Friday, August 28, 2015

An Economic Benedict Arnold ??

For convenience, I have long divided the vast field of economic theory into three schools.  First is the Austrian school, which requires balanced budgets every year.  Second is the Keynesian school, which advocates deficit spending during weak economic conditions but surplus spending during strong economic times.  (History shows elected politicians use strong economic times to expand entitlements instead of repaying debt.)  Third is the supply-side school, which argues a tax cut for "job creators" is always a good idea.

For the last few years, supply-side believers in Congress have complained about the Austrian school believers in the Congressional Budget Office (CBO).  They complained that CBO used "static scoring" which doesn't make the assumption that tax cuts kick-start the economy.  "Dynamic scoring" does make that assumption, and the supply-side believers insisted on that.  They were successful in getting Keith Hall appointed head of the CBO.  He was an economic adviser to President George W. Bush and was involved in the Bush tax cuts.

Last week, he dropped this bomb on supply-side believers:  "No, the evidence is that tax cuts do not pay for themselves.  And, our models that we're using, on macroeconomic effects, show that."

Screaming betrayal -- instead of actually studying the economic model -- the true believers are now calling for Mr. Hall to resign.

OK, I will not snicker, I will not snicker, I will not snicker, I will not . . .

America's ISIS

I love my guns!  If you use them frequently, you learn enough of their different characteristics that some seem to develop personalities.  I've actually given names to some of them.  To paraphrase some dead guy, "they" will take away my guns when "they" pry my cold dead fingers out of the trigger guard.

Still, the NRA is crazy!  The National Rifle Association (NRA) has caused more American deaths than ISIS.  They are a model of intolerance, thinking any regulations to keep guns away from crazy people is a slippery slope.  If crazy people cannot have guns today, then Republicans cannot have guns tomorrow.  Or, was that Democrats?  Or, people with blue eyes?  It's a slippery slope, they say.

The NRA also has no respect for the long American tradition of majority rule.  The majority of Americans favor increased gun regulation, but they are opposed by the NRA.  The majority of actual voters favor increased gun regulation, but they are opposed by the NRA.  Incredibly, the majority of gun owners actually favor increased gun regulation, but they also opposed by the NRA.  They are intolerant of majority rule.

Like ISIS, they will tolerate ONLY their interpretation of the Second Amendment/Koran.

The heart-broken father of the young reporter murdered on live television promises to fight the NRA for the remainder of his life.  That reminds me of The Charge of the Light Brigade by Lord Alfred Tennyson, describing the slaughter of a small, weak British military unit by the vastly more powerful Russian forces during the Crimean War in 1854.  They had no chance, and neither does the heart-broken father. That makes me sad.

Even Donald Trump, who doesn't need NRA money, continues to pander to them, looking for NRA votes.  That makes me even more sad!

Wednesday, August 26, 2015

Quote Of The Day

"Neither a man nor a crowd nor a nation can be trusted to act humanely or to think sanely under the influence of a great fear." - Bertrand Russell

I Wonder . . .

Tuesday's stock market action was bizarre.  As indicated by the futures market, the Dow opened very strongly.  At one point, it was up 441 points.  Around 2PM, it started sinking - faster and faster.  At closing, it was dropping like a rock and closed down 205 points. -- a 646 point in one trading day -- simply bizarre!

This begs the question:  what breaking news turned all those bulls into bears?

I have a suspicion that it had to do with the retail investors.  They wisely utilize mutual funds as their investment vehicles.  While stocks are bought and sold during the day, mutual funds are bought and sold only at the 4PM closing.  Whenever there is an imbalance between buy and sell orders, the closing can be chaotic.   Obviously, sell orders were much larger yesterday than buy orders, sinking the market.  Monday night, after the Dow fell 588 points, I suspect retail investors looked at the 401(k) balances, couldn't take the pain, and entered sell orders.  As the sell orders were building up during the day, traders knew they should get out of the way and started selling about 2PM.

The answer to the begged question is:  no breaking news, just the build-up in sell orders.

This may be a good omen!  An old Wall Street adage is that bulls don't run until "capitulation," which is that time when investors can't take the pain and uncertainty any longer and sell out at any cost.

Was Tuesday the capitulation we have been waiting for?  The futures market indicates a very strong opening on Wednesday.

Tuesday, August 25, 2015

An Unhealthy Linkage

The main Chinese stock exchange lost another 7.6% last night, which is a slight improvement over the 8.5% loss the previous day.  This morning, the futures market indicates that the U.S. stock market will open higher, much higher.  One reason for the strong futures indication is that the People's Bank of China (PBOC) just announced a cut in interest rates and an easing in bank reserve requirements.

The media has been reporting the current market collapse resulted from last week's devaluation of China's currency, the yuan.  The argument is that the devaluation was an admission that the Chinese economy, which has been the world's economic growth engine, was sputtering and, without China, worldwide stock markets cannot continue to grow.

That is wrong!  A devaluation helps the economy, by boosting exports.  Instead, the current market collapse resulted from China's intervening in their stock market, primarily by a ban on selling stock.  Nothing focuses an investor's mind as much as telling him he cannot get his cash.  That is a guarantee of panic selling sooner or later.

While the currency devaluation, interest rate cut, and reduced bank reserves will help the overall Chinese economy, I expect the Shanghai stock market to continue falling.  But, I am optimistic the linkage between that stock market and other markets worldwide has been broken, at least partially.

Capitalistic inventions (like the U.S. stock market) do not play well with non-Capitalistic versions (like the Chinese stock market).

Monday, August 24, 2015

Ham-Handed China

The longest 36 minutes of my life began at 2:32 PM on May 10, 2010 as I watched the stock market lose 998 points, which was a whopping 9% of its value.  Barely breathing, I knew it was irrational and therefore not sustainable.  The economy had certainly not fallen 9% and showed no evidence that it might.  The international flow of capital was stable.  There was no mention of a derivatives blow-up.  I knew reality would catch up to the stock market.  Fortunately, the market quickly started recovery that afternoon and later went on to new highs, and the trader who caused this 9% collapse has been arrested.

Last night, the Shanghai stock market dropped 8.5%.  While there is no allegation of technical manipulation, the behavior is still irrational and therefore not sustainable.  A few years ago, China wanted to create a stock market, and it encouraged the Chinese people to invest in it.  Over 80% of China's stock is held by retail investors, compared to about 20% here.  Citing the impatience of investors to emulate the growing U.S. stock market, the Chinese government then encouraged margin trading.  Today, the average investor has five times the margin debt as retail investors in the U.S.  Naturally, the over-hyped stock market eventually began a normal self-correction.  Instead of letting the market self-correct, the non-capitalist Chinese government started intervening in a ham-handed manner.  For example, forbidding investors to sell their stock is insane!  That makes investors, who had no interest in selling, realize they are forbidden from getting their cash or life savings.  Suddenly, everybody wanted out of the market.  More ham-handed measures soon followed.  If the Shanghai stock market is a black hole for the rest of the world to get sucked into, the naive, non-capitalistic measures of the Chinese government spilled grease all around it.  The otherwise healthy stock markets in the U.S. and Europe are in danger of being sucked into Chinese black hole.

The reason for today's 8.5% drop in Shanghai is that the Chinese government did not announce any new measures over the weekend, even though it was expected.  Instead, they announced liquidity measures for the economy as a whole, not the stock market.  That is a step in the right direction.  Let the bloodbath in the Shanghai stock market begin!  It won't be as bad as they fear but certainly worse than it would have been, if they had done nothing originally.  Their effort to help only made the market collapse worse!

This is not an economic collapse.  It is merely a market collapse, an irrational market collapse that will therefore not be sustained.

Sunday, August 23, 2015

To Cruise . . . Or Not To Cruise

If you are dieting . . . then taking a cruise is not for you.

If you have claustrophobia . . .  then taking a cruise is not for you.

If you enjoy racial diversity . . . then taking a cruise is not for you.

If you enjoy fine dining instead of mass feedings . . . taking a cruise is not for you.

If FAST internet connectivity is important . . . then taking a cruise is not for you.

If you enjoy the enjoy the company of young folks . . taking a cruise is not for you.

If you have a high emotional need to control . . . then taking a cruise is not for you.

If your idea of a good time is the glitz, glamour, and sin of 24/7 Las Vegas . . . then taking a cruise is not for you.


If you wonder why some people fall in love with the sea . . you should take a cruise.

If you want a different visual perspective of the world . . . you should take a cruise.

If you want to see remote places unavailable by plane . . . you should take a cruise.

If you want to go many places without re-packing your suitcase . . . take a cruise.

Most importantly,

If you want to make your wife happy . . . then you absolutely must take a cruise!

Saturday, August 22, 2015

Dying Dinosaurs

In 1968, I graduated from Infantry Officer Candidate School and then Parachute School.  Earlier, I had also applied for Ranger School (8 weeks) or Special Forces School (21 weeks).  To my surprise, I was given my choice and chose Special Forces.  That decision has been on my mind this week, with the good news that the first two women have graduated from Ranger School.

Twenty years ago, women began joining the military in large numbers, and there was considerable discussion as to whether they should be allowed into combat roles.  At that time, I was opposed to it.  That attitude reflected the view of many in my generation that women were to be respected and protected at all times.  Therefore, I knew I would expose myself to additional risk to protect a woman on the battlefield, compared to a man.  Additional risk threatens the mission.  Never take additional risk, because you may threaten the mission.  The mission always comes first!

The problem was not that women are not tough enough.  Some of the toughest people I've ever met were women.  Instead,  the problem was the attitude of men in my generation toward those women.  The attitude was not that women are not good enough, it was that men behave differently, and maybe dangerously, in the presence of women.

Today, however, my generation of dinosaurs has aged out of combat roles.  I don't think combat soldiers in the current generation feel the same way and don't think they would jeopardize the mission just to save a woman or anyone else.  That threat to the mission has passed, and it is time to let women into combat roles.

I proudly salute Captain Kristen Griest and Lieutenant Shaye Haver!

Friday, August 21, 2015

Hating Meds

The U.S. stock markets are down almost 5%.  Is the world falling apart?  Well, we are halfway to a technical correction (down 10%) and may be facing a genuine bear market (down 20%).  Does that mean we should be scared?

I don't know of any investment analyst who doesn't think that corrections or bear markets are good for stock markets in the long run.  But, it is like taking medicine.  It is no fun and causes investors to lose sleep!  It causes capital to flow from over-valued stocks to under-valued stocks.  This is called "back-filling" and actually makes the long-term trend stronger.

And, never forget the sage advice of Warren Buffet who paraphrased "I don't know where the market will be tomorrow, but I do know where it will be in ten years -- UP."

Don't confuse normal corrections with systemic collapses.  We are steeped in the sudden drama of "the crash of 1929" and actually experienced the slow-motion-train-wreck of 2008/9.  We are hyper-sensitive to investment drama!

This half-correction is largely a result of China's economic ignorance and the resulting collapse of oil prices, which hurts the U.S. oil industry badly.  This half-correction is a routine economic event, not a systemic collapse.  When you see a few hedge funds suddenly go out of business or when you see a few banks suddenly fail, there may be a systemic collapse approaching, and you can get scared.  Until then, take your medicine and embrace the correction.  It's good for you!

It could be worse . . . your mother could make you swallow a spoonful of Castor Oil!

Wednesday, August 19, 2015

"Good" vs. "Mad Men"

The defense industry is not the most powerful industry in the world.  It merely produces the means to kill millions of people.  The most powerful industry in the world is the advertising industry.  It changes the way millions of people think and make decisions.

The objective of the advertising industry is to change the way people perceive reality and make decisions, usually buying decisions but not always.  Lobbying is obviously a part of the advertising industry.  Is it really any different to influence which arguments to buy in Congress or to influence which corn flakes to buy at the grocery store?

Currently, there is a debate in Congress and the investment world about the "fiduciary rule," which requires the investment advisor to act in the best interests of the client.  NAPFA-Registered Financial Advisors gladly adopted that standard years ago and have pushed for the standard to be applicable to stockbrokers as well.

Stockbrokers are only held to a "suitability standard," which means the broker can, for example, sell you a large-cap mutual fund that sends the broker and spouse to Hawaii on vacation, even though the expenses of that mutual fund are quite high, instead of a low-expense mutual fund -- as long it is also a large-cap mutual fund.  Some describe that as receiving a bribe and having the client pay for it.

Stockbrokers are fighting the obligation to behave in a fiduciary fashion with clients.  This week, I see they are running TV commercials of a typical couple bemoaning the fact they never get to talk about their investments with another human being and are instead forced to question a computer program.  This is based on the argument that brokerage houses would be forced to supervise their stockbrokers so closely, so carefully, that it would be cheaper to simply fire the brokers, leaving nobody to help small investors except computers.


The brokerage houses will undoubtedly break into smaller units and push the compliance responsibility down into those smaller units.  Would it be more inconvenient for the stockbrokers?  Absolutely!  Would it put them out of business?  Of course not!  Will it benefit the small investor in the long run?  Absolutely!

After this fiduciary issue is settled, then the advertisers can return to influencing Americans that sugared foods are better for Americans than healthy food or that only skinny young people can be beautiful or something else as harmful.  By the way, advertising companies also lobby that the investment industry needs regulation, but the advertising industry does not.

Tuesday, August 18, 2015

Fed Fretting

It has been an old Wall Street adage that it is always "facing a wall of worry."  There is the normal run-of-the-mill crisis that rotates into and out of our focus, such as the Greece default or Chinese yuan devaluation.  Then, there is the long-term overarching fear of the Fed.  It is the default fear.  If there is no crisis today, let's all fret about the Fed.

But, that seems like the most irrational fear.  The Fed has said they will not raise interest rates until the economy is strong enough, which means unemployment is trending lower and inflation is dead.  Isn't that really good news?  So, Fed-watchers and the guy-in-the-street should be happy when the Fed raises interest rates, because the economy is stronger, right?  Who doesn't want a stronger economy?

To Wall Street, however, it is not good news for two reasons.  The traditional reason is that an interest rate increase will cause expenses at companies to rise -- in order to pay increased interest costs.  In today's market, however, that situation hardly exists.  During the last six years of extremely low interest rates, most companies have largely refinanced their floating rate bank debt into fixed rate corporate bonds.

More importantly, there is the pervasive fear that the first interest rate increase will begin a series of rate increases, ending at the "terminal point" of about 6% or so, which would cause huge losses in the bond market.  A minor increase of .25% will cause little more than a ripple in the bond market.  However, pricing in a huge increase, like the terminal point, will crush the bond market.

Frankly, I think this concern is misplaced.  First, I don't think the Fed will move next month, as Wall Street does expect.  Second, when the Fed does move, it is more likely to be "one and done" than a series of rate increases.  They need to prove their "street creds" that they have the courage and will actually increase rates, but they have no desire or need to do it more than once, especially when the global economy needs the U.S. economic engine so badly.  And, in the absence of inflation, why should they?

Sunday, August 16, 2015

As Sure As The Seasons Change

As sure as Spring follows Winter, there will be stories of stockbrokers cheating their clients.  The latest appeared in the local paper on Sunday.  It was about a stockbroker who sold phony investments to his trusting clients.

While there are certainly honest stockbrokers, when was the last time you heard about a NAPFA-Registered Financial Advisor who sold phony investments to their clients??  Stockbrokers are simply salesmen, who make money when they SELL something to somebody . . . anybody.  NAPFA-Registered Financial Advisors don't sell anything to anybody.  They don't earn commissions.  They are paid a flat rate, which increases when the client's portfolio increases in value and decreases when the client's portfolio decreases in value.  They invest money for their clients and don't sell anything.

Frankly, I think Congress should pass a law requiring every person to have a tattoo on their writing hand that says "Never invest with anybody who does not use a third-party custodian to hold the assets of the client and send honest financial statements to the client."  Okay, that might be a little long for small hands, but it is a big point -- a huge point -- and must never be forgotten.

Also, I think an investor should be very suspicious of any stockbroker or financial advisor with wildly expensive tastes.  Without exception, every financial planner I know lives and breathes the religion of low-overhead expenses.  I don't know any planners who drive Rolls-Royce cars or live in $5 million mansions.  Even those who could live wildly expensive lifestyles, would find it a violation of everything they preach.

And, of course, as sure as Summer follows Spring, there will be another article in some newspaper in the near future about even more clients who were defrauded by their stockbroker!   

Wednesday, August 12, 2015

Turning The Corner?

Brilliant professionally and affable personally, my favorite investment guru is Jeremy Seigel of Wharton.  I follow his thinking often.  While he is not yet predicting it, he would not be surprised if the stock market entered correction territory, which is a 10% fall.  He feels this is possible due to the lack of breadth, that small cap stocks are lagging large caps, and that the VIX is so low, suggesting too little fear or too much complacency.  In addition, he thinks the Fed will increase interest rates next month.  Naturally, the market will overreact to that increase and fall.

My thought is that we're already about 3% down.  And, does it really make any difference if the market falls a thousand points over the next few weeks and then starts recovering?  Such corrections are routine and healthy for the market.  Is it really a disaster if the market is only 10% from its record high?

Separately from Jeremy, the market reached its "death cross" yesterday.  This happens when the 50-day-moving-average crosses below the 200-day-moving-average and is a classic sell signal.  Normally. This would concern me a great deal, but I'm a little less concerned than usual, because the market has been so range-bound all year, without any violent swings.

What does concern me is the ham-handed approach China has taken to solve their economic problem.  It has given me comfort that they have sufficient power to make change, unlike the U.S., but they are mis-using that power, because they don't seem to understand what they are doing.  They are dangerously close to starting a currency war.  This makes an interest rate increase next month much less likely, indeed this year.

It is too early to start raising cash but not too early to start thinking about it.

Tuesday, August 11, 2015

Currency Killer?

For years, China was known as a "currency manipulator" which is a pejorative in international finance akin to "cop killer" in polite society.  Never willing to admit they stopped doing something they always denied, China began unofficially pegging their currency, the yuan, against the dollar.

Once the U.S. stopped quantitative easing and Europe, along with Japan, began quantitative easing, the dollar became much stronger.  While this hurt U.S. exports, our economy was in recovery and could afford it.  However, with the yuan pegged to the dollar, Chinese exports also dropped - but when their economy was weakening.  With economic stimulus on their mind, China suddenly announced a devaluation of the yuan.

What they did is totally logical.  However, what was surprising is that they announced it, when they have no obligation to do so.  To understand, you have to understand the primary fear of the Chinese leadership, which is social unrest.  They made the announcement, so their people could see the government was taking concrete steps to limit further economic weakening.

Of course, the U.S. stock market over-reacted, as it always does.  To the U.S. investor, the Chinese announcement was an admission their economy was unacceptably weak, reducing worldwide growth, as well as reducing demand for oil and other commodities.  This too will pass!

Saturday, August 8, 2015

God Bless Satelites?

The Newseum is a wonderful museum dedicated to explaining the industry that reports news (in exchange for advertising dollars, of course).  Originally located in Rosslyn, Virginia, across the Potomac River from the nation's capital, it was relocated inside the District a few years ago.

One exhibit in particular fascinates me.  They are able to download & exhibit some 20-30 newspapers from around the world, in English or the home language.  You can literally read the front pages from around the world every day.  The difference in how the news is reported is so revealing.  Also, the differences in what actually constitutes news is worth noting.

The practical application is that I am able to have The Wall Street Journal delivered to my stateroom floating in Alaska.  I had my choice of many newspapers but chose my favorite.  It does cost $6.50 each day but is well worth it to me!

Technology certainly adds to the quality of our life, but it also adds to the quantity of our frustration.  I can have a newspaper delivered daily in the middle of the ocean but cannot make a cell phone call??  The satelitte phone works, but that's expensive.  Cell phones only work in port, darn it! 

Friday, August 7, 2015

Seven Days & NOT Counting

After seven straight down days on Wall Street, which hasn't happened in four years, it is time to remember a few definitions.  First, there are both bull and bear markets, which means the trend is for the market to be going either up or down, respectively.

Second, there are bull market corrections and bear market rallies.  The upward trend of bull markets are almost always a jagged line with drops.  This is, in fact, healthy for the market and often called backfilling.  Bear market rallies are equally misleading to short-term investors.  They are also called "dead cat bounces" referring to the rather inhumane notion of tossing a dead cat off the roof of your garage and noticing it does bounce a little when it hits the driveway, just like rallies only bounce a little during a bear market.

This bull market will end with either a flow of bad economic data or a sudden financial disaster.  Neither is likely in the near future.  The U.S. has been in a long bull market, which is not surprising following such a severe recession.  Today's DOL reports that 215,000 jobs were produced last month, which shows the economy continues to be a job-creation machine, and makes a minor interest rate increase more likely and unduly frightens investors.  The economic data remains good.

There is little outside the opaque derivatives market that worries me right now.  The U.S. banks may have TOO MUCH capital now, which protects their shareholders along with our financial system.

This is a bull market correction and should be viewed as a buying opportunity, not a selling season.

Thursday, August 6, 2015

No Miss America . . .

. . . will ever rival the breathtaking beauty of Alaska on a sunny day . . . WOW !!

Monday, August 3, 2015

Bottomless Oil Pit

Financial analysts fall into two broad, very broad, categories.  First, there are the fundamentalists like myself, whose forecasts reflect their reading, their correlation of facts with data points,and that certain cynicism grown from long experience.  Second, there are the technicians or chartists, whose forecasts reflect their ability to read many highly technical graphs.  While I don't rely on technical analysis, I do follow it.

The technical analysis for oil prices currently looks pretty grim.  Take a look at this graph:

Chart of the Day
It has broken out of its channel to the downside and attempted a recovery but failed miserably.  When it hit the bottom or green line and turned back down instead of piercing the line, technicians conclude that oil has not yet found a bottom yet.

A fundamentalist will also look at supply and demand factors.  It takes either a decrease in supply or an increase in demand or some combination to cause prices to increase.  It is hard to see an increase in demand without China growing much faster.  At first, supply could decrease with the "shutting-in" of wells used for fracking.  Because that process takes a very long time and because it would hurt the U.S. more than any other country, that is not a significant price-mover for oil.  With the strong probability of Iranian oil coming back on the market, I suspect the supply of oil can only increase, driving down the price per barrel.

Oil company stocks will be attractive buying opportunities . . . but now yet.