The Big Picture | August 2005

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3 and 2 year yield curve inversion

Wednesday, August 31, 2005 | 07:30 PM

in Economy | Fixed Income/Interest Rates

One of our commenters today noted the 2 and 3 year yield curve inverted

Here's what that looks like, intraday:
click for larger chart

Source: Bloomberg

I can't say I know what this means . . . any idea?

Tracking Fuel Costs

Wednesday, August 31, 2005 | 02:49 PM

in Commodities | Weblogs

A few links that track gas prices and other related items (via the WSJ):

• GasPriceWatch.com -- A database-driven site that allows users to search for the lowest prices across the country; depends on "spotters" to supply data.

• GasBuddy.com -- A nationwide site that aggregates data from 170 local gasoline-price Web sites operated by GasBuddy, such as losangelesgasprices.com or californiagasprices.com.

• FuelEconomy.com -- This site offers links for price information on a state-by-state basis, which drills down into lists of city links.

• FuelMeUp.com -- A consumer-based site that depends on drivers to submit data on where to find the cheapest gasoline around the country.

• Fuel Cost Calculator -- This site estimates the amount and cost of gasoline needed to complete vacation trips, based on current prices from AAA's daily online Fuel Gauge Report, as well as the latest highway fuel economy ratings from the U.S. Environmental Protection Agency.

>
Source:
Surge in Gasoline Prices Spark Dire Comparisons and Forecasts
WALL STREET JOURNAL ONLINE, August 31, 2005 2:17 p.m.
http://online.wsj.com/article/0,,SB112548899289227717,00.html

PMI, GDP stink up the joint

Wednesday, August 31, 2005 | 11:23 AM

in Economy

The first revision of GDP growth for the second quarter rose at a (seasonally adjusted) 3.3% annual rate. This was below expectations of 3.4%, and the revised Q1 GDP data of 3.8%. (recall that GDP data for Q1 was revised due to the specious theory that new home prices had dropped for that quarter).

Meanwhile, the Chicago PMI utterly collapsed below the magic 50 level to 49.2 in August, down from 63.5 in July. This was well short of consensus expectations of 61.0, and was the weakest level since April 2003.

Chicago PMI components showing the largest declines were:

new orders (46.5 from 69.6 in July)
production (56.2 from 70.5 in July).
Order backlogs (45.7 from 56.1 in July).

Three of seven PMI components are now below the 50.0 boom/bust line: order backlogs (45.7), new orders (46.5) and supplier deliveries (48.7).

Katrina/New Orleans Disaster Relief Aid

Wednesday, August 31, 2005 | 07:43 AM

in Weblogs

It appears the damage to New Orleans region is far worse than originally expected. As we did with the Tsunami, here are numerous resources that you may find helpful in keeping informed about the damage, and making donations to help survivors:

1) Relief Organizations

Americares
Known as the most efficient relief charity in the U.S. (and Non-denominational also)
88 Hamilton Avenue, Stamford, CT USA 06902
Toll Free: 1-800-486-HELP (4357) Phone: 01-203-658-9500

American Red Cross
1-800-HELP-NOW
800-435-7669
http://www.redcross.org/
(You can also donate via Amazon.com or the iTunes Music Store)

Salvation Army
1-800-SAL-ARMY
800-725-2769
http://www.salvationarmyusa.org/

see below for complete list of charities

2) News Coverage

Yahoo! FULL COVERAGE: Hurricanes & Tropical Storms
http://news.yahoo.com/fc/world/hurricanes_and_tropical_storms

Google Groups katrina relief aid
http://groups.google.com/groups?hl=en&q=katrina+relief+aid&qt_s=Search

The KatrinaHelp Wiki relief page
http://katrinahelp.info/wiki/index.php/Main_Page

3) Weather Related Resources

National Hurricane Center
http://www.nhc.noaa.gov/

Actual Water Level Measurements, at New Orleans, LA
USGS 073802338 IWW @ I-510 Bridge (Paris Rd) http://waterdata.usgs.gov/nwis/uv/?site_no=073802338

See this Google Map for location:
http://maps.google.com/maps?q=Paris+Road,+New+Orleans,+LA+70129
&spn=0.217644,0.317677&hl=en

National Weather Service
http://iwin.nws.noaa.gov/iwin/ graphicsversion/bigmain.html

Hydrologic Information Center (river flooding)
http://www.nws.noaa.gov/oh/hic /index.html

4) Government Resources

Federal Emergency Management Agency
1-800-621-FEMA
http://www.fema.gov/

City of New Orleans
http://www.cityofno.com/portal.aspx

Louisiana Governor's Office
http://www.gov.state.la.us/

Mississippi Emergency Management
http://www.msema.org/

Louisiana Homeland Security
http://www.ohsep.louisiana.gov/

5) State Government Resources

Louisiana Emergency Road Closures
http://www.ohsep.louisiana.gov/evacinfo/rdclosureindex.htm

Mississippi Emergency Road Closures
http://www.gomdot.com/

Alabama Emergency Road Closures
http://www.dot.state.al.us/closures/

Florida Emergency Road Closures
http://www.floridadisaster.org/

New Orleans Convention and Visitors Bureau Update
http://www.neworleanscvb.com/static/index.cfm/action/group/
contentID/256/sectionID/1/subsectionID/0/

Continue reading "Katrina/New Orleans Disaster Relief Aid"

Dow Jones Chart (1900-2004)

Wednesday, August 31, 2005 | 05:22 AM

in Investing | Markets

There is a terrific Dow Jones Chart (1900-2004) for sale at the Minyanville.com gallery.

Its along the same concept of a chart we did back in 2003 -- only this one includes P/E ratios, which is a very instructive addition to the graph:

click for an enormous chart:

"Officially licensed and designed by Minyanville's own Kevin Tuttle, follow the critters through the historical ups and downs and sideways trails of the Dow Jones Industrial Average from its humble beginnings of the last century up to the present day 'Ville."

I may have to get me one for my office wall!

Source:
Minyanville Dow Jones Chart (1900-2004)
http://www.minyanville.com/shops/gallery.htm

Ben Stein: Wrong About Earnings

Tuesday, August 30, 2005 | 05:21 PM

in Earnings | Economy | Financial Press | Psychology/Sentiment

The (unfortunately under-rated) Dylan Ratigan is hosting Kudlow & Company tonite, and one of his guests was Ben Stein.

I've been on several shows with Stein, and he's a nice guy, but . . .

One of the other guests suggested that earnings were decellerating, which Stein vociferously disagreed with. That is, to be blunt, ignorant.

Since peaking in Q3 2003, year over year S&P500 earnings gains have been decelerating. From nearly 30% Y-over-Y, straight down for the next 6 quarters to just under 10%. The past two quarters have seen minor improvements -- thanks to energy -- to push Y-over-Y earnings back over 10%. But back out Energy and the decelerating trend remains intact.

Further, there is an argument to be made that earnings are meaningless -- or at least not the most significant impact on stock price. Why? Most of the gains we have seen in prior Bull Markets are due to P/E expansion, and not earnings gains. Thats purely a function of psychology (more on this tomorrow).

UPDATE: August 30, 2005 5:26pm
Actually, my title is excessive -- Stein did say something that makes a whole lot of sense: Investors should buy a diversified basket of Indices or ETFs that cover stocks, bonds and commodities. Thats good, simple, low cost advice for most people.

BTW, here is my favorite of Ben Stein's work:

Economics Teacher: In 1930, the Republican-controlled House of Representatives, in an effort to alleviate the effects of the... Anyone? Anyone?... the Great Depression, passed the... Anyone? Anyone? The tariff bill? The Hawley-Smoot Tariff Act? Which, anyone? Raised or lowered?... raised tariffs, in an effort to collect more revenue for the federal government. Did it work? Anyone? Anyone know the effects? It did not work, and the United States sank deeper into the Great Depression. Today we have a similar debate over this. Anyone know what this is? Class? Anyone? Anyone? Anyone seen this before? The Laffer Curve. Anyone know what this says? It says that at this point on the revenue curve, you will get exactly the same amount of revenue as at this point. This is very controversial. Does anyone know what Vice President Bush called this in 1980? Anyone? Something-d-o-o economics. "Voodoo" economics.

Music Industry Attempts Price Increases (or Hari Kari, Part II)

Tuesday, August 30, 2005 | 11:30 AM

in Intellectual Property | Music | Web/Tech

for the About a year and a half ago, we noted the "Music Industry is Intent on Commiting Hari-Kari." Today, we revisit that subject.

In an apparent attempt to either a) prove they are as dumb as lawn furniture or 2) hasten their own imminent demise, the music industry is trying to raise prices for legal downloads.

A front page NYTimes article discusses how the music industry is (once again) trying to force prices up. This demonstrates a shocking lack of economic comprehension, as well as a distinct failure to understand their own customers.

Its a basic rule of Economics: Goods that have Elastic demand (i..e, non essential) are highly price sensitive. Further, any item easily available for free (albeit illegally) will have an even bigger response to price increases.

This is before we even get to the proposition that 99 cents songs at iTunes are not a particularly good value proposition either (you can buy the disc and rip it and have both MP3s and CD for about the same price).

Prediction: if the labels manage to crank up ITMS prices, expect those pricey legal downloads to plummet in volume. That's just basic economics -- if a free alternative exists, and consumers already think your product is overpriced, than you are in for a heap of trouble if you try to raise your selling price point.

Question: Where the hell are the artists and their representation in all this? Hasn't anyone in the industry besides Mick Jagger (London School of Economics) eceived any sort of business training?

As we have shown time and again, music buyers are extremely price sensitive, that CDs do not represent a good value for consumers, that consumers are rapidly adapting other forms of entertainment, and that DVDs provide more bang for the buck.

Further, price decreases spur music sales, as does strong economic environments.

Here's the NYT Ubiq-cerpt:™

"Two and a half years after the music business lined up behind the chief executive of Apple, Steven P. Jobs, and hailed him and his iTunes music service for breathing life into music sales, the industry's allegiance to Mr. Jobs has eroded sharply.

Mr. Jobs is now girding for a showdown with at least two of the four major record companies over the price of songs on the iTunes service.

If he loses, the one-price model that iTunes has adopted - 99 cents to download any song - could be replaced with a more complex structure that prices songs by popularity. A hot new single, for example, could sell for $1.49, while a golden oldie could go for substantially less than 99 cents.

Music executives who support Mr. Jobs say the higher prices could backfire, sending iTunes' customers in search of songs on free, unauthorized file-swapping networks.

Signs of conflict over pricing issues are increasingly apparent. This month, Apple started its iTunes service in Japan without songs from the two major companies - Sony BMG Music Entertainment and Warner Music Group - leaving artists like Avril Lavigne, Beyoncé and Rob Thomas out of the catalog because the companies refused to license their music to iTunes, executives involved in the talks said . . .

Some analysts suggest that the willingness of the music companies to gamble on a new pricing structure reflects a short memory.

"As I recall, three years ago these guys were wandering around with their hands out looking for someone to save them," said Mike McGuire, an analyst at Gartner G2. "It'd be rather silly to try to destabilize him because iTunes is one of the few bright spots in the industry right now. He's got something that's working."

Observation: From Stereophile, comes what may be the most astute statement on the subject -- "The real issue may be that iTunes has become the 500 lb gorilla on the digital music block, controlling 75% of all legal downloads and 80% of the portable digital player market. That level of market dominance may be the real sticking point for the recording industry, which has long been used to actually driving the market rather than being in the passenger seat. In other words, it may be an old-fashioned turf war."

Great . . . just what the recording industry needs now, a good old fashioned cockfight.

Alex, I'll take Clueless Industry Executives for $100, please.

Sources:
Apple, Digital Music's Angel, Earns Record Industry's Scorn
Jeff Leeds
NYTimes, August 27, 2005
http://www.nytimes.com/2005/08/27/technology/27apple.html

Is the iTunes price right?
Recording Industry Update
Wes Phillips
Stereophile, August 29, 2005
http://www.stereophile.com/news/082905recording/

New Music Business Model: Ancillary Revenues

Tuesday, August 30, 2005 | 08:30 AM

in Finance | Intellectual Property | Music

Yesterday's WSJ has an interesting discussion about a new music industry business model, using the The Pussycat Dolls as the prime example. The key takeaway is the potential revenue from ancillary lines of business.

Here's your ubiq-cerpt:™

"The Pussycat Dolls aren't due to release their first album until next month, but they've already got the No. 1 song on Billboard magazine's Pop 100 chart -- plus their own makeup line and a Las Vegas nightclub. A clothing line, a possible reality television show and more nightclubs are in the works.

The new, all-female pop group's far-flung endeavors are a departure from standard music-industry practice. The Pussycat Dolls' record company, A&M-Interscope, is an equal financial partner in any money-making enterprise the group participates in, from touring to TV.

Interscope last year created a company it jointly owns with the Dolls, which at the time wasn't a pop group at all, but rather a long-running Los Angeles dance troupe that performed a burlesque routine at nightclubs and events. Now the Dolls consist of six members who record and tour and another eight-member troupe that performs in Las Vegas.

Normally, music companies make money only by selling their acts' recordings, whether on compact disc or as digital downloads. Music labels typically don't see any direct benefit from concerts, movie appearances or ads in which a performer appears. Past manufactured pop groups, such as the Backstreet Boys, were usually created not by their record labels but by their managers, who primarily reaped the profits from promotional activities.

As recorded-music sales have plummeted in recent years -- due to excessive pricing, weak offerings, lack of consumer interest, and competition from other entertainment -- there has been a search for alternative sources of revenue.

And, its beyond the usual touring and t-shirts. Call it more than Merch:

"One of the most relevant words in the music business today is 'ancillary,' " says Jeff Haddad, the Pussycat Dolls' manager. "It's no longer strictly music."

Source:
Pussycat Dolls, Music Label Share All Profits in Novel Deal
ETHAN SMITH
THE WALL STREET JOURNAL, August 26, 2005; Page B1
http://online.wsj.com/article/0,,SB112501337985823631,00.html

Mom versus RIAA (Elektra v. Santangelo)

Tuesday, August 30, 2005 | 07:30 AM

in Intellectual Property | Music

Patricia Santangelo, the single mother of 5 without any P2P on her PC, has decided to take on the RIAA and the rest of the music industry.

Even better, her lawyers set up a blog: Recording Industry vs The People (pretty cool).

>
UPDATE: August 30, 2005 8:06 am

Godwin's Law points to a transcript of a pre-trial court proceeding. Its apparent the judge understands the game the RIAA is playing -- and she's having none of it. (Good for ~~him~~ her)

Apple to introduce new music-related (Video?) product

Monday, August 29, 2005 | 08:00 PM

in Music

AppleInsider: Apple Computer plans to host a special event on September 7th to introduce new music-related products.

On Monday the iPod maker began distributing e-mail invites to the event, which will take place at 10:00am on Sept. 7th at San Francisco's Moscone Center.

"1000 songs in your pocket changed everything. Here we go again," the invite reads, in part. The slogan "1000 songs in your pocket" was originally used by the Apple when it introduced the the very first 5GB iPod digital music player in 2001.

Continue reading "Apple to introduce new music-related (Video?) product"

Time to Bet Against the U.S. Consumer?

Monday, August 29, 2005 | 02:18 PM

For at least the past decade, anyone who has bet against the resiliency and unending spending capacity of the U.S. consumer has decidedly lost the wager. Even through the recession of 2000-01, they hardly slowed their profligate ways. 9/11 managed to create a pause in spending - at least for a short time - but it was more than made up for in the ensuing quarters.

Indeed, the careers of Economists who have declared the U.S. consumer to be tapped out litter the countryside like corpses after a war.

There are early signs, however, that taking the other side of this bet is no longer a sure thing. We see a variety of factors suggesting that the consumer, while not yet exhausted, is slowly but surely moving in that direction. While it is premature to declare the American consumer “shopped out,” I suspect it is now quite late in the cycle. Barring a significant improvement in economic fortunes, including robust job creation and increased personal income levels, that exhaustion now looks all but inevitable.

First up: Energy. Despite the same economists telling us how much smaller energy is as a percentage of GDP than in the 1970s, high-energy prices still hurt spending. How bad are the gas pains? Well, if the increase in drivers using credit cards to manage gas costs is any indication, pretty bad.

Weak back to school sales are another sign of Personal Spending slowing. The National Retail Federation noted the “dip,” blaming (of course) energy prices. This is consistent with an Opinion Research Corp. (Aug. 18-21) survey cited by ICSC.org. It showed that 58 percent of households are reducing their discretionary spending on clothing, shoes, jewelry and consumer electronics, as well as restaurants, spa and beauty services, and other nonessential purchases.

The recent drop in Consumer Confidence also is energy related. The danger, according to Oxford Analytica, is that “persistently low confidence undermines consumer spending.”

Further, its not just the Wal-Mart shopper who feels the pinch; Even high end consumer electronic sales are expected to dip next year.

My best guess -- and its only a guess -- is that the combination of energy prices combined with the end of the easy refi money will be a serious one two punch. Add to that big expenditures for discounted GM vehicles, and you have the makings of a wobbly consumer.

The key tell: Look to see how this holiday shopping season is. If its more difficult for retailers than expected, we will have unequivocal confirmation that the consumer has finally exhausted themselves.

Chart of the Week: Savings as a % of Disposable Personal Income

Monday, August 29, 2005 | 02:09 PM

in Economy | Retail

The U.S. savings rate has plummeted since 1980, from over 10% to under 1%.

Savings as a % of Disposable Personal Income
click for larger chart

Source: Detroit News

AP reports that “every American man, woman and child” owes $145,000. That is the cost of the long-term promises the U.S. government has made to creditors, retirees, veterans and the poor. That doesn’t include “credit card bills, mortgages -- all the debt we've racked up personally.”

Random Items:

Supply factors in the 2005 oil price surge

How big is your bubble?

’Whats Real About the Business Cycle?

The struggle over science (see also Adam, Eve and T. Rex)

Emerging Technology: Digital Hook ups

Single Mother Of Five Takes On RIAA In Downloading

Quote of the Day:

"All progress is based upon a universal innate desire on the part of every organism to live beyond its income."
-Samuel Butler

Ten Useful Economic Lessons

Sunday, August 28, 2005 | 09:22 AM

in Economy

Dr John Llewellyn, chief global economist at Lehman Brothers, writes about lessons from 35 years as a professional economist:

1) Economic events ('shocks') - seldom produce just one consequence. Usually, the effects ripple on for years.
2) Good economic policies do not guarantee good economic performance; bad economic policies inevitably result in bad performance.
3) It is structural, not demand-side, policies that most influence economic performance over the long term.
4) People respond powerfully to economic incentives.
5) Economic and social policies have to be considered as a whole.
6) Competition is one of the most powerful of forces that motivate the perpetual quest for more efficient ways of doing things.
7) History seldom, if ever, repeats precisely. Economies have the habit of producing new mixtures of circumstances that require new approaches.
8) Complicated economic policies whose rationale is hard to explain usually fail.
9) Some of the biggest, and most important, economic issues remain unresolved.
10) Just because professional economists don't always have a confident answer, it does not follow that all proffered solutions have equal validity. Demonstrate why the current fad is wrong and will fail is a valid contribution.

via New Economist

Sources:
Ten useful lessons for a sexagenarian
John Llewellyn
The Observer, Sunday August 7, 2005
http://politics.guardian.co.uk/economics/comment/0,11268,1544056,00.html

Oiloholics

Sunday, August 28, 2005 | 07:17 AM

in Commodities | Financial Press

The Economist has a telling cover this week:

Here's what The Economist had to say:

"The best long-term solution—for America as well as the world economy—would be higher petrol taxes in the United States. Alas, there is little prospect of that happening. America, unlike Europe, has preferred fuel-economy regulations to petrol taxes. But even with those it has failed abysmally. These regulations have been so abused that the oil efficiency of its vehicles has fallen to a 20-year low. This week, the Bush administration announced proposals for changing the fuel-economy rules governing trucks and sport-utility vehicles, but failed to close loopholes that allow these gas guzzlers to use more petrol than normal cars, a shameful concession to carmakers.

America and China, in their different ways, are drunk on oil consumption. The longer they put off taking the steps needed to curb their habit, the worse the headache will be. George Bush once learned that lesson about alcohol. It is time for him to wean America off oiloholism too."

Quelle surprise . . .

Source:
The oiloholics
The Economist, Aug 25th 2005
http://www.economist.com/printedition/displaystory.cfm?Story_ID=4316744

Earnings or Multiple Expansion?

Saturday, August 27, 2005 | 10:01 AM

in Earnings | Investing | Markets

There's a fascinating analysis (in Barron's), looking at S&P500 earnings in a very different way than our prior discussions of using year-over-year S&P500 earnings changes as a buy signal.

Keith Wibel, an investment adviser at Foothills Asset Management, observes that:

"Over 10-year periods, the major determinant of stock-price returns isn't growth in corporate profits, but rather changes in price-earnings multiples. The bull market of the 1980s represented a period when multiples in the stock market doubled- then they doubled again in the 1990s. Though earnings of the underlying businesses climbed about 6% per year, stock prices appreciated nearly 14% annually."

I've seen other analyses that show well over half, and as much as 80% of the gains of the 1982-2000 Bull market may be attributable to P/E multiple expansion.

Wibel's piece in Barron's lends some more weight to this theory that "rising price-earnings multiples are the key driver of stock-price gains, and further, the decline in P/Es since the 1990s bodes ill for equity investors."

Here's the Historical Data:

	S&P 500
	Annual Change		P/E Ratio
Decade	EPS	Index	Beginning	Ending
1950s	3.9%	13.6%	7.2	17.7
1960s	5.5	5.1	17.7	15.9
1970s	9.9	1.6	15.9	7.3
1980s	4.4	12.6	7.3	15.4
1990s	7.7	15.3	15.4	30.5
2000s*	4.1	-3.8	30.5	20.7
Average	6.1%	8.1%	7.2	16.4
Projected Figures For S&P 500 In 2014
	Average	High	Low
EPS	$105.85	$131.16	$81.02
P/E	16.4	23.4	9.4
Level	1735.94	3069.14	761.59
10-Year Growth Rate**	3.5%	9.5%	-4.7%
Dividend Yield	1.7%	1.7%	1.7%
Annual Gain***	5.2%	11.2%	-3.0%

*Through Dec. 31, 2004
**Compound rate
***From S&P 500's level of 1234.18 on July 31, 2005

Even after the multiple compression during the 2000's from 30 to 20, we are still at relatively high P/Es, at least when compared to prior early Bull market stages. That's yet another factor which argues against this being anything other than a cyclical Bull market within a secular Bear. Or in plain English, this is not the early stages of a decade plus of market growth.

Here's the Ubiq-cerpt:™

"Conventional wisdom states that share prices follow earnings. Over very long periods, this statement is correct. However, the time necessary to validate this assertion is much longer than is relevant to most investors.
In order to test the conventional wisdom, we examined the growth in earnings in each decade, beginning with the 1950s. We chose 10-year periods because they're long enough to allow the cyclical peaks and valleys to offset each other, yet short enough to be a reasonable planning horizon for most investors. The results of the study are shown in one of the accompanying tables.
There is very little correlation between earnings growth and share-price appreciation. During the 1950s, earnings grew less than 4% a year, yet that was one of the best decades for stock-price performance. The 1970s saw the fastest earnings growth in the past 55 years, but that was the worst decade for investors in the stock market. (Fortunately, the book is still open on the 2000s.)

The average rate of earnings growth clusters around 6% a year, reflecting growth in the economy which tends to average 3% to 4% per year. Add 2% to 3% annually for inflation and one is back to approximately 5% to 7% growth in nominal gross domestic product and the growth in profits for the companies in the S&P 500 Index.">

Note: I am posting this from sunny Palo Alto, California, about 8 blocks from Steve Jobs house -- Pretty cool!

UPDATE August 30, 2005 10:25 pm

Ed Easterling of Crestmont Research has a book out that is related to the subject of stock market returns and P/Es called Unexpected Returns: Understanding Stock Market Cycles. The book also has a website;

If anyone has read this, be sure to share your views -- but it looks interesting . . .

Sources:
Preparing for Low Returns
KEITH WIBEL
Barron's, MONDAY, AUGUST 29, 2005
http://online.barrons.com/article/SB112482778471020893.html

Table Sources:
Author KEITH WIBEL's projections and Standard & Poor's data

Trouble Ahead
KEITH WIBEL
Barron's, MONDAY, AUGUST 29, 2005
http://online.barrons.com/article/SB112509312029524518.html

Apprenticed Investor: The Stock Pre-Nup

Friday, August 26, 2005 | 10:00 AM

in Investing | Psychology/Sentiment | Technical Analysis | Trading

The latest "Apprenticed Investor" column is up, and its called "The Stock Pre-Nup."

Let’s assume you found a stock that meets all of your purchase criteria. Its a company that you really like, one that you plan on purchasing. Before you pull the trigger, however, there are some issues we need to discuss: Specifically, your relationship with this stock -- and why you need an agreement before you buy it:

Why A Pre-Nup?

Whenever I discuss this concept with investors, they invariably ask “Why A Pre-Nup?” There are several reasons why you should create a document to govern your affiliation with this stock. Let’s briefly review them:

The first is objectivity: Once you own something, you lose that ability to take a cold-hearted look at something. You’ve become invested in the company in more than one way. Lots of time and energy has gone into selecting the stock. You have developed a reservoir of knowledge about the products, its market, and the firm’s management.

You become emotionally invested in the stock. That means that you may have a hard time putting the old girl down when the time comes. A stock isn’t Old Yeller, but you would be surprised at how hard it is to make a clean break.

Emotions are the second reason for the prenup. They are actually the flip side of objectivity, and are what rush in to fill the void when objectivity is lacking. (We discussed the danger of emotions previously)

The ideal time to work out an exit strategy is while you are unemotional, objective, and not too involved. By having a clearly defined set of parameters regarding how long you are going to hold the stock, and under what circumstances you will “file for divorce,” you avoid making emotional decisions to either sell too soon, or not at all.

The next reason is discipline. Its one of the keys to successful investing. All traders know that without discipline, even the best investment plan is worthless. In the classic investing book “Market Wizards” by Jack Schwager, the theme of discipline comes up repeatedly in interviews with traders of all sorts: commodities, stocks, currency, futures and fixed income.

Unfortunately, far too few investors actually have any. Indeed, whenever we hear of some hedge fund which “blew up,” you often hear a manager lament - “if only we had stuck to our discipline.” The Pre-nup is a way to insure you avoid that fate.

Finally, you want a record (paper or computer) of what you were thinking prior to entering this investment. We are all too capable of rationalizing our actions after the fact. I’ve heard investors come up with every excuse in the world to hold a dying position, rather than admit they were wrong and move on from that trade. The pre-nup helps to eliminate that counter-productive behavior.

Prior Apprenticed Investor columns can be found here.

Light Blogging Ahead

Thursday, August 25, 2005 | 10:00 AM

in Weblogs

Light blogging ahead:

A project I am working on has me travelling to L.A., San Francisco and Palo Alto over the next few days.

Very interesting stuff -- I'll post on it when I can . . .

Even More LEI silliness

Thursday, August 25, 2005 | 08:27 AM

in Economy

An emailer (who insists on anonymity) asks: "Aren't you done Bitch-slapping the Conference Board yet?"

Umm, no.

We've addressed this twice recently. Today, I'm going to hand the micropohone over to Bob Bronson, who makes an extremely compelling argument that we haven't highlighted the utter dishonest foolishness of what the Conference Board has wrought enough:

Without the revision eliminating the bearish impact of a narrowing yield curve the Conference Board's composite of leading economic indicators would have been down in July, rather than up a meager 0.1%.

But even with this revision, the other five leading economic indicators, which are coincident with the stock market, are below their highs oflast year and/or this year. Most significantly, they are rolling over again,as illustrated in the chart below.

Here's the chart:

click for enormously large chart

graphic courtesy of Bronson Capital Markets Research

Sources:
The Conference Board Removed the Bearish Impact of the Flattening Yield Curve From Their Leading Economic Indicators, But...
Bob Bronson
Bronson Capital Markets Research, August 2, 2005
http://www.financialsense.com/editorials/bronson/2005/0802.html

U.S. LEADING ECONOMIC INDICATORS AND RELATED COMPOSITE INDEXES FOR JUNE 2005
The Conference Board U.S. Business Cycle Indicators, 10:00 A.M. ET, THURSDAY, JULY 21, 2005
Conference Board Changes to LEI (PDF)
http://www.conference-board.org/economics/bci/RevisionsLEI_2005.pdf

Global Investors Gobble Up Mortgage-Backed Securities

Thursday, August 25, 2005 | 07:45 AM

in Financial Press | Real Estate

Front page story in yesterday's WSJ, titled " Housing-Bubble Talk Doesn't Scare Off Foreigners."

Funny thing is, foreigners are notorious for their bad timing in buying both equities and real estate in the U.S.

Examples: Rockefeller Center purchased by the Japanese at the top of the 1980s Real Estate run; Foreigners dumped U.S. equities in the summer of 2002, after piling into them in 1999.

Here's a chart, along with our Ubiq-cerpt:™

Wsj_08232005224858 WSJ: "U.S. lenders will make about $2.8 trillion in home-mortgage loans this year, according to the Mortgage Bankers Association. The MBA estimates that about 80% of these loans will end up in mortgage-backed securities. Mortgage-backed securities outstanding at the end of the first quarter totaled $4.61 trillion, up 61% since the end of 2000. In the same period, total Treasury securities outstanding grew 35% to $4.54 trillion.

Investors' strong demand for mortgage debt, besides allowing lenders to offer many borrowers better terms, has also made it easier to offer mortgages to borrowers who might not easily qualify for a loan. The growth of the mortgage markets spreads the risks around. But some mortgage-industry analysts say lenders have become less stringent in their loan terms because they can sell almost any type of loan to those who package mortgage securities for investors.

"Loose lending standards are probably the single biggest thing fueling the speculative fever we have today" in housing, says Kenneth Rosen, an economist who is chairman of the Fisher Center for Real Estate at the University of California at Berkeley.

In a world of low interest rates, the market for mortgage securities is simply too big and profitable for many investors to ignore. Investors can earn about 5.5% on mortgage securities whose payments are guaranteed by Fannie Mae or Freddie Mac, government-sponsored companies. Those who can stomach greater risk can buy subprime mortgage securities, which come with no guarantee but can yield as much as 15%, according to Bear Stearns. By contrast, 10-year U.S. Treasurys yield about 4.2%; the equivalent government securities in Germany yield about 3.2% and in Japan 1.5%.

The buyers of mortgage-backed securities include U.S. pension funds, hedge funds and insurance companies. But overseas investors are the fastest-growing source of demand. The trade publication Inside MBS & ABS estimates that foreigners held $280 billion of U.S. mortgage securities at the end of 2004, or 6% of the total outstanding. The foreigners' holdings rose 26% last year and have continued to bound ahead so far this year, Inside MBS & ABS says.

"There's this insatiable appetite for mortgage-backed securities world-wide," says Andrew Sciandra, a senior vice president at IndyMac Bancorp, a California thrift, who heads a team that creates those securities. In the past year, Mr. Sciandra has met with investors from places like Germany, France and Abu Dhabi. Asian investors now account for roughly 10% to 20% of mortgage securities sold by IndyMac"

Pretty intriguing stuff . . . I wonder if history will be repeating itself.

Source:
Housing-Bubble Talk Doesn't Scare Off Foreigners
Global Investors Gobble Up Mortgage-Backed Securities,
Keeping Prices Strong
RUTH SIMON, JAMES R. HAGERTY and JAMES T. AREDDY
THE WALL STREET JOURNAL, August 24, 2005; Page A1
http://online.wsj.com/article/0,,SB112484869024321472,00.html

Pinched at the Pump ?

Wednesday, August 24, 2005 | 11:15 AM

in Commodities

For those of you who still doubt that consumers are being pinched at the pump -- assuming yesterday's Existing Home Sales and today's Durable Goods numbers didnt convince you -- consider the following, via Joanie McCullough:

"We are now cruising along with $2.61 per gallon, regular unleaded, as a national average.

Of course, the high cost of energy hasn’t laid a glove on any of us, right? But I thought you might like to take a gander at a few snippets talking about how some are coping at the moment:

** A small florist chain in Detroit can’t afford hire any more drivers for van deliveries, so they have hired runners to get the job done. (Can you imagine luggin’ a 6-foot funeral tribute across town?)

** A few school districts in Virginia, reeling from the costs of diesel (public schools are exempt from state and federal tax on fuel, mind you) to fire up the school buses and facing the winter heating season, are about the business of adjusting the bus routes. Bottomline: The kids will have to walk further distances. I wonder how the BLS will handle this development, eh? Probably a seasonal adjustment to footwear prices. Down, of course.

But it gets worse: According to South Carolina’s Department of Education, every one penny increase in the price of diesel, jacks their overall transportation expense by $120k.

** The owner of a Chicago dog-walking service says 5 of 27 of his “walkers” are now using bicycles to commute instead of their cars. (Walkin’ Marmaduke all over the county in this heat and then hop on the old Schwinn and pedal home? SOS.)

** A Phoenix-based pizza chain (Streets of NY), recently raised the delivery charge from $2.00 to $2.25. And is in the process of raising all menu prices. Cited: All of its suppliers are adding fuel surcharges on all deliveries to them. (Hold the pepperoni.)

** A Flagstaff-based plumbing business has added a $10 surcharge for “house calls” that exceed a 10 mile trip. The local AC repair has made that a $5 buck surcharge on all “house calls”. (Shower less and keep the windows open!)

** Moving house? Egad. I can’t recap in this space all the instances in all geographies of anecdotal stories of either outright surcharges or significant increases in the hourly rates charged. (Read: Stay put until further notice.)

A couple along more serious lines:

** Mayday: New-boat sales statistics from the Northwest Marine Trade Association indicate that sailboat sales were stronger than those of motor-powered vessels during the second quarter of ’05, as fuel prices have been climbing upward and the higher prices have been given much media attention. Specifically, sail craft sales rose 4.3% y/y while motor yachts dropped by 8.1%. And look at this: Sales of new pleasure craft of all types were up just 1.1 percent in the second quarter of 2005, a substantially slower pace than the year before when overall growth hit 15.7 percent for the year.

** Seeing the boating info, you knew this was comin’: Q2 (usually the strongest quarter RV sales hit the skids. The big 3, Fleetwood, Winnebago and Monaco all cited rising oil prices in some way shape or form. While this is not a commentary on value in this sector as far as the market goes, currently, there are 141 domestic manufacturers in the RV biz. Whew. 141.

So there you have it, a few tidbits of info regarding the higher energy costs which, of course, are not being pushed thru to the consumer. Forgot one: Independent toy shops are jacking prices of plastic toys (petroleum-based) by up to 20%, whereas at the moment, wooden toys are remaining stable. How about a plywood Barbie for Christmas? I think you get the drift.

Next case.