The Big Picture | May 2005

« April 2005 | Main | June 2005 »

I picked Deep Throat!

Tuesday, May 31, 2005 | 05:46 PM

A reader reminds me of something I had written at essays and effluvia, our sister (read: goofy) blog. Back in February, I picked who was Deep Throat!

I had forgotten all about it.

Considering I was 11 when Watergate took place, I chalk up this astounding act of prescience tot he fact that I had selected one person from a list of less than a dozen -- hence, it was only good luck.

Looking for the Next Catalysts

Tuesday, May 31, 2005 | 12:49 PM

in Markets | Trading

As the markets are digesting their most recent gains off of the April lows, we are looking at potential catalysts – some obvious, some less so – which will allow the markets to break out of their recent trading ranges.

A few items come to mind. While some are impossible to time – a Hedge fund blow up, terrorist activity, Avian flu outbreak outside of Asia, significant Iraqi developments – others are potentially more “game-able.” We’ll concentrate on those catalysts where we at least have a fair chance of potentially forecasting market-moving outcomes:

· Non-Farm Payrolls: The most significant economic report of the week, if not month. While most investors took solace in April’s NFP Report, we are in a distinct minority who view April data as an outlier. This is primarily due to the BLS’ Birth/Death adjustment. April 2004 saw a similarly disproportionate impact. As such, a weaker than expected release may force investors to reconsider their expectations of an ongoing Goldilocks economy; A sell off may test resolve and help form the next substantial bottom;

· Oil relief?: Last year, we noted that our upside target for Oil was $57-59; After reaching that level, Oil pulled back towards $47, where support was plentiful. We now expect a move back to the old highs – and beyond – towards $60-62; We do not believe that rising stocks of sour crude with its lower gasoline yields and environmental issues will provide much in the way of relief to Summer drivers;

· Housing bubble bursting: We remain in the distinct minority in believing that housing is not a bubble – at least, not yet, anyway, by a technical definition of what a bubble actually is. That doesn’t mean a bubble can’t or won’t form, it simply suggests that this is not an immediate danger to the market anytime soon. (More on this issue tomorrow).

· Microsoft EU problem: While the DoJ has let Microsoft off the hook, their European equivalent never seems to let an opportunity go by to administer a spanking to Gates & Co. Given the company’s weighting in SPX, Dow and NDX, a severe punishment, while a low probability event, could have a significant impact;

· Euro Weakness: The French “Non” vote will pressure the Euro versus the Dollar. Given that the weak dollar hasn’t done diddley for US exports, we are clueless as to the impact that this development will have. Color us confused at best.

Our expectations remain for a tradable low in June.

We advise using pullbacks to s l o w l y build long positions in higher Beta sectors: Tech, Energy, Semis.

UPDATE: May 31, 2005 9:31pm
On the way home tonite, I got to thinking about the next Fed meeting at the end of June . . . Any signal from the Central Bank that the tightening cycle is about to pause potentially launches a moonshot.
>

Chart of the Week: A/D with Volume 2 x 21-day MA

Tuesday, May 31, 2005 | 12:38 PM

in Markets

Internals continue to improve from oversold conditions but a pause is likely. NASDAQ improvement suggests that after some digestion (backing and filling), a summer rally can work higher. As such, expect choppy trade. Improving internals suggest an upside resolution of the trading range.

Advancers-Decliners with Volume 2x 21-day MA
click for larger graphic

Source: Kevin Lane, Redwood Technimentals

The 10-day average (blue line) of the net above average volume advancers (above average volume stocks trading up minus those trading down) has moved back above the zero line suggesting that more stocks are trading up on big volume than down - this is a positive change in a conditional element.

Random Items:

Yield Curve, More Than Shapely Body, Has a Brain

Trojan horse also hit major int'l firms

The real problems with $50 oil

Bullish on housing, no letup in sight

It's Not a Bubble Until It Bursts

Why smart people defend bad ideas

11 steps to a better brain

Quote of the Day:

“Every time everyone is talking about something, that is the time to sell."
-George Lindemann

Don't Buy Housing Bubble Propaganda

Tuesday, May 31, 2005 | 06:03 AM

in Real Estate

The latest subscription only Real Money column, Don't Buy Housing Bubble Propaganda, is now available on Yahoo (no subscription required).

In writing it, I decided to forget everything I thought I knew, and look at housing from scratch. Consider the factors that make Real Estate very different than stocks. Lose the assumptions, check out the numbers driving Real Estate, and see if Housing is truly the bubble everyone claims it to be.

Turns out there's much less of a bubble than commonly believed by many people believe. While anecdotal evidence of regional excesses are interesting, they doesn't mean we are about to see home prices get cut in half (or worse) over the next few years.

There are three key drivers hardly discussed by pundits opining on the U.S. housing market "bubble":

1) Purchase prices don't matter to buyers -- monthly payments do;
2) US has the fastest growing population of industrialized nations;
3) "Only 3% of all buyers sell their home in a year or less," a survey found.

These issues, taken together, suggest that while Real Estate may be an extended asset class (i.e., two standard price deviations above historical trend) that doesn't maeke it a bubble.

Of course, its interesting to note that a Playboy bunny gave up her modeling career to go into real estate speculation (mentioned previously here), it doesn't mean the end is nigh.

Now if I can only figure out how these columns end up at Yahoo . . .

Source:
Don't Buy Housing Bubble Propaganda
Barry Ritholtz
RealMoney by TheStreet.com, Thursday May 26, 2:04 pm ET
http://biz.yahoo.com/ts/050526/10225437.html?.v=3

UPDATE June 12, 2006 9:39am

I just noticed that the Yahoo page expired; The full article is after the jump . . .

Continue reading "Don't Buy Housing Bubble Propaganda"

Summer's almost here!

Monday, May 30, 2005 | 09:56 AM

in Finance

via The New Yorker

John Murphy's Ten Laws of Technical Trading

Monday, May 30, 2005 | 09:00 AM

in Technical Analysis | Trading

StockCharts.com's Chief Technical Analyst, John Murphy, has created another set of trading rules: "Ten Laws of Technical Trading:"

"Which way is the market moving? How far up or down will it go? And when will it go the other way? These are the basic concerns of the technical analyst. Behind the charts and graphs and mathematical formulas used to analyze market trends are some basic concepts that apply to most of the theories employed by today's technical analysts."

The following are John's ten most important rules of technical trading:

• Map the Trends
• Spot the Trend and Go With It
• Find the Low and High of It
• Know How Far to Backtrack
• Draw the Line
• Follow That Average
• Learn the Turns
• Know the Warning Signs
• Trend or Not a Trend?
• Know the Confirming Signs

Note: All of the following is the work of John Murphy (not me)

1. Map the Trends

Study long-term charts. Begin a chart analysis with monthly and weekly charts spanning several years. A larger scale "map of the market" provides more visibility and a better long-term perspective on a market. Once the long-term has been established, then consult daily and intra-day charts. A short-term market view alone can often be deceptive. Even if you only trade the very short term, you will do better if you're trading in the same direction as the intermediate and longer term trends.

2. Spot the Trend and Go With It

Determine the trend and follow it. Market trends come in many sizes -- long term, intermediate-term and short-term. First, determine which one you're going to trade and use the appropriate chart. Make sure you trade in the direction of that trend. Buy dips if the trend is up. Sell rallies if the trend is down. If you're trading the intermediate trend, use daily and weekly charts. If you're day trading, use daily and intra-day charts. But in each case, let the longer range chart determine the trend, and then use the shorter term chart for timing.

3. Find the Low and High of It

Find support and resistance levels. The best place to buy a market is near support levels. That support is usually a previous reaction low. The best place to sell a market is near resistance levels. Resistance is usually a previous peak. After a resistance peak has been broken, it will usually provide support on subsequent pullbacks. In other words, the old "high" becomes the new "low." In the same way, when a support level has been broken, it will usually produce selling on subsequent rallies -- the old "low" can become the new "high."

4. Know How Far to Backtrack

Measure percentage retracements. Market corrections up or down usually retrace a significant portion of the previous trend. You can measure the corrections in an existing trend in simple percentages. A fifty percent retracement of a prior trend is most common. A minimum retracement is usually one-third of the prior trend. The maximum retracement is usually two-thirds. Fibonacci retracements of 38% and 62% are also worth watching. During a pullback in an uptrend, therefore, initial buy points are in the 33 38% retracement area.

5. Draw the Line

Draw trend lines. Trend lines are one of the simplest and most effective charting tools. All you need is a straight edge and two points on the chart. Up trend lines are drawn along two successive lows. Down trend lines are drawn along two successive peaks. Prices will often pull back to trend lines before resuming their trend. The breaking of trend lines usually signals a change in trend. A valid trend line should be touched at least three times. The longer a trend line has been in effect, and the more times it has been tested, the more important it becomes.

6. Follow that Average

Follow moving averages. Moving averages provide objective buy and sell signals. They tell you if existing trend is still in motion and help confirm a trend change. Moving averages do not tell you in advance, however, that a trend change is imminent. A combination chart of two moving averages is the most popular way of finding trading signals. Some popular futures combinations are 4- and 9-day moving averages, 9- and 18-day, 5- and 20 day. Signals are given when the shorter average line crosses the longer. Price crossings above and below a 40-day moving average also provide good trading signals. Since moving average chart lines are trend-following indicators, they work best in a trending market.

7. Learn the Turns

Track oscillators. Oscillators help identify overbought and oversold markets. While moving averages offer confirmation of a market trend change, oscillators often help warn us in advance that a market has rallied or fallen too far and will soon turn. Two of the most popular are the Relative Strength Index (RSI) and Stochastics. They both work on a scale of 0 to 100. With the RSI, readings over 70 are overbought while readings below 30 are oversold. The overbought and oversold values for Stochastics are 80 and 20. Most traders use 14-days or weeks for stochastics and either 9 or 14 days or weeks for RSI. Oscillator divergences often warn of market turns. These tools work best in a trading market range. Weekly signals can be used as filters on daily signals. Daily signals can be used as filters for intra-day charts.

8. Know the Warning Signs

Trade MACD. The Moving Average Convergence Divergence (MACD) indicator (developed by Gerald Appel) combines a moving average crossover system with the overbought/oversold elements of an oscillator. A buy signal occurs when the faster line crosses above the slower and both lines are below zero. A sell signal takes place when the faster line crosses below the slower from above the zero line. Weekly signals take precedence over daily signals. An MACD histogram plots the difference between the two lines and gives even earlier warnings of trend changes. It's called a "histogram" because vertical bars are used to show the difference between the two lines on the chart.

9. Trend or Not a Trend

Use ADX. The Average Directional Movement Index (ADX) line helps determine whether a market is in a trending or a trading phase. It measures the degree of trend or direction in the market. A rising ADX line suggests the presence of a strong trend. A falling ADX line suggests the presence of a trading market and the absence of a trend. A rising ADX line favors moving averages; a falling ADX favors oscillators. By plotting the direction of the ADX line, the trader is able to determine which trading style and which set of indicators are most suitable for the current market environment.

10. Know the Confirming Signs

Include volume and open interest. Volume and open interest are important confirming indicators in futures markets. Volume precedes price. It's important to ensure that heavier volume is taking place in the direction of the prevailing trend. In an uptrend, heavier volume should be seen on up days. Rising open interest confirms that new money is supporting the prevailing trend. Declining open interest is often a warning that the trend is near completion. A solid price uptrend should be accompanied by rising volume and rising open interest.

"11."

Technical analysis is a skill that improves with experience and study. Always be a student and keep learning.

- John Murphy

Link Fest

Monday, May 30, 2005 | 08:16 AM

in Web/Tech

Online Television News
ABC | BBC | CBS | CNN | C-SPAN | Fox | MSNBC

Inside Politics | The Hill | Off Beat News: Drudge Report | Fark.com | Smoking Gun

Website Locator/Registration
Country Domain Codes | Domain Registration | InterNIC 'Whois' | Register.com
Go Daddy Registrar

Weekend Wrap Up

Sunday, May 29, 2005 | 06:00 PM

in Economy | Markets | Trading

Add weatherman to the list of prognosticators (including economists and strategists) who often get it wrong. Despite the forecasts for a rainy weekend in the Northeast, the weather is glorious, and (as of Saturday morning) I’m hitting the beach -- before the weathermen end up being right after all.

Before I run, there are a few fascinating stories worth pursuing -- print ‘em out, they make for good beach reading!

• ETF Lab:
The Stock Trader's Almanac has created an interesting new feature: the Almanac Investor ETF Lab. They will be chronicling the developments and tracking the growth of the ETF universe.

Jeff Hirsch was kind enough to give me permission to post the first installment of this (PDF), which you can download for free. (Stock Trader's Almanac is by subscription). Their dissection of the universe of ETFs by sector, trading volume, market cap and performance is terrific. Fascinating stuff.

• Half of New Jobs Are Real Estate Related
I'll bet that title got your attention? Its barely an exaggeration: From the end of 2001 recession until April 2005, 43% of new private sector jobs were housing industry related, according to Northern Trust. From 2001 to the start of the rate hiking cycle, it was over half. Pick your jaw up off the desk and go read all the details.

• Quite a few Hedge fund stories this week:
First, the WSJ and the NYT look at each side of the coin of hedge funds. The Journal looks at the Demand for funds, while the Times explains why the Supply is there. (If you lack access to either, go here).

• Hedge fund Performance Numbers:
Two looks -- One from Barron's, which notes the relative weak fund performance as of late . The second, from Cogent Hedge, which provides an interesting table chock full of data on style (and sub-style) performances. (Same routine: click here).

• Prediction markets:
Readers know I have reservations about placing too much trust into things like Tradesports and IEM. But if you want to start researching Prediction Markets, you can't do better than Chris Masse’s prediction market vortal. Enormous amounts of data and links on the subject.

• Blogs blogs blogs:
You may be sick of hearing about them, but I suspect the top ain't in yet. A (free) WSJ story discusses why Measuring the Impact of Blogs Requires More Than Counting is worth a few minutes, C/Net asks whether Blogs are the next big thing for advertisers.

• The Greenspan Conundrum
John Mauldin has some choice words for the Fed chair. I do not think he and the Chai see eye to eye on inflation, bubbles and the like. So too for Jim Jubak, who notes that The Fed Is All Wrong About Inflation.

• Wonk Heaven:
Finally, the policy wonks out there might like to read the most recent remarks by Vice Chairman Roger W. Ferguson, Jr. To the Seventh Deutsche Bundesbank Spring Conference, Berlin, Germany on Asset Prices and Monetary Liquidity. Also, have a look at this discussion on Global Imbalances: A Contemporary Rashomon Tale with Five Interpretations...

Lastly, mad props to Paul Kedrosky, who's RM weekend link fest is always good fun (and the inspiration for my Saturday CC posts). Be sure to check out Infectious Greed, his musing about the money culture.

10 Principles of Being Rich

Sunday, May 29, 2005 | 08:34 AM

in Investing

K_10prin_1 Ever come across an odd but interesting website, that you just don't know what to do with? That was my experience with Fiscal Agents.com.

Since I started writing the Apprenticed Investor series, I've been researching various methodologies for planning simple planning strategies. Not the actual plan, mind you, but ways to get people to sit down and execute one. This strategy is as good as any other -- if it forces you to do just that:

1. Focus on Time

2. Time as a Friend - as a Foe

3. The Frugal Investor

4. Setting Goals - Recognizing Values

5. Developing a Blueprint

6. The importance of Insurance

7. Building a Portfolio

8. Diversification and Asset Allocation

9. Monitoring / Buy and Hold

10.Estate Planning

Each of these titles is a chapter in a book, and is available on line for free here.

Sources:
The Ten Principles Of Being Rich
Fiscal Agents.com
http://www.fiscalagents.com/knowledge/10principles/10bookmain.shtml

PDF
http://www.fiscalagents.com/knowledge/10principles/pdf/FullBook.pdf

Trading Mistakes

Saturday, May 28, 2005 | 10:10 AM

in Trading

Nick Proffitt has a nice overview of classic Trading Mistakes.

-- Letting small losses turn into large losses.
-- Refusing to take a loss at all.
-- Overbetting.
-- Bottom fishing/Catching falling knives.
-- Averaging down.
-- Shorting bulls and buying bears.
-- Confusing the company with its stock.
-- Falling in love with a "story."
-- Following the leader.
-- Buying IPOs.
-- Finding the Holy Grail.
-- Overtrading.
-- Excessive tape watching.
-- Being undercapitalized.
-- Letting the tax tail wag the stock dog.
-- Relying on gurus.
-- Thinking this market stuff is easy.
-- Thinking rather than looking.

That's just the list; its fully explained at Decision Point.

Why is common sense so uncommon?

ETF Lab

Saturday, May 28, 2005 | 09:55 AM

in Investing | Markets

The Stock Trader's Almanac has created an interesting new feature: the Almanac Investor ETF Lab. They plan on chronicling developments and tracking the growth of the ETF universe.

What they are doing is dissecting the universe of ETFs by sector, trading volume, market cap and performance. Fascinating stuff.

Jeff Hirsch was kind enough to give me permission to post the first installment of this, which you can download for free. (Stock Trader's Almanac is by subscription).

Its full of surprises -- like ETFs by largest market cap:

click for larger graphic

The Internet Holders (HHH) a bigger market cap than the S&P500 (SPY)? Who knew?

Very interesting stuff -- kudos to Hirsch et al for putting together this useful data on an ongoing basis.

Download June ETF Lab

Note: All of the prices in this edition were compiled on May 6th. This is of importance because ETFs that issue dividends (greater than 50% of them do) adjust their historical prices backwards. For example, the Utilities HOLDRS (UTH) issued a dividend on May 10, May 6, May 4 and April 28. Therefore, the historical data has been readjusted 4 times in two weeks. In order to do the Lab Pages, we picked the Friday before our press deadline as the cut off and we will continue to use the Friday before the issue is completed as our standard cut off point.
>

Hedge fund Performance Numbers

Saturday, May 28, 2005 | 06:26 AM

in Investing

Some follow up to yesterday's Hedge fund discussion:

We start out noting Barron's comparison between S&P500 and Hedge Fund Performance:
click for larger chart

Barron's observes:

"[f]unds' current popularity was fueled by a good run after 1998, an annus miserabilis in hedge-fund history. That year, as the S&P 500 leaped 28.60%, the CSFB/Tremont Index fell 0.36%.

But in '99, the hedge-fund index was up 23.43%, while the S&P rose 21.04%. The index climbed 4.85% in 2000, 4.42% in 2001 and 3.04% in 2002 -- years in which the S&P fell 9.10%, 11.90% and 22.10%, respectively.

The strong performance in the 2000- 2002 bear market turned out to be a great selling point, especially as institutional investors began looking for alternative assets that didn't correlate as much with stocks and bonds. Soon, a tidal wave of cash cascaded into hedge funds. Net inflows hit $72 billion in 2003 and $123 billion last year, says Tremont Capital Management. Indeed, perhaps nothing would help the industry more than another bear market.

In this year's first quarter, HFR estimates that inflows rose to $27.4 billion, producing a growth rate of 23% -- nice, but way below the 180%-plus seen a year earlier. Tremont, however, estimates that inflows actually fell by $13 billion. (The reason for the wide disparity in estimates is unclear, although the firms' data, to some extent, may cover different funds.)

Many in the industry blame hedge fund's less-than-stellar investment performance in the past 18 months on the paucity (at least until recently) of volatility and strong market trends -- crucial elements for generating gains. "In a low-volatility environment, even the smartest investors have problems making money," observes Jan Loeys, a JP Morgan strategist who has analyzed the industry. Among the big-name firms that have been struggling is John W. Henry, which trades managed futures. Its Global Finance and Energy Portfolio was down an estimated 27% in this year's first four months."

Next, we get into the detains of those numbers, along with an interesting analysis of Hedge fund performance, from CogentHedge.com:

click for larger chart

At the Cogent fund site, this chart is dynamic -- each category can generate another chart of all the subspecialties with each fund style.

Source:
Cogent Dynamic Averages
Cogent Hedge
http://www.cogenthedge.com/home/inv_strategy.asp

For Hedge Funds, Is the Party Over?
Lawrence C. Strauss
Barron'S, Monday, May 30, 2005
http://online.barrons.com/article/SB111723461158245597.html

Half of New Jobs Are Real Estate Related

Friday, May 27, 2005 | 05:48 PM

in Economy | Real Estate

Did that title get your attention? Its barely an exaggeration:

We've discussed -- quite extensively -- how stimulus driven this economy has been. Starting with the initial jolt ("The Frankenstein Economy"), the government then moved to throwing everything they had (but The “Kitchen Sink”) at the Economy; all this in the context of a Post-Bubble environment.

The problem with stimulus, regardless of your economic philosophy, is what happens when that stimulus fades away. Things slow down -- and worse.

Which brings us to the present "soft patch." Placing that into context is Asha Bangalore of Northern Trust. Banglore makes the intriguing observation about the private job creation between the end of the recession and the beginning of the rate tightening cycle:

"Residential investment outlays have made a sizable contribution to the growth of real GDP in the current business expansion and sales of new and existing homes have soared to set new records. The future of the housing market is tied to employment conditions in the economy. The sluggish performance of payroll employment is the primary reason for the FOMC to take a measured path toward bringing the federal funds rate to a neutral level. At the same time, the performance of the housing market has played a visible role in payroll growth. Employment in housing and related industries (sum of employment in the establishment survey under various categories related to housing industry) accounted for about 43.0% of the increase in private sector payrolls since the economic recovery began in November 2001. The Fed began raising the federal funds rate in June 2004. During the June 2004 and April 2005 period, housing and related industries have accounted for 13.0% of private sector payrolls. The point I am trying to make is that a cooling off the housing market will have an impact via fewer new jobs in addition to other adverse effects. The number of job losses could be significant given the role the housing sector has played in the current recovery."

From 2001 to last month (April 2005) 43.0% of private sector jobs are housing related. That's astonishing. As if that's not enough, consider what happened once the Fed began tightening:

Real Estate Jobs (post recession)
click for larger chart

Once the Fed began raising rates (June 2004 to present), Real Estate related job creation plummeted 68.2%! During the post-recession - pre-tightening period (11/01-6/04), about half of allt the new priate sector jobs were housing related.

In yesterday's column ("Don't Buy the Housing Bubble Propaganda"), I noted how this could all end badly:

"The last, and in my opinion, potentially most damaging factor, is the employment situation. As long as most people are gainfully employed, they will be able to service their mortgage costs. (For those of you who are buying a home you can barely afford, then let me suggest buying mortgage insurance -- just in case your main income source falters).

The biggest risk to the housing market is not just rising interest rates -- rather, it's a significant decrease in national employment. Why? It's not the leverage, but the ability to service the debt that causes problems. A potentially negative scenario is the Fed tightens too far, inducing a recession. Something else goes wrong - theoretically, China stops buying our Treasuries, and that forces the Fed to become a buyer of last resort (think Bernanke's printing press). Next thing you know, we have hyperinflation, large-scale unemployment, and a housing market off 50%."

I thought this scenario was in the realm of possibility -- but not necessarily the most likely outcome. Bangalore's data suggests it may be more likely than I originally believed.

Economic Stimulus, Anyone?
click for larger chart

What does all this mean? Barring a sudden rise in organic job creation over the next 6 to 9 months, this cycle will have run its course -- my guess is late 2005/early 2006.

And that's not good for anyone.

>'

Hat tip to Gary Evans!

>
Source:
Housing Market – Another Information Tidbit
Asha Bangalore
The Northern Trust Company, May 23, 2005
http://www.northerntrust.com/library/econ_research/daily/us/dd052305.pdf
>

Hedge This

Friday, May 27, 2005 | 09:26 AM

in Investing

Last week, we looked at the rise of the Hedge Fund. Today, we see two interesting Hedge fund articles, courtesy of the NYT and the WSJ.

The Journal looks at the demand side -- why so many big institutions are putting money into Hedgies. By coincidence, the Times looks at the supply side -- why so many hedge funds have popped into existence.

First up: Demand, via Steve Liesman, who discusses his experiences at a conference for a not-for-profit University endowment money.

The sessions on hedge funds were "standing-room only:"

"To understand the reason for the heightened interest, you have only to look at stock-market returns over the past several years. You'll see a lot of negatives. Many of these endowments and pension funds are required to distribute some of their funds each year, to be used for scholarships or sports or endowed chairs. Negative returns on their investments mean they are cutting into principal. That just couldn't last long.

They went searching not so much for higher returns as more even returns. "One of the reasons that pension funds are moving money toward hedge funds, is because they've now sort of changed their objective to producing a more consistent return year after year," says Bob Prince, co-chief investment officer for Bridgewater Associates, which has $115 billion under management and is one of the nation's biggest hedge funds.

So what was attractive about hedge funds, then, was both higher returns and investments in alternatives that weren't correlated to the stock market.

The demand for these hedge-fund services hit at just about the same time that there was an increase in supply for those who would offer them. Recall the two critical investment mantras from the 1990s: that markets were instantly efficient and couldn't be beaten and, therefore, the best way to invest was to buy and hold. Along came "benchmarking" which acted like a ball and chain around the necks of investment managers. Beating the benchmark became the be all and end all. And the best way to beat or at least match the benchmark was to hold a preponderance of the securities in that benchmark index."

The demand is there. And why the supply? Well, perhaps this has something to do with it:
click for larger graph

Its not just the top performers; The NYT explains the details:

"The secret to the wealth of hedge fund managers is how they get paid. Instead of receiving a fixed percentage of the funds they manage, as mutual fund managers do, hedge fund managers generally make "1 and 20" - 1 percent of assets under management and 20 percent of profits.

That means that a $1 billion hedge fund manager earns $10 million just for opening the doors, and a lot more if his fund performs well. Investors are willing to pay more for these managers' talents because, at a time when stocks are doing poorly and yields on short-term Treasury securities are low, hedge funds hold out the hope of a better return."

Indeed.

Source:
Hedge Funds Are Taking Roles of Jekyll and Hyde in Markets
Whether Passing Fad or Permanent Shift, Supply, Demand Bring Them to Fore
Steve Liesman
WSJ, May 27, 2005
http://online.wsj.com/article/1,,SB111713947456744350,00.html

Hedge Funds Are Stumbling but Manager Salaries Aren't
RIVA D. ATLAS
NYT, May 27, 2005
http://www.nytimes.com/2005/05/27/business/27hedge.html

A Few Words on Prediction Markets

Thursday, May 26, 2005 | 11:36 PM

in Markets

A recent conversation with a friend made me made realize how easy it is to be misinterpreted, especially on more complex issues.

Let me clarify my views on the so-called prediction markets.

In the past, I have very strongly dissed some people’s concept of these markets and their ability to “predict” the future. The primary reason for my view is the unfortunate tendency for some people to place way to much faith in the crowd to know the unknowable.

I have yet to see a reasonable explanation as to why IEM missed Dean's collapse in the primaries; a commentor notes that the American Idol contract on Tradesports had Bice 90% favored in the final minutes -- but lost.

That said, I rely on many forms of market action to provide color to my expectations. Trend Following is one obvious area. The Fed futures are another. All of technical analysis requires interpreting price and volume changes. I would be lying if I said I didn’t think the Bond market was saying something.

So when I dis prediction markets -- especially about their lack of liquidity and small trading pool -- its a slight. It reflects my general disdain for the efficient market hypothesis, amongst other flawed theoretical concepts. When it comes to explaining market behavior, I'm more of a Chaos-theory man myself.

The difference between the Bond market and say, the Iowa Electronic Markets, NewsFutures and the Hollywood Stock Exchange or Trade Sports is in the size, scale, and liquidity. I am agnostic about these smaller markets, but I do not discount the possibility that any mechanism can potentially provide some insight into future market behaviors.

On a related note, I am reading (quite skeptically) the Wisdom of Crowds -- something quite related to the concept of prediction markets. Its a book that I find slow going because of the continual fisking it requires. While its a pleasure to read Surowiecki's prose, on most of the market related items I’ve gone through there are readily identified logical flaws and unsupported assumptions. (More on this in the future).

As to the Prediction markets value, I remain an interested skeptic.
>

If you want to learn more about Prediction Markets, than the meta page you want to see is Chris Masse’s prediction market vortal. There's a ton of data and links there to get you started . . .

Tip Jar

Thursday, May 26, 2005 | 07:55 PM

in Books | Film | Music

I get as much out of this site as the 5-10,000 or so people who swing by each day do. The feedback, the links, the suggestions and ideas are all tremendous.

That's partly of the reason why I don't sell advertising (I don't care for the visual clutter), nor make a big deal about the wish list nearby (or the read to me / sing to me variations).

But every now and then, a reader wants to say thanks and selects something off the wish list. To my Australian friend who did so with The Elegant Universe, I say thanks (I loved the PBS series).

Its now in the queue.

New Column up at Real Money (05/26/05)

Thursday, May 26, 2005 | 05:25 PM

in Real Estate

RealMoney

My latest Real Money column, Don't Buy Housing Bubble Propaganda, looks at some of the numbers driving the real estate boom. While anecdotal evidence of regional excesses are always interesting, that doesn't mean we are about to see home prices get cut in half (or worse) over the next 6 months.

While its interesting to note that a Playboy bunny gave up her modeling career to go into real estate speculation (mentioned previously here), it doesn't mean the end is nigh. Also, for those of you missed the weekend's round up of interesting Real Estate factoids, you can see them here.

Here's an excerpt:

The second factor is demographic trends. Here's a little-known fact: The U.S. has the fastest population-growth rate of any industrialized nation. According to NPG, the U.S. average fertility rate is currently 2.1335 births per woman -- the highest fertility rate since 1971. For comparison, the U.K.'s fertility rate is 1.7, Canada's 1.4 and Germany's 1.3. If this rate is maintained, the U.S. population will double every 35 years.

Further, the kids of the baby boomers -- the echo generation -- are now at home-buying age. Thanks to the intergenerational wealth transfers, they can buy bigger and more expensive homes than their parents could at the same age. Their purchases also have been impacting the housing market. (Some analysts believe that the life cycle of the boomers has been a key driver in equities also -- so on this point, there may be some parallels between the two asset classes.)

Take this organic increase in U.S. population, add to it a healthy supply of legal immigration, and that's a formula for a rising demand for housing. And, there are no warehouses stocked with homes awaiting more births and naturalized citizens.

There's more data points worth reviewing.

UPDATE May 30, 2005 9:43pm:

The full column is available on Yahoo:

Conundrum Revisited

Thursday, May 26, 2005 | 12:30 PM

in Economy | Markets

There were several things we didn't get to discuss last night regarding the Conundrum discussion.

1. Demand and Supply issue
Since the 30 year was cancelled, its a simple matter of the supply/demand equation. With less 30 year's around, the price gets bid up, and the yield lowers. So Bond managers look to the 10 year, yielding only moderately less 4.41 versus 4.07 -- but a third of long a duration.

Why is it that everyone in America – from Businesses to each and every homeowner has refinanced their debt at half century low levels – except for America itself? Who ever decided to cancel the 30 year owes Uncle Sam a big apology.
>

2. Deflation warning.

Now that we seem to have inflation licked, there’s still that nasty worry about Asia exporting Deflation to the U.S. That will likely be the next battle. Unless we want to ignorethe warning signs -- wage pressure, ever decreasing prices for finished goods, coupled with weak demand -- Deflation remains a genuine concern.
>

3. Its good for China

China has developed the biggest appetite for US treasuries – and Why not? The balance of trade deficit gives them more cash than they know what to do with. Why not buy US Bonds, and keep rates low for finance-loving Chinese-goods purchasing US Consumers? Until they are so stuffed with dollars that they have no where else to put them, and then they can dump them on the open market. While we are dealing with that mess, China then invades Taiwan. You read it here first.
>

4. Bond Market is foreseeing an economic slowdown in 2006

This is the ugliest component – the Bond market may be foretelling a slowdown into 2006. Watch the market slong enough, and you cannot help but notice that the bond markets are the “adult supervision;” Equities markets, on the other hand, are more akin to a hormone addled teenager.

I'd be interested in hearing any other factors keeping rates low. Post below, and I'll excerpt the best ones here later.

For the other side of the argument, see Richard Clarida's WSJ OP-ED, Our Post-Bubble World.

I Don't Like BizRate

Wednesday, May 25, 2005 | 10:16 PM

in Retail | Web/Tech