Thursday, May 30, 2013

A Kumbaya Moment

The two most practiced schools of investment management are fundamental analysis and technical analysis.  Mostly, I practice fundamental analysis, which means I look at the company, how its stock trades relative to the company, how the stock is rated by full-time analysts, how it is impacted by the business cycle, etc.

Sometimes, I will take a look at technical analysis.  That is the type of analysis that uses stock prices to identify meaningful patterns on a graph.  While it is interesting, it demonstrates meaningless precision.  To me, I consider it voodoo analysis.  However, when both schools suggest the same thing, it is worth paying attention.

Take a look at this technical view of the stock market:

Chart of the Day

On an inflation-adjusted basis, the Dow is not even close to the red resistance line, which means it will probably continue going up.  When technical analysis confirms what I study in fundamental analysis, I feel pretty confident indeed.

That doesn't mean there won't be corrections.  There was a 3% correction in April.  And, don't forget, two out of every three years experience a correction of 10% or more.  Corrections are routine and actually good for the stock market.  Long term, I remain much more concerned about a "heart attack" in the derivatives market than the business cycle.  So, let's just enjoy the short term!

Wednesday, May 29, 2013

The "Timex" Americans

Back in the Dark Ages, there was a TV commercial for Timex watches that said "it takes a licking but keeps on ticking."  That came to mind Tuesday morning when I heard the latest consumer confidence numbers.  Since consumer spending is two-thirds of GDP, it is important to see how confident they are and whether they will increase or decrease their spending.

Confidence increased 7.2 points to 76.2 last month, which is the highest in the four years since the recession ended.  And, it comes on the heels of a 7.1 percent increase the previous month.  That's a whopping 23% increase in two months and suggests many bullish things.  But, what could cause such a huge increase in confidence?

Clearly, the economy is not 23% better.  Sadly, our leaders are not 23% better.  The stock market is up but certainly not 23%.  Maybe, the weather is 23% better, but I don't think that matters quite so much.

I suspect it is the continual Chinese water-torture of bad news that has moved into the distance.  Americans may be realizing the sky did not fall after the Congressional  fiasco at year-end.  The day after sequestration, breakfast was on the table, just like normal.  And, Europe did not implode from the Greek or Cypriot problems.  China has neither collapsed nor declared war on anybody.  As I've said so many times, the stock market hates uncertainty, and uncertainty seems to be reduced.  This lack of bad news reduces uncertainty.

Of course, we can always worry (and usually do) that this is just the calm before the storm, that we have become sanguine simply due to the lack of bad news -- that something bad is really about to happen.  But, when is that not the case?  Is there anybody who doesn't know there are always bad things in the future?

Many observers have remarked upon the optimistic can-do attitude of Americans.  It only takes a lack of bad news to get our juices flowing again!  You know, I really like Americans . . . they keep on ticking . . . and spending . . . thank God!

Sunday, May 26, 2013

A Memorial Day Memory

I was a brash young lieutenant who knew everything and was on my first assignment after completing my Special Forces training.  He was a wise, older Command Sergeant Major (CSM), which means he was an enlisted man and out-ranked by any brash young lieutenant like myself.  Of course, he could have subtly embarrassed me somehow in front of my troops or tolerated me as merely another nuisance.  Instead, he took me under his wing and protected me from my own youth and inexperience.  I knew what he was doing and do believe I showed my sincere appreciation before we were both reassigned in 1969.  I resolved to be more like him and to help mentor younger colleagues during my lifetime.  His name was Wilbur Childress.

Many years later, I was walking in Arlington National Cemetery, paying my respect to the thousands of souls who were less lucky than myself.  By sheer coincidence, I came upon a tombstone of CSM Wilbur Childress who died in combat in 1970.  I felt like I had been kicked in the stomach.  I could barely breathe.  How could anybody so professional, so military, and so kind possibly be dead?  At that instant, I realized I actually loved the old guy for the help he had given me and the things he had taught me.  I wanted to thank him one more time, at least!

But, it got worse!  After much digging, I learned he had been "fragged," which means he was intentionally killed by a fellow American soldier.  An ocean of salt washed into my open emotional wound.  My sorrow became anger.  To my knowledge, nobody was ever charged with his murder.

During this Memorial Day weekend, I will, of course, be respecting the hundreds of thousands of men who laid down their lives for their country.  I will also be remembering one particular solder who had his life taken before he could die for his country.  The world in general and the Army in particular would be a better place if he had lived.

Sergeant Childress, I salute you, I miss you, but I know you are in the good company of genuine patriots on this Memorial Day.

Thursday, May 23, 2013

The Vampire Squid Speaks

Goldman Sachs is a huge investment banking firm, once satirized as a giant vampire squid sucking on the face of mankind.  I find nothing about that description to disagree with!  However, they do have a great research department, and here are some of their latest projections:

1.  GDP growth will sharply accelerate from 1.9% this year to 2.9% next year.
2.  Unemployment will drop to 6.6% by the end of next year.
3.  Inflation remains tame.
4.  The S&P is currently about 1,655 but will end this year at 1,750 and next year at 1,900.
5.  Gold will end next year at $1,270/oz as the dollar rises.
6.  The market will not over-react to the debt deadline this summer.

There was also an interesting discussion about the impossibility of successfully "timing" the market, i.e., buying at the lows and selling at the highs.  While I agree it is foolish to get in and out of the market based on some arbitrary signal, such as a 10% drop to sell everything, for example.  I do think it is prudent to increase cash levels as the market falls and decrease it as the market rises.  Besides, two out of every three years, there is a 10% correction.  Anything that occurs so often must be considered normal.

I've often heard in church that nobody is all bad.  The same is true for vampire squids!

Wednesday, May 22, 2013

Toe-Dipping Time

Yesterday, we discussed the latest outlook from the National Association of Business Economics (NABE) and Jeremy Siegel of Wharton, both of whom I respect and both of whom are very bullish about the underlying economy.  It is now apparent that there is more than just quantitative easing by the Fed that is  impacting the stock market.  However, the bulls have already been running down Wall Street for several months now.  Does that mean it is too late to invest?  Take a look at this graph:

Chart of the Day
You can see the current rally is not even an average rally, much less exceptionally strong or long rally.  Of course, force your eyes to notice that some rallies have been less strong and shorter than the current one.  My point is that this graph is interesting but not conclusive.  

Unrelated to this graph is the theory of 15-year stock market cycles.  According to that theory, we have another twelve years of a bull market ahead of us.  Few market strategists put much faith into this 15-year theory, but  it is one more piece of corroborating evidence that the bull really is loose and running.

I have a relative who refuses to take her medicine for high cholesterol.  She appears healthy and active, but her heart worries me, just like the heart of our economy, i.e., the financial system, worries me.  There was a story in The Wall Street Journal recently discussing the return of securitization and, more worrisome, "shadow-banking."  The needed statin or medicine for the economy is transparency of "shadow-banking."  Until that happens, my finger won't get too far from the SELL button for my more "nervous" clients.

But, for now, go ahead . . . stick your toe in!

Tuesday, May 21, 2013

Now, sing along . . . "Happy Days Are Here Again"

It is a small secret that I find economics endlessly fascinating.  One would expect I would be a member of the American Economic Society, but I found those are the nerdy, academic type of economists who value mathematical purity more than usefulness.  Instead, I have been a long-time member of the National Association of Business Economics (NABE).

Yesterday, NABE released their latest Outlook, predicting that the GDP growth of 1.7% last year, will increase to 2.4% this year, and 3.0% in 2014.  That is very strong, compared to the last few years.

In February, they predicted the decreased government spending was a 1% drag on our GDP growth.  Since sequestration actually happened, they have increased that drag to 2.3%.  Now, putting politics aside, that means our GDP growth rate for this year would be a whopping 4.7%, which sounds like the "good ole days."  We haven't seen that much growth in many years.  This tells me the underlying economy is doing better than people realize.  Unemployment will remain high, and we'll hear a great deal of political chatter about the "jobless recovery."

With respect to the largest spending component of GDP, consumer spending rose 1.9% last year.  NABE expects consumer spending will rise another 2.3% this year and another 2.6% next year.  Again, this is very strong and also sounds like the "good ole days."

In addition, my favorite professor from my Wharton days was (and still is) Jeremy Siegel.  He is arguing this bullish stock market is not a mere reflection of quantitative easing but a reflection of the growing strength of the underlying economy.  (Of course, he does not explain what quantitative easing is actually doing, if not pumping up the stock market to make consumers feel good enough to increase their spending.)

Now, assuming both NABE and Dr. Siegel are correct, what are the political implications?

Saturday, May 18, 2013

Thanking our European Friends . . .

One of the reasons that the U.S. stock market is doing so much better than the U.S. economy is that the U.S. economy is doing so much better than the European economy.  The latest data from Europe is not good, with GDP decreasing 0.2% last quarter.  Over the last 1.5 years, the GDP has decreased 1.5%.

The European GDP is now 3.3% lower than its peak in the first quarter of 2008.  By comparison, the U.S. GDP is 3.0% higher than its peak in the fourth quarter of 2007.  That's a huge 6.3% difference!

A slowing GDP doesn't need as much capital as a growing GDP.  "Capital always goes where it is treated the best."  European capital is now migrating to the U.S.  Logically, some of it should be migrating to China as well.  However, don't forget there are many restrictions on foreign capital in China and regulation can be arbitrary, to put it kindly.  Despite our terrible corporate tax code, capital is still treated better here than in Europe or China.

Of course, this in-migration of European capital is less important than competitive quantitative-easing (QE) by the central banks of the U.S., Japan, and, to a lesser extent, Europe.  Pundits in this country are already worried about what happens if Bernanke slows down quantitative easing.  I am less worried about this.  Bernanke may be many things, but stupid, he is not!  The end of QE will not be sudden and the period of tapering will be left undetermined by design.  There will be some initial disruption, but it will not be significant.  Don't forget, Bernanke has set a goal of reducing unemployment to only 6.5% before cutting back on QE, and that is no time soon, unfortunately.  But, when it gets here, the U.S. economy should be even stronger than it is now.

Thursday, May 16, 2013

Thin Ice

As a white male, it is dangerous to discuss certain issues, and most of us avoid those subjects like the plague.   We can never discuss racial issues or gender issues . . . because we are wrong, no matter what we say.

But, I can report comments by a female speaker at the conference this week about gender issues.  She said women communicate with their eyes, and it is critical to maintain eye contact with them.  Women use stories to communicate, while men use data.  Women use words to find ways to cooperate, while men use words to compete.  Women are more conservative investors, while men tend to be gun-slingers.  Men look for competence, while women look for someone who cares about her family.  When there are three people in a meeting, it is best to sit directly in front of the woman.  And, never, never ignore her!

The purpose of her comments was to make her mostly male audience of investment planners more sensitive to the perspective of female clients.  Mission Accomplished, I think!  After all, women are expected to inherit 70% of the $41 TRILLION in inter-generational wealth transfer.  They already make 85% of household buying decisions, including financial services.

After an hour or so, I began to feel "politically correct" enough to think this is really a gross over-generalization, as I've met numerous women who are more involved in their financial planning and investment planning than their husbands.  Maybe, I'm just fortunate to have met many extraordinary women?  Because, I seriously doubt I care more about the man's opinion than the woman's opinion, as I normally prefer the company of women over men anyway.

An interesting side-note is that 43% of all household were "traditional" in 1960, composed of a married husband, wife, and children.  Today, only 20% are.  Co-habitation or "living together" has increased 1,700%.  The times, they are a-changing . . . indeed!

Wednesday, May 15, 2013

Econometrics, Accents, . . . and socks

Yesterday morning, I was in Indianapolis and spent three hours listening to a brilliant Italian mathematician speak rapidly in a thick Italian accent, as he discussed numerous, long complex formulas with lots of Greek letters.  (You know, the type of formulas that Warren Buffett doesn't trust.)  Listening required absolute focus, and I was exhausted after those three long hours.

The short version is that binary economic data operates under six different scenarios; meaning the binary relationships we assume, such as between unemployment and inflation, are different depending upon whether GDP growth is high, etc.  I'll you spare the details, but my thought was a sarcastic "you're kidding me?"

The most interesting part to me was that an investor can normally use diversification to hedge most risks.  However, the one risk that cannot be diversified, according to our speaker, is political risk.  This increased uncertainty means investors must expect a greater return for the risk they are taking.  Up to this point, I agree.  Then, he explained the strong market rally we're seeing now is due to investors demanding more return . . . OK, I lost something in his translation on that one . . . or he is simply wrong.

One other thing jumped out at me.  It took two hours of formulas to conclude that (1) the stock market likes Republicans better but (2) the stock market performs better under Democrats.  I've heard this for years and saw the mathematical proof today and just wondered "so what?"

It's gratifying that I can still stay focused so long -- until I realized I learned a great deal about something I either don't believe or don't care about.  Just think, I could have spent the time playing golf or even re-arranging my sock drawer instead!

Sunday, May 12, 2013

Pensive Thoughts on Mother's Day

This is the seventh Mother's Day that I thought was the last one for my Mother.  It is also the first she has spent in hospice care.  It is not easy for anybody, especially my Father.

She has taught me much about life and death.  But, I have been thinking about the dying process - of being between life and  death.  As an existentialist, I normally view death as the ultimate absurdity.  But, the process of dying is more serious than death.

When a client and old friend died recently, I marveled at his process of dying.  He was athletic and fit, until a month before his death.  When the doctor gave him 2-6 months to live, he passed away 6 days later.  On his deathbed literally, he joked that getting a tattoo of the William and Mary logo on his behind was on his "bucket list."  That night, he passed quietly.  He had a good life and a good death.

In the meantime, I have watched my Mother wallow in misery for years, needing and demanding more and more of those around her.  It is not enough to have a good life.  It is just as important to have a good transition between the two worlds of life and death.

At a seminar on longevity in Baltimore last year, I learned that men die faster than women and are usually healthier before death.  In other words, men die more quickly and easily than women.  This is partially due to our estrogen-starved hearts and our tendency to "do God's work" by committing suicide.

Also, being a good and decent person doesn't guarantee an easy transition.  Saying "the Lord works in strange ways" is just a cop-out.  Earning an easy transition is never guaranteed, but I do believe you can improve your odds by becoming athletic and fit.

Undoubtedly, mothers teach us more than anybody else, even some things they don't mean to teach, which are probably the most valuable lessons of all.  I wish a pleasant transition to almost everybody, but I'm especially grateful for my Mother and wish her the best . . .

Saturday, May 11, 2013

The Joy of Numbers

Yes, I'm aware that the Dow broke the 15,000 barrier.  That's great!  I'm actually more impressed that the S&P broke 1,600.  But, I'm most impressed by the fact that the stock market held both levels.  This rally is real!

The media is paying a lot more attention to the 15,000 barrier than it did when the Dow broke the 14,000 level, and I doubt it pays as much attention when the Dow breaks the 16,000 level, which it will, sooner or later.

15,000 is a media-worthy number.  1,600 is not.  I guess people have a need for the phony significance or specificity of numbers.  There is a school of investment theory for these people.  It is called the 'chartist" or technical approach of investment theory.  They believe that past movements in stock prices, plotted on a chart or graph, will predict future price movements, based on a complex, ever-changing set of patterns with such exotic names as "inverted head and shoulders".  To me, people who believe in astrology are most likely to embrace this chartist approach or this love of meaningless numbers.  I use chartistism merely as a reference point in some buy/sell decisions.  For example, one chartist is predicting gold will drop to $1,322/oz.  If I see that happen, I will likely buy some more gold.

To their credit, many chartists are now predicting an 8-10% market correction, meaning the Dow might drop to 13,500 or so before resuming its upward climb.  I suspect they are right, not because of some obscure pattern of price movements but simply because the recent market rally has been so steep.  Periodic corrections are good-thing, not a bad-thing.

When good news is good and bad news is also good, the bull is out-of-control.  We've seen that several times in the past two weeks, when the market simply ignored bad news and rallied anyway.  While nobody knows if there is a 10% correction in front of us or not, I do believe that it will happen in the short-run but continue rising in the long-run . . . until that day when we have our "Jim Fixx" moment, and it will likely begin in Europe.

Stay tuned . . . I'm looking for more obscure, non-media-worthy numbers!

Thursday, May 9, 2013

The SEC, The Army Inspector General, and . . . socks

While most people consider their military experience to be good, most of their memories are bad.  Some memories, however, are just plain annoying.  My nomination for the most annoying of all military memories is the "IG Inspection."  This is when some field-grade officer from the Inspector General Department comes to inspect the troops.  Ostensibly, he makes sure the troops have the equipment they need and that equipment is properly maintained.  Actually, it is a great way to increase and enforce conformity of the troops.

As an example, soldiers were issued two pair of wool socks and two pair of nylon socks.  They were to be presented for IG Inspection by being placed in the top tray of our foot locker.  The top tray had a left and a right compartment.  The wool socks were displayed on the bottom left corner of the left compartment, and the nylon socks were displayed on the bottom left corner of the right compartment.  Further, the two pair of wool socks should be touching.  The nylon socks had to be separated by a quarter inch.

The most similar experience to IG Inspections in civilian life must be regulatory inspections.  As one absurd example, an SEC auditor once criticized me years ago for having light blue files instead of dark blue files.  Fortunately, I have found the Virginia regulators to be far less absurd, even helpful.

The SEC never caught Bernie Madoff, because they were looking for absurd little things that don't matter, just like the Inspector General.  On the other hand, the Virginia regulators first make a good-faith effort to determine if the advisor is a crook or not, before then showing the advisor some helpful hints to actually improve his compliance.

Yesterday, we were audited by the state, and they didn't care if my nylon socks are touching or not.

I know it is not fashionable to say anything good about state employees, but maybe we should let them run the SEC . . . or at least run the Army's Inspector General Department.

Do I hear a motion?

Tuesday, May 7, 2013

Good Company

Conventional wisdom is a dangerous thing.  For generations, investors have been told that bonds are always safer than stocks, which is WRONG, WRONG, WRONG!  Today, the popular "retirement-date funds" just allocate a greater and greater portion of a person's portfolio into bonds as they get older, which should be WRONG, WRONG, WRONG!  Investors think they are being prudent by investing in bonds -- but are being anything but . . .

Suppose you pay $10,000 for a bond paying 5%.  That means you get paid interest of $500 annually.  Now, let's suppose interest rates go up to 6%.  But, your bond still only pays $500 or 5%.  However, you can still sell your bond but not for the $10,000 you originally paid for it.  How much would somebody else pay you for it?  You can compute it this way:  $500 divided by 6% equals $8,333.  That is all your bond is worth after rates go up -- just one percent.  In other words, your bond just lost almost 17%, which doesn't sound all that safe to me.  If interest rates go up 2%, you lose almost 29%

(I'll spare you the arithmetic but long-term bonds are much more risky than short-term bonds.  That's why extra cash should only be parked in short-term bonds, not long-term bonds, even though short-term bonds normally pay lower interest than long-term bonds.)

According to the conventional wisdom (AKA old wives' tales) investors primarily seeking income (as opposed to capital growth) should be invested in a portfolio of bonds with varying maturities.  With so little safety of capital in bonds and with so many excellent stocks paying dividend rates much higher than interest rates, the conventional wisdom is WRONG, WRONG, WRONG!

This morning, I felt vindicated watching Warren Buffett, as he said that investors "could lose a lot of money on long-term bonds" even U.S. Treasuries.  I've been saying this a long time.  I may not agree with Warren on everything, but I am always delighted when he agrees with me.

Now, do you have any long-term bonds?  If you don't know, why don't you know?

Monday, May 6, 2013

Advertising, Responsibility, and Existentialism

Recently, I discussed the pervasive nature of advertising in our society -- hoping to drive home the point that business wouldn't spend billions of dollars on it, if it didn't actually channel consumer behavior.  This has generated some interesting discussion; questioning whether it is consistent with an existential viewpoint.

You'll recall the stereotype of existentialism is that individuals live on their own individual and isolated islands, where they are the King and responsible for whatever happens there.  Still, the island is impacted by exogenous factors, such as weather systems, technology, shipping routes, etc.

Sitting smugly on my island, I am bombarded with advertisers telling me what choices I should make.  They are trying to instruct me, not teach me.  As King of this island, I must make prudent choices and must bear that responsibility.  The individual advertisers are not responsible for my choices -- I am!

My question is whether the industry-as-a-whole bears any moral or financial responsibility for consumer behavior?  Does the dope-dealer bear any responsibility for enticing a kid to become a dope-addict, any responsibility at all?

Friday, May 3, 2013

Happy Days Are Here Again . . . ???

At 8:30 AM this morning, Dow futures indicated the stock market would open flat.  Within minutes, it indicated the market would gain 100 points as soon as it opened.  What happened?

Of the 130 economic reports issued each month, the stock market pays the most attention to the monthly Jobs Report.  Judging from the sudden jump in futures, you know the report must have been better-than-expected.

The market was expecting that only about 135 thousand new jobs were created last month.  Instead, it was 165 thousand, and the unemployment rate dropped from 7.6% to 7.5%.  More significantly, we learned that the Jobs Reports for February and March were under-stated by another 114 thousand jobs.  Jobs created in February were revised from 268 thousand up to 332 thousand, which is the best in years.  Despite severe fiscal headwinds from the Sequester and increased taxes, the job market looks better than we previously thought.

But, it is not great!  We need to average at least 250 thousand a month to make a meaningful dent in the unemployment problem.  The number of both unemployed and under-employed workers is still well over 13 million.  Every single day they are not employed fully creates a permanent loss of income for the country.

Remembering that our Federal Reserve is the only central bank in the world that has a combined mission of controlling inflation AND unemployment, the slowly improving job market with minimal inflation means the Fed is accomplishing its mission in the short-run . . . even if it is not the right thing in the long-run.

Thursday, May 2, 2013

The Darling of Austerity-Fatigue

There are many schools of thought on economics.  For convenience, this blog has always focused on The Big Three.  First, there is the Austrian or "Tough Love" school that says budgets should be balanced at all times.  Second, there is the Keynesian school that says deficits are good during bad times as long as the budget has a surplus during good times.  Third, there is the relatively recent Supply-side school that argues debt is easier to handle if the economy is growing faster, which results from a cut in the highest marginal tax rate.

Europe has been using the Austrian approach to recover from its financial crisis and has been applying "tough love" or austerity to their budgets and their people.  However, the time for this approach to work is running out.  Already, there are anti-austerity demonstrations and riots.  In addition, the ongoing scandal over the research methodology of This Time Is Different by Reinhart and Rogoff has dis-credited the intellectual basis of the Austrian approach, at least temporarily.

So, it should not be surprising that a relatively obscure school of economic thought is now getting much more attention, and that is Modern Monetary Theory (MMT), which has been around since 1895.  It argues that nations with their own free-floating (not linked to gold) currency have an obligation to run budget deficits in order to finance GDP growth.  They believe deficits increase money supply.  (There is little disagreement that economic growth must have some increase in the money supply, but how much is too much?  Plus, should that increase in money supply come from the central government or the central bank?)  When a government runs a deficit, it gives the private sector a piece of paper called a bond and then re-deposits the cash into the private sector.  It is a win-win, no?

When former Vice President Dick Cheney famously said "deficits don't matter," he unknowingly re-energized Modern Monetary Theory.  Liberal Nobel-Prize-winning economist Paul Krugman said that MMT is "just not right" because it places too much emphasis on the freedom of the central government to run deficits in both bad economic times and good economic times, as long as they have their own free-floating currency.  MMT may have more friends on the right than the left.

Certainly, MMT is not one of The Big Three of economic theories, but it is now growing as a logical result of austerity-fatigue.  The intellectual tide is shifting . . .

NOTE:  Modern Monetary Theory (MMT) should not be confused with Modern Portfolio Theory (MPT), which deals with improving investment performance while managing risk, not budgets and money supply.

Wednesday, May 1, 2013

Your Digital After-Life

Ricky Rash was a 15-year-old kid who committed suicide.  His grieving parents wanted to understand what was in his mind before he died.  Understandably, they wanted to see what he was saying and doing online.  But legally, the online companies like Facebook, Yahoo, etc. could not allow any cooperation.

So, what happens to your online world when you die, and should somebody be allowed to shut down any online accounts you have?  A professor at George Washington University has estimated the average adult has 20-25 online accounts.

Some of these accounts are, of course, just foolishness, but some could have financial significance, such as online banking and investment accounts.  While a few states, including Virginia, have enacted laws to help bypass the privacy issues, who wants to hire a lawyer just to deal with online accounts, when it can be done quickly and simply by your friend or executor?

What should you or your spouse or your parents do?  A retired financial planner has prepared a spreadsheet to capture that information for the benefit of your heirs or successors.  I will be mailing a copy to my clients.  If you would also like a copy, just email us at  (If you would like to follow his excellent blog on the overlapping subjects of estate planning and elder care, you can do so at

Yes, Virginia, there is an after-life . . . digital and otherwise!