

If you want to read about my “rules,” read the rules category.

Maybe you want to read some of my most popular series:

My blog is not for everyone. ?I write about what I feel most strongly about each evening. ?Since I have a wide array of interests, that makes for uneven reading, because not everyone cares about all the things that I do. ?If that makes my readership smaller, so be it. ?My blog expresses my point of view; it is not meant to be the largest website on finance. ?I want to be special, even if that means small, expressing my point ?of view to those who will listen.

I thank all of my readers for reading me. ?I appreciate all of you, and thank you for taking the time to read me.

As one final comment, I need to say this. ?I note people unfollowing my blog at certain times, and I say to myself, “Oh, I haven’t been writing about his pet issue for a while.” ?Lo, and behold, after these people leave, I start writing about it again. ?That is not intentional, but it is very similar to how the market works. ? People buy and sell investments at the wrong times.

To all my readers, thank you for reading me. ?I value all of you, and though I can’t answer all e-mails, I read all e-mails.

In summary: the Aleph Blog is about ethics and competence. ?I want to do what is right, and do what gives the best investment performance, in that order.

Sorted Weekly Tweets

Posted on 21 January 2014 by David Merkel

Rest of the World

Crunch Escalates as Money Funds Rival Shadow Banks http://t.co/JVU1w5ipZc Money funds in China suck liquidity away from wealth mgmt prods $$ Jan 20, 2014
Spain?s Worst Year for Work Leaves Rajoy Counting Cost http://t.co/KlaAGab4kY Private debts r not economically neutral. Large -> unstable $$ Jan 20, 2014
Richest Scandinavian Nation Extends Its Junk Boom http://t.co/ZVwwxEAdIa Norwegian financial institutions have hunger for yield in kronor $$ Jan 20, 2014
Bird Flu Kills Health Worker, Stokes Transmission Concern http://t.co/FVcxVhaH4L Would not b concerned, seems difficult to transmit virus $$ Jan 20, 2014
Rise of ‘Common Man’ in India Threatens Stability of Government Coalition http://t.co/vke6lnqM3s Things get squishy if no majority win $$ Jan 20, 2014
German Economic Growth Fails to Gain Impetus http://t.co/g9EQLN5HNg Depends on on the strength of those that import German goods $$ $SPY Jan 20, 2014
French First Lady Leaves Hospital http://t.co/hnnrYJwE2q At least *one* person cared about the behavior of Francois Hollande $$ #sad Jan 20, 2014
Solar Beats Gas Unlocking Middle East?s Heavy Oil, Report Says http://t.co/dmyDla2t7R Fascinating, using cheap solar energy 2 produce oil $$ Jan 20, 2014
Hot Demand for Emerging-Market Bonds http://t.co/LLZPDt4iyT This is puzzling , I don’t get how emerging markets r well financed $$ Jan 19, 2014
China encroaching on U.S. military dominance in Pacific, says top admiral http://t.co/h152VrhcEg So we can’t be global cop, good thing $$ Jan 19, 2014
Mobius Placing Biggest Wagers on Nigeria for Frontier Rally http://t.co/dsxt8Fft6e It is difficult to make $$ when there is a quiet war Jan 19, 2014
BENGHAZI WAS PREVENTABLE: Hillary Clinton cited for major security lapses http://t.co/5oCpBVlbdK Hillary will have a lot to answer for $$ Jan 19, 2014
Saudi King Sees Egypt Too Big to Fail Under Friendly General http://t.co/oIHo5fae5s Saudi Arabia gets pragmatic, supports Egyptian Army $$ Jan 19, 2014
The West Is Losing Ukraine http://t.co/GWCNb322Ss Ukraine is losing the West, as its leader strips freedoms, & fights protesters $$ $SPY Jan 19, 2014
Hollande?s Tryst and the End of Marriage http://t.co/EUGztMAKnq Secretly, even the French care about the stability of their leaders $$ $FXE Jan 19, 2014
Baltic Homes That Singed Scandinavia Banks Heating Up: Mortgages http://t.co/3KHcPllcKZ Beware large increases in indebtedness $$ $TLT $SPY Jan 19, 2014
China’s Indie Rockers Get Boost From Online Music Platforms http://t.co/MSbdnGFzRI Note the prominence of our friend Michael Pettis $$ $FXI Jan 19, 2014
Venezuela Post-Ch?vez: Hustlers’ Paradise http://t.co/ROstARpBkc Thugs run govt. Some people get cheap goods, while others get shortages $$ Jan 19, 2014

US Politics & Policy

Stop Obamacare?s Outrageous Bailouts http://t.co/uHYJvyRcM7 Once losses exceed 8% of premiums, taxpayers pay for 75% of excess losses $$ Jan 20, 2014
Questionable: Robert Gates?s Dishonorable Act http://t.co/bIEGf7o57k There r too many bad secrets in DC that we ought to know about $$ $SPY Jan 20, 2014
Which Fed Guidance Should We Believe? http://t.co/yqjOZX5AX6 As FOMC uses more & more words 2explain what they r doing we understand less $$ Jan 20, 2014
When Low Unemployment Is Bad News http://t.co/QLiWV8ocV5 Labor force participation rate continues 2 fall as punk economy creates few jobs $$ Jan 20, 2014
NSA Data Have No Impact on Terrorism: Report http://t.co/ug8GtnLjqz NSA is not worth the privacy risk, nor what we pay to employ them $$ Jan 20, 2014
Ari Fleischer: How to Fight Income Inequality: Get Married http://t.co/zz6lbDWiku Poverty rate falls 4 those who can make a marriage work $$ Jan 20, 2014
Obama’s Constitutional Education http://t.co/bH4jfr1rro & http://t.co/hdzNe1Blo4 Should consider unilateral actions modifying PPACA also $$ Jan 20, 2014
How the crash of safe assets fueled the financial crisis http://t.co/4Vlfxp7PUj When “safe” assets r found to have credit risk -> bust $$ Jan 20, 2014
Congress split over NSA’s domestic spying program, could just let laws expire http://t.co/mCD2pIbSl1 Divisive: left & right vs center $$ Jan 20, 2014
Young enrollees of Obamacare fall well short of goal http://t.co/VokUg0XFP6 When premiums rise as a result, people will b unhappy $$ $SPY Jan 20, 2014
Spy court judge slams proposed privacy advocate http://t.co/vkz4SyY5li We need someone arguing against spying on average people $$ $SPY $TLT Jan 19, 2014
What?s Net Neutrality? What Happened to Net Neutrality Yesterday? What Happens Next? A Q&A for the Rest of Us. http://t.co/xQACJvW8UC Read Jan 19, 2014
Volcker Rule Fix Will Aid Large and Small Banks http://t.co/nGv1TXtLT5 This is a lousy rule that allows banks to bury Trup CDO losses $$ Jan 19, 2014
Hillary Clinton’s political hit list of top betrayers includes Kerry, Kennedy http://t.co/33RFv63nKz This reminds me of the Nixon enemies $$ Jan 19, 2014
Judge Disallows Plan by Detroit to Pay Off Banks http://t.co/XQ6f1E2EZM Detroit should aim for the bast long-run outcome $$ $MUB $SPY $TLT Jan 19, 2014
Is Your Abortion My Free Speech?? http://t.co/kUA2XLRPB9 This is where constitutions fall apart, b/c they are limited documents $$ Jan 19, 2014
Reid Gives Landrieu VIP Treatment to Tip Election Odds http://t.co/UhQFIcPVt9 Democrats desperate to retain power, aid marginal members $$ Jan 19, 2014
Where Are the U.S.?s Millionaires? http://t.co/c8fXDEPD5S Alas, but Maryland sucks the blood of America, & creates millionaires $$ $SPY $TLT Jan 19, 2014
I Spent Two Hours Talking With the NSA’s Bigwigs. Here’s What Has Them Mad http://t.co/UrXexYR07k They hate Snowden’s guts $$ $thatsimple Jan 19, 2014
How the NSA Almost Killed the Internet | Threat Level http://t.co/1SLDuNq93O Sowing distrust in major internet utilities on privacy $$ $GOOG Jan 19, 2014
To enforce net neutrality, the FCC has to decide that Verizon is a common carrier http://t.co/WRb6VestAF Simple idea, simple solution $$ $VZ Jan 19, 2014
Student Loans, the Next Big Threat to the US Economy? http://t.co/5hXsK5SIFn Rule of Thumb: avoid lending in area w/greatest debt growth $$ Jan 19, 2014
ISS Open to Activists Paying Bonuses to Directors http://t.co/R1nNEkokg4 Carl Icahn wins a small victory; broader implications unclear $$ Jan 19, 2014
?Wolf of Wall Street? Offspring Never Quite Die http://t.co/oXkGDZQ1Ml It’s a revolving door & FINRA doesn’t provide real access 2 data $$ Jan 19, 2014

Market Impact

Investor Animal Spirits Spread to Companies Worldwide http://t.co/e8pKcudzhR No such thing as animal spirits, only pursuing opportunity $$ Jan 20, 2014
JPMorgan Says BVG Owes $200 Million Over ?Unfortunate? CDS http://t.co/coJQm6dpD5 What’s worse is trifling yield prompting BVG’s greed $$ Jan 20, 2014
Hedge Funds Raise Gold Wagers as Goldman Sees Drop http://t.co/7dc9dGCUCA Hedge funds 2short-term could b forced sellers on weakness $$ $GLD Jan 20, 2014
Even money market funds in a crisis would have a hard time delivering a >2% loss, which would b borne by investors, & not systemic $$ Jan 20, 2014
How You Can Survive a New Era in the Bond Market http://t.co/BvSkibWANR Too many people banging the drum 4 higher interest rates $$ $IEF Jan 20, 2014
From the prior tweet, Central Bankers have drawn wrong conclusion: You can fix a bust by issuing lots of credit. $$ Jan 20, 2014
The correct answer is that you can avoid a bust by not running loose monetary policy as in the ’20s & ’00s. We still have pain to come $$ Jan 20, 2014
Where Have All the Star Fund Managers Gone? http://t.co/qwbpDyDlkU Focus on low fees, long track record, low assets & not index-like $$ $SPY Jan 20, 2014
Reinsurers face ratings cuts, S&P warns http://t.co/70dK590OCG Too much surplus chasing reinsurance biz; I’ve been lightening the boat $$ Jan 20, 2014
Interest rates don’t matter? Federal Reserve paper says so http://t.co/guAPSQ05II Sad but true, monetary policy is weaker than most think $$ Jan 19, 2014
Professor Puts Ideas in Practice as Reverse-Mortgage CEO http://t.co/T3Kt0cNQtc As w/most complex financial agreements, this will fail $$ Jan 19, 2014
Metals, Currency Rigging Is Worse Than Libor, Bafin Says http://t.co/KjDNrRVR7m Impossible 2 create benchmarks free of human gaming $$ $SPY Jan 19, 2014
Nobody Likes Bonds!: by @ritholtz http://t.co/FuYachZ58I But *I* like bonds, particularly short corporates, loans, & $TLT FD: + $TLT $$ Jan 18, 2014

Other

Comet-Chasing Spacecraft Sends First Signal in 31 Months http://t.co/mZB62QnIYm Satellite to hitch ride on Churyumov-Gerasimenko comet $$ Jan 20, 2014
The ‘Sharing Economy’ and Its Enemies http://t.co/Qnc4YyZrOh How Airbnb steps on the toes of hoteliers, regulators & the tax man $$ $SPY Jan 20, 2014
Device Thefts Fueling Rise In Larcenies http://t.co/ohZZt8q2Qh NYC larcenies fall if you exclude theft of Apple-branded devices $$ $AAPL Jan 20, 2014
The Right Way to Go After Big Clients http://t.co/J6hoSbcHVX Can waste a lot of time & find margins squeezed in the end $$ Jan 20, 2014
What Secrets Your Phone Is Sharing About You http://t.co/u7wv29tyMG Many hack your phone datato get insights into how you shop $$ $SPY $TLT Jan 19, 2014
Moms in ?Survival Mode? as US Trails World on Benefits http://t.co/uSPuVZztqV We can argue over any benefit, but what when US is broke $$ Jan 19, 2014
Tennis Quant?s System Doubles Money Without Knowing Players http://t.co/sAS5Xug7DN Small markets r often inefficient, allow 4 small wins $$ Jan 19, 2014
Miners Chopping $10B Search Bodes Next Price Boom http://t.co/6X7H0KAivX Miners cut exploration budgets, should lead to higher prices $$ Jan 19, 2014
How the Target Hackers Did It http://t.co/Z8Jc5WuBQQ Scraped RAM in POS machines grabbing all manner of data on card users $$ $TGT $SPY $TLT Jan 19, 2014
Another Bad Year for Religious Freedom http://t.co/3C3C5lrjCo Religion by its nature tends to invite constraint as it is a threat 2 govts $$ Jan 19, 2014
If Google Is a Guy, DuckDuckGo Is a Ghost http://t.co/rk9o0I3Uwx Want privacy for your searches? Consider DuckDuckGo $$ Jan 19, 2014
http://t.co/uPsFzsm1Tn How an intelligent lady managed to wrongfoot & destroy a website engaged in “revenge porn.” $$ Jan 19, 2014

Wrong

Likely Wrong: A New Asset-Allocation Strategy for Investing in Retirement http://t.co/eDqaDxhFuH Stocks r risky over intermediate periods $$ Jan 20, 2014
Wrong: Bonds Captivate $16T of Pensions http://t.co/NEpJSjCD7p Bonds have 2 go somewhere & defined benefit pensions have long liabilities $$ Jan 20, 2014
Wrong: Bailout Risk, Far Beyond the Banks http://t.co/iv5eT6lhea! Asset mgmt companies can go bust, & they pose no systemic risk $$ Jan 20, 2014
Wrong: Stanley Fischer saved Israel from the Great Recession. Now Janet Yellen wants him to help save the US http://t.co/CPMUggr3CA $$ $TLT Jan 20, 2014
Wrong: Ten quotes on the question of financial bubbles http://t.co/MNwr543Vsf No one focuses on the effect of borrowing money in bubbles $$ Jan 19, 2014
Wrong: Wealthy CEO Is Deeply Concerned About Budget Deficits http://t.co/gTGUwSF3hS Biased article doesn’t factor in entitlements $$ $TLT Jan 19, 2014

Replies, Retweets, and Comments

@DavidBCollum Look here: http://t.co/VaqQESCdCu Value Line has a chart that goes back to the 20s though… Jan 17, 2014
RT @cate_long: Please add http://t.co/QHQiCxYopc RT @researchpuzzler: a guide to finding data on the cheap from @AlephBlog http://t.co/mb? Jan 15, 2014
RT @Pawelmorski: Great spot @toby_n : DB’s Slok quantifies how difficult the Fed finds explaining itself. http://t.co/1quahXrnJD Jan 14, 2014

Sorted Weekly Tweets

Posted on 12 October 2013 by David Merkel

Rest of the World

Catalonia Wants ECB Seat After Referendum http://t.co/Dbggf0LOWs So Catalonians want to be free? Guess what, the EU does not want that $$ Oct 12, 2013
French State?s Bluster Belies Alcatel?s Job-Cutting Reality http://t.co/kzmpjKDNTC France will lose; companies will leave, so will jobs $$ Oct 12, 2013
Danes With World-Beating Debt Loads Prepare 2 Dig Deeper http://t.co/Vgx0fqqf9N This will eventually blow up; it is only a matter of time $$ Oct 12, 2013
Tepco Gets Japan?s First LNG Spot Cargo From Angola at Futtsu http://t.co/A3OnIzAFJH Future of energy is more efficient hydrocarbon use $$ Oct 11, 2013
France Calls for Alcatel-Lucent to Revise Job Cuts Plan http://t.co/KySqRhGqvN France won’t b happy until every large business leaves $$ Oct 10, 2013
Korean Banks? Margins Seen at 4-Year Low on Rate Decline http://t.co/bWhpoYhs6g High pread loans mature, low spread loans originated $$ Oct 10, 2013
Icelanders Run Out of Cash to Repay Foreign Debts http://t.co/RdCFa8jRl4 Perhaps they can default on these debts as well $$ #externaldefault Oct 09, 2013
Swedish Bubble Concern Grows With Soaring Home Prices http://t.co/VwiAVbm1wD What happens when monetary/financial policy is too loose $$ Oct 09, 2013
Algerians Cry Currency as Euro Black Market Thrives http://t.co/ftRHUXwF3q Really bad currencies attract competition from betr currencies $$ Oct 08, 2013
Finns Foraging for Cheap Food Shows Price of AAA Obsession http://t.co/kuPKb8g3KQ Really, it’s being in the E-Zone, not having own curncy $$ Oct 07, 2013

US Politics

7 doomsday default scenarios http://t.co/sDgNpzRCSU There is nothing good here, particularly banks and money market funds blowing up $$ Oct 12, 2013
Budget Battle Ends Soon With Tea Party Loss: King, Corker http://t.co/Dk6XVMUPRo Discharge petition coming as liberal GOP teams w/Dems $$ Oct 11, 2013
Now Is the Time to Delay ObamaCare http://t.co/Dklp65OWnJ Make case off of lack of technical readiness of computer systems $$ Oct 11, 2013
EPA may reduce ethanol blending volumes for 2014 -sources http://t.co/Ve4DU5AaV2 End the RIN-sanity & watch refiner stock prices fly $$ Oct 10, 2013
Legislative History of Sec 4 of 14th Amndmnt http://t.co/JCEmr9SnHZ Must Executive prioritize payments? Must Congress raise debt ceiling? $$ Oct 10, 2013
Justice Kennedy Offers Views on Shutdown, Congress, Gay Marriage http://t.co/Nq9VcPtbNn Love him, hate him, you have to understand him $$ Oct 10, 2013
Obama Seems 2Think Presidency Gives Him Absolute Power http://t.co/IhFwBRTcYn Scotus has ruled presidents can’t delay, amend or repeal laws Oct 09, 2013
Surplus to Cost Uncle Sugar Up to $300M http://t.co/vl4QNMq2Vb Environmentalists & free marketers can agree: Eliminate sugar subsidies $$ Oct 09, 2013
Once the budget is balanced, businessmen will have greater certainty over sustainable tax policy, & will become more aggressive $$ Oct 09, 2013
Ryan: Here’s How We Can End This Stalemate http://t.co/QePY6Y3XWd Behind every economic debate in DC, entitlements is the hidden issue $$ Oct 09, 2013
President Obama Might Ask Who Benefits from US Debt Default http://t.co/F8mzQQQSUU Anybody know how big total notional amt on CDS on US? $$ Oct 09, 2013
White House Backs Temporary Debt-Ceiling Fix http://t.co/moMSWfLKab This may be how agreement is reached, w/some budget compromise also $$ Oct 08, 2013
Meltdowns Hobble NSA Data Center http://t.co/NpnnX0eyPy Investigators Stumped by What’s Causing Power Surges That Destroy Equipment $$ Oct 08, 2013
USDA Buyers Stuck in Limbo as Shutdown Hurts Housing http://t.co/M0LvI019Ye USDA should not be in the lending business. Ag is doing well $$ Oct 08, 2013
He Beat Us in War but Never in Battle http://t.co/Gixl0Fm9mt John McCain writes on recently deceased N. Vietnamese Gen. Vo Nguyen Giap $$ Oct 08, 2013
Americans are more conservative than they have been in decades http://t.co/GQrkq0ZHg5 I find this difficult 2 believe, would b more chg $$ Oct 07, 2013

Market Impact

Better Beta Is No Monkey Business http://t.co/UrSmi7Ql3h High dividend stocks are overvalued; dividends are not the best proxy for value $$ Oct 12, 2013
The BIGGEST Problem with Buy and Hold http://t.co/lIb3cQpqgY Biggest companies, bot&held do not have the same room to grow vs smaller cos $$ Oct 12, 2013
How Investors Lose 89% of Gains from Futures Funds http://t.co/inEYR2xDgi Long article on how managed futures doesn’t make $$ 4retail invtrs Oct 08, 2013
Worst Stocks to Reverse With Commodity Profits Rising 18% http://t.co/ImKtQ5KXPi A contrarian idea w/precious metals doing poorly of late $$ Oct 08, 2013
Finra to Consider Requiring Brokerages to Carry Arbitration Insurance http://t.co/qjxeVp89b7 A very good idea; mkt would weed out the bad $$ Oct 06, 2013

Companies & Industries

Boeing’s New 777X Could Make the Largest Jumbo Jets Obsolete http://t.co/VnBflpZ6dr Efficient engines, folding wings end the 747 era $$ $BA Oct 11, 2013
US eyes cutting ethanol usage http://t.co/d7r88Z2hA8 This should be a no-brainer, aside from corn farmers, $ADM, & ethanol refiners $$ Oct 11, 2013
Jeff Bezos and the Age of Amazon: ‘The Everything Store? http://t.co/EtF1QvWcqg Looong & interesting about Amazon & its founder’s origins $$ Oct 10, 2013
Costco Stands Behind Its Cheap Rotisserie Chicken Strategy http://t.co/aptxcuyH8u $5 for a Rotisserie Chicken? Can’t buy raw that cheap $$ Oct 10, 2013
Verizon and Vodafone Talks Took Four International Cities and Eight Months http://t.co/GmR1XjxTgl Patient $VOD wins against needy $VZ $$ Oct 09, 2013
US Banks Margin Under Tremendous Pressure http://t.co/EQVHiLmKWr Funding costs can’t get much lower, while old high-yielding loans mature $$ Oct 09, 2013
Ohio Smelter Faces Shutdown Without Utility Rate Relief http://t.co/O87iyfFdNQ & aluminum is in oversupply; why should we subsidize this? Oct 06, 2013

Healthcare

Mapping America?s Coronary Stent Hot Spots http://t.co/EFfUjfbjHD Check & c whether u live in an area that over-installs stents $$ #savelife Oct 10, 2013
Mother Dies Amid Abuses in $110B US Stent Assembly Line http://t.co/Nag1UCiqfi Sad tale of medicine done 4 profit 2 the harm of patients $$ Oct 10, 2013
Micro Businesses Find Health-Care Rollout Is Slow http://t.co/1hhcfPlCfX State Small-Business Exchanges Still Aren’t Ready $$ #gigo Oct 08, 2013
Republicans Didn’t Sabotage Health Exchanges, Obama Did http://t.co/OkGA7HEBVw Very difficult 2get complex programming projects done fast $$ Oct 08, 2013
Robot Surgery Damaging Patients Rises With Marketing http://t.co/fFe29Nesdp Check out track record of any doctor doing robotic surgery $$ Oct 08, 2013
Exchanges Will Raise US Healthcare Costs http://t.co/8UhQm58INQ Removing economic incentives has always raised healthcare costs $$ Oct 07, 2013
IT experts question architecture of Obamacare website http://t.co/hvfjKXp5Rt System architecture flaws caused problems, not traffic alone $$ Oct 07, 2013

US Local Economics

GED Faces New Rivals for High School Dropouts http://t.co/SG0UQ1wqzT Passing the GED doesn’t mean much, but if you pass a tougher test? $$ Oct 12, 2013
Machines Gauging Your Star Potential Automate HR Hiring http://t.co/MOcnq8Hd5E Can playing games well reveal u better than your resume? $$ Oct 11, 2013
Montana Towns Struggle With Oil Boom Cost as Dollars Flee http://t.co/3Wz5aUCc2p Small town’s budget can’t keep up w/Infrastructure needs $$ Oct 10, 2013
Housing Boom Bigger in Texas as Home Bidding Wars Erupt http://t.co/GyOZGL1fgC the Texas economy very strong & the builders can?t keep up $$ Oct 09, 2013
Puerto Rico Debt Troubles Regulators http://t.co/s3b54N9UsT Check your muni bond fund, b/c even single state funds bot PR 4extra yield $$ Oct 07, 2013
Pay Raises for Teachers With Master’s Under Fire http://t.co/N3ogmAntdZ The next study should b whether education BAs harm teaching skill $$ Oct 07, 2013

Other

Colleges Try Cutting Tuition?& Aid Packages http://t.co/6MWuklxikq Unlikely 2 work; higher sticker w/greater aid helps selectivity/cachet $$ Oct 11, 2013
Snowden Says He Has No Regrets http://t.co/KFVhXMW7Fu satisfied his actions had an impact; Sam Adams Award 4Integrity in Intelligence $$ Oct 11, 2013
Baseball Battling Dominican Drug Use While Grappling With A-Rod http://t.co/kU2zOHvECu Doping begins in the minors, w/many from DR league $$ Oct 11, 2013
Light Point Security: A Software ‘Jail’ 4 Malware? http://t.co/s1cPTtwlD6 Clever idea: browse in the cloud, image relayed 2local browser $$ Oct 10, 2013
Chemistry Nobel Goes to Three for Computer Program Work http://t.co/GBZA3RtgcB Interesting. Didn’t know u could do chemistry w/computers $$ Oct 09, 2013
Sudden Collapse of Cloud Provider Rattled IAC http://t.co/ilhmBtahWe If cloud provider announces shutdown, act fast 2preserve your data $$ Oct 08, 2013
New York Bans Harbinger’s Falcone From Insurance Role http://t.co/IFfrBHv9Xq Interesting how the NY Commish got Falcone out of MD ins sub $$ Oct 08, 2013
Gold Befuddles Bernanke as Central Banks? Losses at $545B http://t.co/lgtX56v0Oq Central Banks r not immune from the fear/greed cycle $$ Oct 08, 2013
Younger Americans Fare Poorly on Skills Against International Peers http://t.co/c5dL26lXPM But Americans r more flexible & creative $$ Oct 08, 2013
Finance People To Follow On Twitter http://t.co/Q6jBZWGtkg A great list, at least for those that I know, should u have time 2follow 106 $$ Oct 08, 2013
Humans Trump Robots at the Grocery Store http://t.co/atazmQ8R5h Cashiers Trump Self-Checkout Machines at the Grocery Store $$ Oct 07, 2013

Janet Yellen

When Yellen Speaks World Listens as Fed Plans US Course http://t.co/iRO9Fg6JMf More hagiography as media/acdmics overestimate her ability $$ Oct 11, 2013
Senate Confirmation Hearing 2Test Yellen’s Skills of Communication http://t.co/3lQVrH3zXh Can she think on her feet w/hostile questioners $$ Oct 10, 2013
The Yellen Difference http://t.co/Wgeop65jct How Yellen is different than Bernanke: Tobin Keynesians will b in charge at Federal Reserve $$ Oct 10, 2013
Janet Yellen: 5 Things You Should Know About Obama?s Fed Chair Nominee http://t.co/52Ie5o9nkk Wealthy, apolitical, Akerlof, forecasting $$ Oct 09, 2013
Yellen 2b Named Fed Chairman, First Female Chief http://t.co/DSsky1sDgM What’s done is done; someone has 2b the fall guy/gal $$ #glasscliff Oct 09, 2013

Tower Group

Commented on StockTwits: It’s a question of probabilities. Clearly the odds are higher now than a week ago, much h… http://t.co/XPlzWLxvy9 Oct 10, 2013
Commented on StockTwits: I used 2b a corporate bond manager. When u c a 1-yr obligation trading below $95, solven… http://t.co/AugmpPF1Ib Oct 10, 2013
Risky equities should be priced to earn 20%+. The bonds of $TWGP yield 20%+. Makes me think bonds r the true equity & stock a call option $$ Oct 10, 2013
20%+ yield = panic $$ RT $TWGP just watch the bonds they are $88 and B-. Off lows they do not reveal panic. HOLD. http://t.co/VMc0Rih0bT Oct 10, 2013

Wrong

Wrong: Obamacare Foes Using Shutdown Echo South?s Nullifiers http://t.co/js120efIId Not a fair portrayal. Obamacare was badly thought out $$ Oct 12, 2013
Dubious: How Yellen Will Shape Fed’s Banking Regulation http://t.co/DHGcgEOqmb Surprise me if much happens; Fed rarely strong regulator $$ Oct 10, 2013
Uncertain: Recession Looms If Treasury Uses Tools to Prevent a Default http://t.co/FY39fp90eQ Not so sure it would create a recession $$ Oct 09, 2013
Wrong: Detroiters Living Amid Ruins Resist Moving as City Reorganizes http://t.co/MuaBzAfVbm Article purely anecdotal, population shrinks $$ Oct 07, 2013

Replies, Retweets, & Comments

@SilentMachinery I wondered about that also. There may be something there. Oct 12, 2013
I need 2brighten my mood. Ah, @AARP has sent me membership cards. Snip, snip, snip. Much better. Old people suck the blood of the young $$ Oct 10, 2013
Luck seems to even out for me. I miss gains & losses evenly. I usually don’t spend much time on a stock after I sell it $$ @merrillmatter Oct 10, 2013
RT @researchpuzzler: on endowment investing ~ 1) @AlephBlog: http://t.co/UrctMBjW9R ~ 2) @advperspectives: http://t.co/AlhZQgPGnw Oct 09, 2013
To @TheUncorrelated : my article on your whitepaper, with my advice to endowment investment managers is here: http://t.co/dQlapwbWqO $$ Oct 08, 2013
@rishad Beautiful, but it follows the footsteps of Detroit. One poet said, “Chicago is a pompous Milwaukee.” The skylines don’t compare tho. Oct 08, 2013

The Rules, Part XLIX

Posted on 20 August 201320 June 2017 by David Merkel

In institutional portfolio management, the two hardest things to do are to buy higher than your last buy, and sell lower than your last sale.

I’ll tell you about two former bosses that I had.? They are both good men, and I respect them both.? The first one taught me about bond management.? He had a difficulty though.? Typically, he did not like to trade.? When I stepped into his role, but with far less experience, I traded a lot more than he did.? Because I traded more, and liquidity in the bond market is sporadic, I came up with the rule listed above.

The boss had an interesting insight, though: he suggested when you get to large sizes, stocks and bonds are equally illiquid.? I tend to agree.? In my days, I have traded stocks and bonds where I was a disproportionate holder of them, more so with bonds than with stocks.? If you want to learn the microstructure of markets, there is no better training ground than with illiquid securities.? And if you hold a lot of any security, the position is illiquid.

Once you are big, it is hard to trade in and out of positions rapidly.? You have to scale in and scale out, and do it in such a way that you don’t tip your hand to the market, which would then move against you.? Now, it would be easy if you had a fixed estimate of value for the securities, so that you knew whether a proposed buy or sell made sense, but corporate bonds and stocks improve and deteriorate.

Imagine for a moment that you hold five percent of a company’s bonds, and to your surprise, the situation is deteriorating.? Bid prices are falling.? What do you do?? First question: are the bonds money good?? Will they pay off, with high likelihood?? If so, bide your time, and maybe add some more if you have room.? If not, the second question: so what are the bonds worth?? If less than the current price, start selling, but avoid the appearance that you are desperate.? You have a lot of bonds to sell.? For the market to absorb them all will be a challenge.? I would say to brokers, that I was willing to sell small amounts of bonds at the current market, but if someone wanted to buy my full position, I might be willing to compromise a little.? Then you can have negotiations.

More often, in a deteriorating situation, you sell in dribs and drabs as the price of the asset falls.? There is psychological pain as you sell lower, but a good manager dismisses it, forgetting the past and focusing on the future.

Then there was the other boss.? At the interview he asked me, “What is one of the hardest lessons you have learned?”? I said, “In institutional portfolio management, the two hardest things to do are to buy higher than your last buy, and sell lower than your last sale.”

He appreciated the answer, though he had a hard time applying it personally.? He had a tendency to look to the past more than me.? Over the years I have learned to be forward-looking and try to analyze what securities will do the best, regardless of my cost basis.

I got the largest allocation of the Prudential “C” bonds when the deal was done. but I bought an equal amount 10% higher in price terms when it was a great deal in relative terms.? It was tough to buy more at a higher price, but it was still a great yield on a misunderstood bond.

Regret is native to mankind, but you can’t change the past.? You can try to estimate the future.? Don’t think about your cost bases.? Rather, think about what an asset is truly worth, and its trajectory, and manage your buys and sells relative to that.

Forward-looking management wins.? Look forward, and avoid regret.

PS — On Scottish Re (spit, spit) we went through this process.? We bought and bought more as it went down.? I erred in my judgment.? Had I looked at the taxable income, I would have realized that a lot of the profits weren’t real.

Before the company announced its reorganization plan, we doubled our position at a very low price, but then sold the whole thing into an astounding rally when the company announced its plans.? That cut our losses considerably, and we didn’t buy it back.? Eventually, it was worth nothing.? Focus on the future; ignore the past.

The Rules, Part XLII

Posted on 31 May 201320 June 2017 by David Merkel

During a panic, it is useful to reflect on the degree to which the real economy has been driven by the financial economy.? In the Great Depression, the degree was heavy; in the seventies, it was light.? Today, my guess is that it is in-between, which makes it difficult to figure out the right strategy.

Again, this was written in 2002 or so.? As I posted last night, the banks were in relatively good shape then.? I made a lot of money for my clients buying bank floating rate trust preferred securities at ~$80.? There was no security that we did not clear at least $10 on, and most cleared $20 within a year.? One even went from $68 to $100, plus a healthy coupon.? In bond terms those were a series of home runs.? As an aside, as a bond investor, I focused more on net capital gains than most, and that helped us in a rocky era.? I often gave up current income to gain the potential for capital gains, which was the opposite of most of my competitors.

So in 2002 it was reasonable to buy banks as the willingness to supply of credit grew.? But there are limits to how much credit you can have in an economy without things getting screwy.? An economy with too many promises to pay becomes inflexible; far better to finance more of the economy with equity, but that requires a Fed that works properly, like it was under Eccles, Martin and Volcker.? Under men of less courage, like Bernanke, Greenspan, Burns, Miller, Crissinger, and Young, it simply paves the way for asset bubbles and price inflation.

In 1929 and 2008, though, it was relatively easy to know that the financial economy had grown too large for the real economy.? Total debt to GDP levels were at records.

Or think of it from this angle: in 2004, I was recruited by another financial hedge fund to be their insurance analyst.? I talked with them, but ultimately I refused, because I felt the boss was probably less competent than my current boss.? A major part of his presentation was how amazing the outperformance of financial stocks had been over the prior 10 years, implying that it would be the same over the next 10.? That outperformance was not repeatable because the capital of the banking and shadow banking industries had gotten so large that there was no longer any way that they could extract a high return out of the rest of the economy.? As it was, the effort to do so made them take on asset risks that killed many companies, and should have killed many, many more, had economic policy been handled properly.

This is one reason why my long only portfolio was so light on financials, excluding insurers, going into 2008.? I sold the last of my banks in 2007, realizing Europe would be no safe haven.? I retained one mortgage REIT that cratered as repo fell apart, teaching me a valuable lesson that I had bought something cheap, but not safe.? That was my only significant loss during the crisis starting in 2007-2008.? Repo funding is not a safe funding source during crises, and this is something that is not fixed from the last crisis, along with portfolio margining, and a few other weak liability structures.

With respect to the eras starting in 1929 and 2008, the key concept is debt deflation?? When there are too many debts, there will be too many bad debts.? That is the time to only only companies with strong balance sheets that will not need to refinance under any conditions.? That eliminates all banks and shadow banks.

I can’t guarantee that we are past the crisis, because we haven’t seen what will happen to the economy when the Fed starts to lessen policy accommodation, much less tighten.? As it is, for the most part, I not only own companies that are cheap, but primarily companies that are safe.? Value investing is “safe and cheap,” not just cheap.? This applies to financials as well, but many value investors lost a lot of money on financials because they ignored credit quality near the end of a credit boom.? Many credit-sensitive companies looked cheap near the end of the 2007, but they were cheap for a reason — they were about to get pelted by a ton of losses.

As an aside, do you know how hard it is to get a value manager to short something trading at 50% of book value?

I know how tough that is.? I’ve been through it.? He would not bite.

The company had asset risks as well as liability risks.? I extrapolated the liability cash flows to realize the long-term care? policies the company had written would likely bankrupt them.? But when the boss came to me pitching it as a long because one his buddies thought it was dirt-cheap, I uttered, “Gun to the head boss, I would tell you to short it.”? Reply: “But it’s trading at half of book value.” Me: “Book value is misstates true economic value.? Can’t say for certain, but I think this one goes out at zero.”

As it was, we did nothing, and the stock, Penn Treaty, did go out at zero. (There was one small positive out of this, I did convince the private equity arm not to fund a competitor in long-term care.)

Back to the main point.? Have a sense as to the financial economy.? This will probably only happen once in your life, but that time is crucial.? If there is a financial mania going on, move to safety, and reduce exposure to credit-sensitive financials.? It’s that simple, but to most value investors who invest in seemingly cheap financials that is a hard move.? Remember, safe comes before cheap in value investing, and that means questioning asset accrual items.? Financial companies have that in spades.

The Rules, Part XXXVII

Posted on 21 May 2013 by David Merkel

The foolish do the best in a strong market

“The trend is your friend, until the bend at the end.”? So the saying goes for those that blindly follow momentum.? The same is true for some amateur investors that run concentrated portfolios, and happen to get it right for a while, until the cycle plays out and they didn’t have a second idea to jump to.

In a strong bull market, if you knew it was a strong bull market, you would want to take as much risk as you can, assuming you can escape the next bear market which is usually faster and more vicious.? (That post deserves updating.)

Here are four examples, two each from stocks and bonds:

In 1998-2000, tech and internet stocks were the only place to be.? Even my cousins invested in them and lost their shirts.? People looked at me as an idiot as I criticized the mania.? Buffett looked like a dope as well because he could not see how the enterprises could generate free cash reliably at any intermediate time span.
In 2003-2007, there were 3 places to be — owning homebuilders, owning depositary financials or shadow banks, and buying residential real estate directly.? This was not, “Buy what you know,” but “Buy what you assume.”
In 1994 many took Mexican credit risk through Cetes, Mexican short-term government debt.? A number of other clever investors thought they had “cracked the code” regarding residential mortgage prepayment, and using their models, invested in some of the most volatile mortgage securities, thinking that they had eliminated all risk, but gained a high yield.? Both trades went badly.? Mexico devalued the peso, and mortgage prepayments did not behave as expected, slowing down far more than anticipated, leading the most levered players to? blow up, and the least levered to suffer considerable losses.
2008 was not the only year that CDOs [Collateralized Debt Obligations] blew up.? There were earlier shocks around 2002, and the late ’90s.? Those buying them in 2008 and crying foul neglected the lessons of history.? The underlying collateral possessed no significant diversification.? Put a bunch of junk debt in a trust, and guess what?? When the credit cycle turns, most of those bonds will be under stress, and an above average amount will default, because the originators tend to pick the worst bonds with a rating class to maximize the yield, which allows the originator to make more.? Yes, they had a nice yield in a bull market, when every yield hog was scrambling, but in the bear market, alas, no downside protection.

I could go on about:

The go-go years of the ’60s or the ’20s
The various times the REIT market has crashed
The various times that technology stocks have wiped out
And more, like railroads in the late 1800s, or the money lost on aviation stocks, if you leave out Southwest, but you get the point, I hope.

People get beguiled by hot sectors in the stock market, and seemingly safe high yields that aren’t truly safe.? But recently, there has been some discussion of a possible “safety bubble.”? The typical idea is that investors are paying up too much for:

Dividend-paying stocks
Low-volatility stocks
Stable sectors as opposed to cyclical sectors.

A “safety bubble” sound like an oxymoron.? It is possible to have one?? Yes.? Is it likely?? No.? Are we in one now?? Gotta do more research; this would be a lot easier if I were back to being an institutional bond manager, and had a better sense of the bond market pulse.? But I’ll try to explain:

After 9/11/2001, institutional bond investors did a purge of many risky sectors of the bond market; there was a sense that the world had changed dramatically.? At my shop, we didn’t think there would be much change, and we had a monster of a life insurer sending us money, so we started the biggest down-in-credit trade that we ever did.? Within six months, yield starved investors were begging for bonds that we had picked up during the crisis.? They had overpaid for safety — they sold when yield spreads were wide, and bought when they were narrow.

But does this sort of thing translate to stocks?? Tenuously, but yes.? Almost any equity strategy can be overplayed, even the largest and most robust strategies like momentum, value, quality, and low volatility.? In August of 2007, we saw the wipeout of hedge funds playing with quantitative momentum and value strategies, particularly those that were levered.

Those with some knowledge of market? history may remember in the ’60s and ’70s, there was an affinity for dividends, with many companies borrowing to pay the dividend, and others neglecting necessary capital expenditure to pay the dividend.? When some of those companies ran out of tricks, they would cut or eliminate the dividend, and the stock would fall.? Now, earnings coverage of dividends and buybacks seems pretty good today, but watch out if one of the companies you own has a particularly high dividend.? You might even want to look at some of their revenue recognition and other accounting policies to see if the earnings are perhaps somewhat liberal.? You also compare the dividend to what the cash flow from operations is, less cash needed for maintenance capital expenditure.

I don’t know whether we are in a “safety bubble” now for stocks.? I do think there is a “yield craze” in bonds, and I think it will end badly when the credit cycle turns.? But with stocks, I would simply say look forward.? Analyze:

Margin of safety
Valuation, absolute & relative
Return on equity
Likely and worst case earnings growth

And then balance margin of safety versus where you have the best opportunities for compounding capital.? If relative valuations have tipped favorably to less common areas for stock investing that considers safety, then you might have to consider investing in industries that are not typically on the “safe list.”? Just don’t? compromise margin of safety in the process.

At the Towson University Investment Group?s International Market Summit, Part 4

Posted on 20 April 2013 by David Merkel

1??????? Any specific stock, bond, industry, country, or asset picks that you feel strongly about?

I like:

The P&C insurance & reinsurance industries — they are very good at compounding earnings, especially the ones that are good underwriters, conservatively reserved, and shareholder focused over the long haul.
Selected energy and information technology stocks, so long as the valuations are inexpensive.
RGA, National Western Life, Stancorp Financial, AFLAC, and Industrias Bachoco SA
Emerging market bonds — their policies are mainly more orthodox than the developed world, for now.

2??????? What strategies do you use to determine if a company is worth a deeper look into, in the first five minutes?

There is this article: GE Does Not Bring Good Things For Your Life. If you have a Bloomberg Terminal, that is a useful article.

But even if not, the five-minute drill is easy:

Look at price to expected earnings. ?Look at past earnings.
Look at indebtedness and goodwill. ?Ask: is this a stable industry? ?Does the goodwill represent anything valuable, some barrier against competition?
Compare cash flow from operations versus earnings. ?An excess is usually better.
Look at price-to-book for financials and price-to-sales for utilities and industrials — lower is better.
Ask yourself if this is an industry with increasing, stable, or decreasing pricing power.
Look at whether the share count is rising or falling. ?Falling is better.
Does it pay a dividend? ?Yes is better.

Beyond this, for corporate bonds, I have a similar arrangement. ?And I call that the one-minute drill, because in institutional fixed income, you have to be fast when the market is hot.

3??????? What have been valuable resources that you would recommend to up-and-coming investors?

Look through the book reviews that I have written — there are almost 200 of them. ?I have read a lot of books by eminent value investors, bond investors, growth investors, alternative asset managers — you name it, I have read a lot of investment books.

But let’s add in another question:

4??????? What advice would you give to a student who wants to start investing but has not prior knowledge?

My friend Niall O’Malley gave a good answer to this when he said create two lists of stocks — one that you think will do well, and one that you think will do badly. ?Then track them, and learn from the companies that violate your expectations.

My answer would be more plebian — paper trade. ?I did that in my early 20s, long before I had money to invest. ?I came close to winning the Value Line contest in the mid-80s.

But the biggest thing is making a commitment to improve your investment knowledge. ?When I was 26, I said that I would spend one hour per day, except Sundays, to improve my investment knowledge. ?I went all over the map. ?I read practical stuff. ?I read academic stuff. ?I read stuff on stocks. ?I read stuff on bonds. ?I read stuff on industries, sectors, companies, etc. ?I read stuff on management, operations, financial management. ?I read, read, and read.

Investing requires continual self-education. ?Read and learn and profit.

Final episode tomorrow.

Full disclosure: Long RGA, NWLI, SFG, AFL, IBA

Value Investing Flavors

Posted on 4 April 2013 by David Merkel

I ran across this article, Value Investor or Value Pretender: Which Are You?, by John Mihaljevic who puts out The Manual of Ideas, along with Oliver Mihaljevic.? I appreciate what they do — you can learn a lot from their organization.

I told him that I was going to write this, and he said to me:

The piece was meant tongue-in-cheek but feel free to rip it apart 🙂

I will rip it apart, but gently, because every point he made is mostly true for value investors, but there are variations in the way that value investors operate, so you can do some of the things he says you can’t do, and still be a value investor — what matters is how you implement them.

There will be more parts to my “Education of a Risk Manager” series, and one of them will deal with all of the different managers that I met, and how much they varied in terms of what they thought were factors that mattered.

Thus, as I developed my own theories of value investing, I considered the range of opinion, and realized that there is a single model for value investing, but that it is complex enough that different parties use different approximations of the full model, and those approximations do better and worse in different environments.

Like a David Letterman-style Top 10 list, John Mihaljevic listed and described things that made you a value pretender.? Time to go through them:

Reason #10: You invest based on chart patterns

I don’t use chart patterns, but I do use momentum both positively & negatively.? There is decent evidence that investors are slow to react to new information, and so stocks with strong price momentum over 200 days tend to do better.? There is some evidence where there is lousy price momentum over a 4-year period, that things tend to mean-revert.

Granted, there is a tendency among some value investors to troll the 52-week low list.? I like doing that too, but you have to be careful, because maybe you are missing something that cleverer investors know.? The same would be true of short interest figures.? Whenever I see one of my stocks gain a high short interest ratio (shares sold short / volume, or % of mkt cap sold short), I do a review to see what I don’t know.? That’s why I am not afraid of the high level of shorting on Stancorp Financial.? This is a conservatively run firm that manages risk up front.? Even though disability claims rise when unemployment is high, they underwrite better than most of the industry.

There have been some very successful value plus momentum investors.? The balance is tricky, but blending two of the most powerful anomalies does bear fruit.

Reason #9: You assume multiple expansion in your investment theses

I never assume that, but if you are buying them “safe and cheap,” you often do get multiple expansion.? The challenge is figuring out where things are less bad then the implied opinion of the depressed valuation.

Reason #8: You try to figure out how a company will do vis-?-vis?quarterly EPS estimates

I don’t do that either, but I have known some value managers that incorporate prior earnings surprise data, because past earnings surprises are correlated with future surprises.? Often, near the the turnaround point for a company’s stock, there are some earnings surprises.

Reason #7: You base your decisions on analyst recommendations

I have few arguments with this, except negatively.? Sell-side analysts are trailing indicators.? I like buying companies where the sell-side is negative, but not very negative.? With very negative opinion, there are often reasons to stay away, unless you possess specific knowledge that the sell-side analysts do not have.

Reason #6: You use P/E to Growth (PEG) as a key valuation metric

I’m sorry, but PEG works, if indeed you have the growth rate right, which is a challenge.? I do try to analyze sustainable competitive advantage for the firms that I own.? That often leads to growth.? Now I am a growth skeptic, so it takes a lot to make me pay up for growth, but occasionally I will do so, when the PEG is low enough.

Reason #5: You use EBITDA as a measure of cash flow

EBITDA is not cash flow from operations, or free cash flow, but it is a valuable figure in value investing when it divides into Enterprise Value (Value of Debt + Value of Stock – Cash).? Low ratios of Enterprise value divided by EBITDA are very effective at identifying promising investments — it indicates cheap assets, and in a time when M&A is hot, it can really pay off.

Reason #4: You would worry about your portfolio if the market closed for a year

I could live with the market closed, but there are advantages to having it open.? With any given stock, there are times in a year to increase or reduce exposure — if you have a firm idea of what the firm is worth, you can buy more during dips, and sell a little into strong rallies.? Short term (one month) stock price movements are fickle, and commonly reverse.

Reason #3: You make investment decisions based on the activity or tips of others

But Manual of Ideas tracks the 13F filings of great investors.? I get good ideas from the best investors also, but you have to do your own research.? Many bright investors chat with each other, and I had many occasions at the hedge fund that I worked for where I disagreed with a friend of the boss.? I was right more often than I was wrong.

Perhaps a better way to phrase it is “choose your idea generators wisely, but do your own research as well.”

Reason #2: Your investment process centers on the market opportunity

This is largely true, but when I know a industry or sector is in horrible shape, I often buy the strongest name in the industry, realizing that they will do well as the competition dies, and they don’t.? Also, there are times when few recognize that pricing power has shifted, and it is time to take a position on a misunderstood industry that is about to grow faster than expected.? Particularly with cyclical companies this idea can be promising.

The same applies to countries where the markets are washed out.? Don’t try to time the bottom, but when a country is cheap, buy a promising/safe company in the country after things have turned up for 100 days or so.

Reason #1: Your investment theses do not reference the stock price

At some points, I like to own companies with strong management teams relative to their industry.? I will let valuation stretch at those points, because there is more of a sustainable competitive advantage there.? You get more positive surprises, and that definitely aids total returns.

That said, a focus valuation is key to all investing.? The only thing more important is margin of safety.

Margin of Safety

There are three elements to margin of safety:

Sustainable Competitive Advantage (Strong Gross Margins)
Strong Balance Sheet (Conservative Accounting)
Cheap Price vs Likely Value

This is different from other formulations of margin of safety, because one has to take into account factors that make it less certain that we can calculate value.? Many value managers were buying cheap financials up until September 2008, only to realize that their estimates? of value were wrong because credit losses would be far worse than expected.

Good stock analysis begins with good bond analysis.? If you wouldn’t buy a bond from the firm, you probably shouldn’t buy the stock.? Value investing is conservative, and looks for situations where there is little credit risk.

Conclusion

If you want to read? summary of my portfolio rules, you can find them here.? I am a firm believer in value investing, but I realize that there are many ways to approach the process.? I watch other value investors, and continue to learn.? Good value investors are lifelong learners, and generalists with broad knowledge.? It is not a narrow discipline, but one that can accommodate new knowledge.

Full disclosure: long SFG

On Operating Company Defaults

Posted on 8 February 2013 by David Merkel

From an e-mail from a reader:

Hi, David. I hope this e-mail finds you well. I am a long-time reader of your blog and have learned an immense amount about markets from your writings.

I am a stock analyst and am just starting to learn the nuances in the operating vs. holding co. relationship.

I saw your brief explanation here:

http://alephblog.com/2009/03/25/holding-and-operating-companies/

Could you point me to any websites, books, or articles that really delves into this? Specifically, there are lots of bonds issued on both the opco and holdco levels ( EIX, CZR, and many others).

I know distressed guys do this all day and I’ve already read Stephen Moyer’s Distressed Debt Analysis. ?I understand structural vs. contractual subordination, cross guarantees, and other basics, but, I’d like to know how it would impact the publicly traded shares at the holdco level.

?For example, if holdco A has publicly traded shares and has opcos B and C. B is a profitable company while C is loss-making company. B and C both have publicly traded debt.

What would happen if C defaults? ?Nothing is clear cut but I’m trying to find a good way think about these things.

I have been here already.? If company C defaults, company A has no obligation to make you whole.? In my case with Teleglobe, the bondholders got zero.? The parent, BCE, is still doing well.

This is a major aspect of being a bondholder.? You must analyze the relationships, so that you do not rely on those that do not legally need to pay you.? Implicit support is always suspect.? In a crisis, it goes away.

Post 2000

Posted on 12 December 2012 by David Merkel

This has been a lot of fun.? This has been a lot of work.? This has been a “labor of love.”

When I wrote for RealMoney, I would sometimes say to my editor Gretchen, “Here’s another labor of love piece,” to which she would give a hearty response, because she liked editing me.? She told me she always learned a lot from me.? I liked working with her a lot.

Unlike some writers at RealMoney, I would sometimes troll through the comments on Cramer’s blog.? Sometimes I would defend him, at minimum I would try to explain him.

At the time, there were some financial blogs that I liked a lot — Jeff Miller, Barry Ritholtz, Roger Nusbaum, Steven Randy Waldman, Eddy Elfenbein, Alea… I know there are more, but I can’t remember now.? I resisted starting a blog for 1-2 years, because I felt RealMoney was my blog.? I especially liked participating in the Columnist’s Conversation.? (Note: if RealMoney would like to invite me back, I am open to the idea.? That said, the CFA Institute has encouraged me to blog for them as well — just don’t know how much content I can produce, because everyone wants original content.)

But I realized that RealMoney and I had different goals, and in talking with some of those that commented at Cramer’s blog, I decided to launch Aleph Blog.? Why call it Aleph Blog?? Many reasons, as noted in the link, but part of the fun was getting to read Borges, who I had not previously read.

When I launched Aleph Blog, I had no idea what I was getting into, and I did not intend on leaving RealMoney.? I liked the editorial freedom, though, and liked the broader interaction with many voices across the internet, rather than only RealMoney columnists, good as they were.? I did research when I started, and so I created my own domain, signed up with Seeking Alpha, and launched just prior to the mini-crisis where the Chinese stock market crashed in Shanghai.? When that happened, I wrote a popular piece that Seeking Alpha picked up that my friend Cody Willard promoted as well.

And off we went!? A grand experiment, allowing me to spread my wings more wide than at RealMoney.? My goal was to do a brain dump of areas where I thought I had competence.? I didn’t want to be like many bloggers where over 50% of their post is quoting others — I wanted to write from my heart, expressing my views on a wide number of topics relating to economics, finance and investment, from my unusual framework, which is Evangelical Christian, mostly libertarian (but not for financials), actuarial, value investor, doubting neoclassical economics and modern portfolio theory.

I was recently at a Baltimore CFA Society meeting, when a few people came up to me telling me how much they liked my blog.? Some quoted to me recent pieces I had written.? This was new; I was surprised.? I have never had local people come to me and say that.? Yes, stats for Maryland on my blog are above average, but my work helping the local CFA Society always seemed to be detached from other things that I do.? My worlds are merging, maybe.

My worlds are also merging from the many evangelical Christians who write to me.? This is a blog written by a Christian, not a Christian blog.? I’m here to serve everyone, but my views on ethics will color all that I write.

At the beginning, I tried focused linkfests, where I drew together posts on a hot topic, and narrated them to give my thoughts.? Those were a lot of work.? Today, my linkfests occur through Twitter.

Twitter: it took me even more pain to decide to do Twitter.? Given that my blogging is more long-form than most — why should I do Twitter?!? My answer for today is simple: to have good conversations, and push good content to readers.? And, for those who don’t do Twitter, they can read my weekly sorted tweets.? I got the idea from History Squared, a newer blog that I like.? Sorting the tweets makes them more useful to readers, so if it takes half an hour to do so each week, it is worth it.

But now I have more followers on Twitter than on RSS.? 6000 vs 5300.? I prefer RSS because people see the whole post, but I understand how the lower bandwidth on Twitter allows people to choose what attracts them.? Twitter makes us all epigram writers in AOL-ese.? It is challenging to do, but I like a good challenge.

I’ve written a number of series that have been significant:

I’m sure there are more, but I can’t think of them now.? At the same Baltimore CFA Society meeting as mentioned before, one person asked me, “How do you write about the wide variety of topics that you do?”

Part of it is my varied career, and educational background.? I have worked in a large number of areas, and have not been afraid to branch out and try things slightly outside my grasp.? You only learn when you fail.? I’ve learned a lot. I’ve failed a lot.

If you don’t take reasonable chances, you won’t grow.? Look for opportunities to expand your abilities — who can tell where you will go?!? Opportunities go to those who are there, grab hold of them, and win.? If you don’t try, you won’t win.

I know that my blog is an acquired taste, and best for professionals and advanced amateurs.? If you are a beginner, best you should focus on my personal finance category.

My goal has been to give something back to my readers.? I’ve had an interesting career, with many unusual and entertaining experiences.? I don’t have to have more fame or clients.? I enjoy relating the truths of the markets to others, whether they are beautiful or ugly.

To my readers: I don’t know if I will last another thousand posts, but I appreciate that you read me, eclectic as I am.? The one thing I promise: I will do my best for you, poor as that may be.

Your Servant,

David

PS — I know that my views on Fed policy and economics will win me few friends, but someone has to point out that the paradigm is broken.? Same for Modern Portfolio Theory….