Saturday, July 30, 2016

What, Me Worry?

As 2016 began, worldwide stock markets were suffering with the collapse in the energy sector, as well as a slowing China.  (I was especially concerned about a derivatives default by Glencore.)  Yet, the markets recovered.

In June, the surprise Brexit vote stunned worldwide stock markets, who were terrified of the possible collapse of the European Union.  Yet, the markets recovered.  Indeed, European stock markets gained 4.81% in July!

July was good to all worldwide stock markets.  Developed markets outside the U.S. gained 5.11%.  Emerging markets gained 4.84%  Japan was up 5.73%, Latin America up 5.52%, and Australia up a whopping 6.95%.  The Dow was up a relatively modest 2.94%.

It would be pleasant to believe these improving worldwide stock markets reflect improving worldwide economies.  Oh, how naive!  Part of this good stock performance is undoubtedly due to some stabilization in China's economy and the energy sector, but most is due to increasing confidence in central banks to keep increasing the supply of money.  As long as they keep playing the music, stock markets will continue dancing.  Darn it!

Friday, July 29, 2016

Real Men Don't Cry

Real men don't cry!  Yet, tears rolled down my cheeks last night.  Nothing - absolutely nothing - brings me to tears quicker than our American soldiers.  I am sorry for the loss of every person, every adult, every child and even animals.  But, I don't cry . . . except for our soldiers.

Last night, the quiet dignity, grace and barely-contained-rage of Khizr Kahn from Charlottesville brought me to tears, as he remembered the brave death of his 27-year-old son in Iraq, a Muslim Army Captain who laid down his life for his Christian troops.  I felt his pain, I felt his rage . . . and I cried.

The powerful emotional tug was not surprising.  That it occurred during a partisan attack was both surprising and disturbing to me.  My unrelenting cynicism of partisan blathering just melted away.  With sunrise, my brain has now silenced my heart, and I can feel the cynicism returning . . . thankfully.

Thank you, Mr. Khan!  Thank you for sacrificing your son for us!  Thank you for your powerful speech last night.  But, I never want to hear it again!

Thursday, July 28, 2016

The Most Common Question

Everybody lives in fear . . . of something!  Investors live in fear of sudden market crashes (even though each has been followed a recovery).  They have vivid memories of the Crash of 1929, the Crash of 1987, and the Global Financial Crisis of 2008/9.  As long as the bulls run, there will be an increasing fear that "the end is near."  It is the most common question I receive.

The shorthand method of explaining whether the market is over-priced is by examining PE ratios.  A Price-Earning ratio is the market price of a stock divided by the earnings-per-share of that stock.  For example, if a stock is earning $10 per share, while the value of that stock is $100, then the PE ratio is ten.  Aggregating all those individual stocks into one number is a reasonable indication of whether the stock market is over-priced and likely to soften.  (While analysts have devised variations of a PE ratio, this is still the most common shorthand method.)

Historically, we've said the market is overpriced when the PE ratio rises above the 16 - 18 range.  Today, it stands at 20, making it overpriced.  However, the PE ratio for the energy stocks is a whopping 53.  That means the fall in stock prices of oil companies has not kept up with the fall in oil prices.  There is no equilibrium in the energy sector, causing an abnormally high PE.  This skews the average PE higher for the whole stock market.  If you factor out the energy sector PE, the overall PE ratio is only 16.

So, the market is not overpriced.

That does not mean the stock market will not soften, because IT WILL . . .  at some point.  It will strengthen and soften mildly with the normal ebb-and-flow of investment dollars sloshing around, but I don't believe the stock market will soften because it is overpriced . . . today!

Tuesday, July 26, 2016

Live Luggage

As anybody who has boarded an airplane recently knows, passengers have almost as many rights as their suitcases in the hold.  There is a website that follows this issue, i.e.,

Here is a copy/paste from today's email from them:

Dysfunctional Relationship
The Reason for Congressional dysfunction
July 26, 2016

To put it briefly, it's minority rule. In the House, under the Hastert Rule -named for a disgraced  former Speaker - legislation cannot be voted on unless a majority of the majority approve.
So, as little as 26% can block votes. In the Senate, as explained to me by former Senate Republican Leader Bob Dole, unanimous consent is required for most votes. Any one senator can place an indefinite and anonymous hold on legislation and the mere threat of a filibuster normally stops the Senate cold.

These congressional rules used by both parties thwart majority rule and popular will in a way never imagined by the Founding Fathers and not supported by anything in the Constitution.

They enable partisan factions, or even a single member of Congress, to block legislation and even shut down the government. When approval of a governing legislature sinks to single digits in other countries it often leads to revolution or a coup.

Short of that, or a state-called constitutional convention, both parties and both presidential candidates should make restoration of majority rule in Congress a cornerstone of reform for 2017.  

Otherwise it will be SOS going forward, as practical, popular and needed legislation is continually smashed, needed compromises cannot happen and American government will continue as by and for entrenched special interests. 

Paul Hudson
Sarasota, Florida

Aging Investment Clubs

Years ago, I had lunch in the historic Old Ebbet Grill across 15th Street from the White House and next to my office at the corner of New York Avenue in Washington, D.C.  I was with two security analysts - genuine nerds - who got into a rather heated argument as to whether Merck (MRK) or Pfizer (PFE) was a better stock to own.  From memory, they were actually quoting footnotes from the financial statements of the two companies.  I was amazed.

To me, it was the perfect example of classic security analysis, originated by legendary Benjamin Graham in his aptly-named Security Analysis back in 1934, who was incidentally the mentor to Warren Buffett.  He advocated extensive, never-ending analysis of all financial statements.  There is still general agreement among investment analysts that this is very important - important as the basic foundation of general security analysis.

Investment clubs sprouted all over the country, composed of individuals willing to share the work of studying so many different financial statements.  Over time, they earned a good reputation for investment performance, often beating the professionals.  Club members were justifiably proud of their portfolios.  But, their performance has started to falter.  Unfairly, some has suggested the problem is the advanced average age of the investment clubs, but that is incorrect.

The real problem is that basic security analysis started developing after the year 1934, during the industrial age and long before the information age.  (Read Alvin Toffler's The Third Wave.)  It was during this period that generally accepted accounting standards (GAAP) were also developed.  Despite honest efforts of the accounting standards board to evolve, GAAP just doesn't help very much in the evaluation of non-industrial companies.

When the company name is so ubiquitous it becomes a verb, like Google (now Alphabet), what is the value of that asset?  When the company name becomes dominant in an industry, like Facebook dominating social media, what is that worth?  How do you amortize the front-end costs of getting new subscribers, like Netflix?  Industrial age accounting is actually an obstacle to evaluating information age stock.

My advice to all investment clubs is to put down the financial statements, take off your bifocals, recruit more teenagers, and actually listen to them.  (I know, I know . . . I don't like doing that either.)

Wednesday, July 20, 2016

R.I.P. (Run-In-Peace)

Thirty-two years ago - today - one of my personal heroes died, at the tender age of 52.  Like many veterans, my physical conditioning slowly faded away after leaving the military.  Then, in 1977, Jim Fixx wrote The Complete Book of Running, helping me lose 20 pounds and regain some of that lost-fitness.  Ironically, when he died, the lean, muscular runner . . . was running.  One day, everything was fine, and the next day, it wasn't.

In 1996, Hyman Minsky died.  He was an American economist, arguably a Keynesian economist, even though he often sounded like an Austrian economist.  He developed the notion that borrowers would keep borrowing money until they couldn't.  In other words, the balloon will keep expanding until it finally bursts.  That moment of bursting is now called "'the Minsky moment."  We saw such a moment in 2008, following the subprime crisis.  One day, everything was fine, and the next day, it wasn't.

In 2007, Nassim Nicholas Taleb wrote the instant classic Black Swan:  The Impact of the Highly Improbable.  He explained the advent of bad things as (1) surprising, (2) sudden and (3) obvious only in hindsight.  The global financial crisis of 2008/9 illustrated his theory perfectly.  One day, everything is fine, and the next day, it isn't.

The philosophical point might be to enjoy every minute of every day, as everything could change in a heart beat.  The investing point is that the "buy-and-hold" strategy -- holding investments throughout all bear markets because the stock market always comes back -- applies only during normal garden-variety recessions, not during Black Swan events.

Now, get out there and enjoy THIS day!  Do it for Jim . . .

Tuesday, July 19, 2016

A Stumbling Giant ?

Italy is one of the ten largest economies in the world, and it is the weakest.  Real GDP is the same now as it was fifteen years ago.  The heart of any economy is the banking system, and Italy may have the weakest.  Remember how low stock prices were in January of 2009?  The share prices of Italian banks are already 60 percent lower than that!  Bad loans (which become direct charges against the capital account when written-off) stand at 8 percent and could rise to a staggering 15 percent this year.  If so, watch out!

Early this year, I was worried about Glencore, the U.K.-based commodities giant, posing a global financial threat.  Fortunately, they sold enough assets quickly to avoid that fate.  Now, I'm worried about the Italian banks.  The combination of under-capitalized banks with as much as 15 percent non-performing loans in a nation with no productivity growth, an aging population, and lavish entitlements . . . . . what could go wrong?

What could go wrong are the credit default swaps, sold to protect bondholders against losses in bonds issued by the Italian banks.  Nobody knows who is "holding the bag" and must absorb those losses.  Therefore, nobody knows which of these derivatives may "blow-up."

Analysts point out that direct U.S. exposure to Italian banks is only 0.4 percent of bank assets, but that reminds me of Ben Bernanke saying subprime mortgages only represented 1 percent of all mortgages in this country and look what happened.

The next pivotal date is July 29th, when European authorities will release results from a stress test of their banks.  If it calls for a major re-capitalization, the stock market will over-react.  If it does not, I will be even more worried.

Monday, July 18, 2016

Pet Peeve #139

Are engineers the only travelers permitted to take showers?  When I grew up, it was easy to turn the shower on and set just the right temperature.  Today, in an effort to be "new and trendy," hotels compete on having exotic hardware in the bathrooms.  I'm sure that costs the hotel a little extra, which is embedded my bill somewhere, which means I'm paying more to rent a shower I cannot figure out.  After all, I only have three college degrees and two certifications . . . but I have no degree
in engineering.

Remember:  Don't just innovate - design something totally unnecessary!

Pet Peeve #207

Is there no place to hide from pollution?  I'm talking about political pollution!  Are we so polarized that we must carry our political leanings onto the beach with us?  Does beautiful weather on a July Sunday afternoon compel true-believers to strut their opinions?  What is the point anyway?  Do they think they will change somebody's opinion?  Do they think this is just another silly game?

Of course, in a state where you can carry a gun into church, why wouldn't you demonstrate your politics on a beach?

Merely being legal . . . does not mean it is in good taste!

Sunday, July 17, 2016


Warren Buffett has said you should buy the stock of a company when you like it and sell it when you don't like it.  His point was to ignore the stock market as a whole.

Some investment managers like to invest on the basis of "drivers" or things that will drive the value of a stock upwards.  Examples are stock buybacks, takeover rumors, or activist interference.  (This is sometimes called "factor-based" investing.)   Guess what -- so far this year, 82 percent of those investment managers have under-performed the Russell 1000 index, which is huge!

It appears there are too many investment managers chasing the few companies that have one of these characteristics or "factors."  These causes stocks with those characteristics to become "crowded."  The ten most crowded stocks under-performed the ten least crowded stocks by a whopping eighteen points so far this year, which is also huge.

This re-ignites the long-running debate as to whether professional investment management is worth the cost or whether the investor should simply buy the index.  The research on this is voluminous, and it is easy to argue both sides.  My observation is that simply buying the index is fine in a bull market but not in a bear market.  Of course, it is always convenient to have a professional manager when making that decision.

Besides, if 82 percent of managers did not beat the index this year, that means 18 percent -- or one out of five managers -- did beat it.

Friday, July 15, 2016

Justice ?

The Dow would be a breath-taking 1,200 points higher today, except for the twelve companies that have been LOSERS since its last high in May of 2015.  The biggest LOSER is the investment giant, Goldman Sachs, which is quite highly respected at Goldman Sachs.  It's value has dropped a whopping 23% and accounts for 327 of the 1,200 points.

One answer to the rhetorical question of "why do bad things happen to good people" might be . . . that bad things sometimes happen to bad people.

Wednesday, July 13, 2016

Grizzled Faces

The Veterans Administration receives much well-deserved criticism, but I value it anyway and chose to receive my own medical care there.  Veterans are only 7% of the U.S. population, a all-time low.  Yet, inside the VA system, it is 100%, and I enjoy the company.  Veterans tend to treat each other with respect and care.  It is not an "I love you" kind of care and more of a "how can I help you, man" kind of care.

Whenever you generalize, you are likely to be both factually wrong and morally wrong.  All people, even veterans, are unique.  Nonetheless, I will generalize about the differences I've observed in the generations of veterans.

The World War II vets were younger when they entered the war and usually did so with "unit integrity".  That means they trained as a unit, went to war as a unit, and returned from the war as a unit.  They were indeed a band-of-brothers.  Their initial mindset was one of shock at the enormity of the war.  Upon discharge, they seized "their American Dream" of a house, a family, and a pension.  Today, they bask in an ocean of accolades and gratitude.

The Korean vets are the invisible vets of an especially brutal war.  You seldom run across them in the VA system, probably because they are few, relative to other war veterans.  They were older than WWII or Vietnam vets when they entered war.  They were step-vets of the WWII vets and followed in their footsteps upon discharge.  Today, they have contented themselves in the reflected glory of the WWII vets.

The Vietnam vets were also young but rotated in-and-out of units, with no unit integrity and no opportunity to bond with others -- no band-of-brothers for them.  Their initial mindset was one of "what am I doing here?"  Upon discharge, they used too many drugs and drank too much alcohol, before reluctantly getting on that American Dream stuff.  Today, they often simmer in resentment and betrayal.

The Iraq vets and the Afghanistan vets are very different.  They were older when they entered war.  They did enjoy some unit integrity and found some brotherhood in their units.  Because they have often served multiple tours, they have a more resolute grimness than other veterans.   Their attitude is professional -- maybe too professional.  They know the horror of war and have accepted it.  It has become part of them -- part of who they are and what they are.  They resent the hollowness of the perfunctory "thank you for your service."  I worry about these vets and am not surprised PTSD is killing so many of them every day.

My father always told me that "a person has to live in their own time."  The same is true for veterans, but the times may have changed the veterans.  The Korea vets and the Vietnam vets will never get the respect they deserve, but I pray the Iraq vets and the Afghanistan vets get the medical care they need and deserve.

Tuesday, July 12, 2016


If you are confident, then you are more inclined to invest more of your hard-earned cash into stock investments.  If you are uncertain, you are less likely to do so.  That is the reason the stock market hates uncertainty so much.

Historically, the stock market just drifts the first half of presidential election years and then rallies strongly, as uncertainty about the election decreases.  That uncertainty usually begins to decrease well before the election.  It is irrelevant if a Republican or Democrat wins, as long as uncertainty about the election begins to decrease.

A few days ago, I wrote about the reasons for the strong, post-Brexit "melt-up" in stock prices.  Since then, I've become suspicious that the stock market has become convinced that it knows the winner in November and expects it to be Clinton.  If that is correct, there is every reason to believe the stock market will end the year higher.

Of course, don't forget the Brexit election!  If the stock market gets surprised with a Trump win, it could repeat the frightening stock drop -- but larger.  Hopefully, an unexpected post-Trump election win and resulting market drop would be followed by another post-Brexit rally like we have just seen.  Wouldn't it be fun to ride that roller coaster again??

Sunday, July 10, 2016

The Only Game In Town

Given that the stock market over-reacts, the reaction of the stock market on Friday was interesting.  The monthly jobs reports indicated 287 thousand jobs were created last month, compared to expectations of about 170 thousand jobs.  It was a great surprise, and the Dow picked up 250 points that day.  At first blush, 250 Dow points was just the market over-reacting to one monthly report.

But, it is more interesting than that.  Friday was the same day the world was reacting to the tragedy in Dallas.  How many more points would the Dow have picked up without that tragic overhang?  A bigger over-reaction, maybe?

Is there any relationship between the Dow's reaction on Friday to the amazing "melt-up" since the aftermath of the Brexit vote?  Yes, money is leaking out of Europe and coming to the U.S.  Yes, investors around the world are moving funds out of Europe.  They do not have the option of switching to "less risky" bonds in Europe or Japan, because interest rates are negative.  That means the investors are guaranteed to be repaid a smaller amount than they loaned out.

And, since the average dividend paid by the S&P 500 stocks is not negative, it is a much better return than negative-interest-rate bonds in Europe and Japan.  Indeed, S&P dividend rate is higher than the interest rate investors can earn on 10-year U.S. Treasury bonds.

If you are an investor with funds in Europe, where will you move those funds to negative-interest-rate bonds in Europe or Japan or dividend-paying stocks in the U.S.??

Duh . . . !

Saturday, July 9, 2016

Feeling For Big D

When I worked for New York-based banking giant Citibank in downtown Dallas, it was a common joke that America was simply "fly-over" country between big cities that actually matter, like New York, Chicago, Dallas, etc.  It was stereotypical to think of the urban cities as civilizations with barbarians banging on the gates.  Indeed, we referred to Dallas as "Dallas, USA" because it didn't seem to really belong in extremist Texas.

The ambush of Dallas police officers leaves me heartbroken.  It was not an external assault by the great unwashed, uneducated masses in the Texas countryside.  It was an internal assault by a different set of unwashed, uneducated crazies.  The fact that this tragedy was just another crazy guy with a gun should not obscure the cancer of race relations in America, which has been growing all my life.  It defies cliche-thinking.

The problem of race relations is not a simple matter of racism.  One other factor is that police departments have been saddled with myriad anti-terrorism duties and supplied by the Federal government with more and better weaponry than I ever had in the Army.  The mindset of police is "to serve and protect."  The mindset of the infantry is "to kill and destroy."

Another problem is that some things really can desensitize an impressionable mind, especially young impressionable minds.  I doubt the Founding Fathers imagined freedom of speech would ever be used to produce games that glorify killing, especially to young impressionable minds.

Perhaps the biggest obstacle to solving the big problem of race relations is that it is not a unique big problem that we don't solve.  There are other big problems that we don't solve, such as reforming the tax code or making any tiny adjustment to the Second Amendment.  We cannot even schedule a vote on big problems, much less solve them.  The object of democracy is to win elections, not to solve big problems.

Mostly, I just grieve for my wife's hometown!

Sunday, July 3, 2016

National Sock Day

America is not a perfect nation, as we are reminded relentlessly, even during our national holidays.  But, the Fourth of July is different.  Unlike Veterans Day when we thank veterans for the service and unlike Memorial Day when we honor those who laid down their lives for the rest of us, Independence Day is the only day of the year, when we can simply rejoice as one nation and embrace our collective experience.  It is a good day to be happy and joyful.  You have 364 other days to complain about our imperfections.

So, as you get your hamburgers and hot dogs ready for the gluttony, grab a sock from the dirty clothes hamper and put it in your pocket.  As soon as somebody starts trash-talking America on that special day, stuff the sock in the their month and tell him to keep it there until the Fifth of July!

It really is okay to love your country . . . warts and all!

Saturday, July 2, 2016

Tension Control

Just as there is an unhealthy tension in Washington between Republicans and Democrats, there is another unhealthy tension developing on Wall Street -- between "bottom-up" financial strategists and "top-down" economic strategists.

It began after the 2008/9 global financial crisis, when the financial strategists looked at the rapidly-recovering balance sheets of corporations, who were refinancing their debt at much attractive levels.  Along with that, their income statements improved with the improving economy.  The future was bright, indeed!  Economic strategists, however, argued that this improving economy was the gift from the only functioning branch of government, i.e., the Fed, and would only last so long.  We saw Wall Street improving, at the same time as the potential for economic collapse was increasing.

A famous Keynesian economist, Hyman Minsky, sounded very much like an Austrian economist when he wrote that debt bubbles grow and grow . . . until they burst suddenly.  This is very much on the minds of the "top-down" economic strategists.

So, should you crawl into a cave, guarding your little pile of gold?  Or, should you ignore the increasing likelihood of economic collapse?  Unfortunately, that is binary "either-or" thinking.  Getting out of the market entirely is a foolish 100% bet.  Ignoring all likelihood of economic collapse is also a foolish 100% bet.  Developing the discipline and determining the triggers to exit from the market is a much more appropriate investment strategy -- one that is consistent with both the financial strategists and economic strategists.

As long as the music keeps playing, just keep dancing . . . it keeps the tension down.

But, don't fall asleep!

Friday, July 1, 2016

Just Another Long, Strange Journey

Following a very minor surgical procedure, there was a very long night, in the middle of which I watched the film adaptation of Andrew Lloyd Webber's 1970 rock opera, the iconic Jesus Christ Superstar.  Having seen the stage adaptation decades ago, I recalled the almost-humorous stylizing of the very well known classic story into the language, music, and clothes of my generation, and I appreciated that very much.  But, another thing happened -- religion became technicolor for me.

My travels through religion have added greatly to the tapestry of my own faith.  I have many Catholic and Jewish friends.  Two Shiite Muslims have even stayed in my home before.  For many decades, I've worn a small bronze medallion around my neck given to me by a Buddhist priest.  The worst hangover of my life followed an all-night drinking bout with a Shintoist priest.  The kindest soul I ever met was a tiny Quaker lady.  My tapestry is rich and nuanced indeed, for which I am grateful.

Early in this journey, I tried to absorb dogma of other religions but came to believe there was too much emphasis on form, instead of substance.  I rejected the notion that any omniscient God would care so much about trivialities.  I came to believe in the universality of frightened people trying to find some meaning for life and some reward for its tribulations.  Religion offers an elegant vehicle for that.

So, thank you Andrew Lloyd Webber.  I suppose I should also thank the doctor for doing the minor procedure, for keeping me up all night, and for allowing me the opportunity to remember how truly blessed I am!