The Big Picture | June 2006

« May 2006 | Main | July 2006 »

Getting Back In

Friday, June 30, 2006 | 03:30 PM

How funny is this:

Source:
The New Yorker, 2001

Marines' Cookbook

Friday, June 30, 2006 | 11:30 AM

in War/Defense

via Baghdad ER:

Kudos to Weber for sponsoring this cookbook: Weber's Command of the Grill: A Cookbook Raises Money for Charities That Directly Benefit Wounded or Killed Marines and Their Families

The story is here: Command of the Grill (PDF)

Story via Yahoo

Martin Pring: Return of the Bear

Friday, June 30, 2006 | 10:00 AM

in Technical Analysis

Martin Pring is a well known technician who recently started writing for the Street.com.

I particularly found this chart of his from a recent RM column instructive:

click for larger chart

Pring describes this as follows:

"Once in a generation or so, you can spot a chart that has extremely important long-term consequences. The first chart below is such an animal.

It shows U.S. stock prices deflated by commodity prices back to 1800. The stock part of the equation consists of the S&P Composite since 1926 spliced with several other indices back through the ages. The commodity series is the CRB Spot Raw Industrial since 1955, which has been spliced into other historical commodity series.

The momentum indicator in the lower panel is a 120-month rate of change. It is a little-known fact that there is a close relationship between momentum and sentiment. Thus, high readings in this indicator correspond to previous stock market bubbles. The theory is that when the oscillator peaks from a high level, it tells us that the stock market bubble has burst and that the psychological pendulum has begun to shift in the opposite direction. This then needs to be confirmed by a trend reversal in the equity series."

Pring has offered up a number of free resources on his site (Pring.com)

Check out:

Return of the Bear (pdf) and

Return of the Bear, a 30-minute video on technical signals and market history.

Part 1

Part 2

Part 3

I found it quite informative.

Source:
S&P 500 Teeters on Wedge
By Martin Pring
RealMoney.com, 6/19/2006 1:04 PM EDT
http://www.thestreet.com/p/_rms/rmoney/technicalanalysis/10292480.html

Haefling on Housing

Friday, June 30, 2006 | 06:34 AM

in Economy | Real Estate

Carl Haefling is a portfolio manager in Bainbridge Island. He is a deep value player in small and micro cap stocks, biotech and medical devices; he and often takes a very long term view. Carl is often a contrarian -- recently, he has been accumulating shares of Jet Blue (JBLU).

He also has a sharp eye for the Macro-environment, and I often find his take on events intriguing. Following the recent data releases on Housing, he recently observed:

I believe the stock market is predictive -- not reactive -- except for relatively short periods of time.

Housing stocks topped out in Dec and are now down up to 50% in numerous cases from those highs. It will take a couple of years at least for this scenario to complete itself. A significant decline in the housing market over the next 2 to 6 years is being predicted by housing stocks.

It takes time for the housing market to fully unravel, we are in the early stages of stage 1. Stage 1 is where the market begins to recognize that prices have reached levels that reduce affordability and thus the number of possible buyers. Sellers, who have been holding back selling for fear of not selling at the top, begin posting signs advertising their home, usually at prices that reflect the highest paid for a similar home, and suddenly the inventory of homes foresale explodes. This has already happened in many parts of the country. This stage may take one to three years to fully unfold.

Stage 2 is price cuts by those who are becoming convinced that the market has softened if they want to sell their home they better cut prices. Once those "reduced" signs start appearing, buyers start reducing offers, even on properties that have been already reduced. Prices will drop far lower then anyone thinks possible in stage 2.

Stage 3 is the exhaustive phase. Buyers are afraid to buy, investors have no liquidity, mortgage requirements demand a high down payment and supporting cash flow, and the press is filled with articles claiming real estate is a terrible investment. (which happens to be true in the previous 5 years).

There are serious other problems that will contribute to this cycle, including a decline in the buying power of the middle class, tilting demographics which will reduce the number of possible buyers beginning about 2010 for real estate and possible shifts in values of owning vs. renting. There remain other problems that are related to real estate but not thought of as being directly connected. A decline in the value of the dollar may force foreign owners of commercial and residential real estate to try and liquefy. Higher interest rates because of inflation or stagflation also impact real estate prices.

And one of the unseen values will be the desire to downsize as the cost of insurance (in some high risk hurricane states you cannot get homeowners insurance except through the state at 3 times previous cost) explodes, the cost to heat and air-condition accelerates, and the cost of maintenance become detriments to ownership.

A house may go from being something that we take pride in, to becoming a burden.

Interesting stuff --thanks Carl.

Is Overstock Behind Hedge Fund Testimony?

Thursday, June 29, 2006 | 11:30 AM

in Corporate Management | Financial Press

Remind me never to piss off Herb Greenberg:

"Herb Greenberg, in his blog on MarketWatch.com, raises an eyebrow about the testimony delivered at today's Senate hedge-fund hearing by Demetrios Anifantis, a former employee of Gradient Analytics. "How independent is Anifantis? Did he write and/or edit his own testimony? If not, who did? For a clue, look no further than a copy of the transcript he provided to the Senate Judiciary Committee," he wrote. (The testimony can be see here (45K Word file). "Scroll down the 'file' menu at the top of the Word document to 'properties.' Click on 'summary.' It says the author of the report is 'mgriffin.' Company: 'Overstock.' Who is 'mgriffin'? Hard to say, for sure, but one attorney representing Overstock is Mark Griffin, the former director of the Utah Securities division. Why is 'mgriffin' of 'Overstock' named as author of the report?"

Sources:
More questions about a key witness
Jun 28, 2006 - 12:13:50 AM Eastern
:: Written by herb
http://blogs.marketwatch.com/greenberg/2006/06/more_questions_.html

Blog Roll -- Morning Edition
David A. Gaffen
WSJ, June 28, 2006
http://online.wsj.com/article/SB115149721057592946.html

Apple Chart

Thursday, June 29, 2006 | 09:45 AM

in Technical Analysis

I am a big fan of Apple for many years -- like the company, the iPod, the Macintosh, and even some of Steve Jobs' schtick.

But looking objectively at the chart, this is a stock facing some problems: a series of lower lows, possibly pulling back towards the $45ish area.

To avoid this, the stock needs to get back over $60, and in a hurry:

Weekly, 2 years
click for larger chart

Any technician's care to weigh in?

UPDATE JUNE 30, 2006 8:43AM

This is why it is foolhardy to dismiss techncials as Voodoo. Someone clearly knew there was a problem with Apple, and they were sellers.

The WSJ reported that "Shares of Apple were down $1.27, or 2.15%, to $57.70 in pre-market trading. The home of the iPod revealed last night it had discovered "irregularities" in its stock-option grants between 1997 and 2001, including one to CEO to Steve Jobs. Apple is investigating further. . . "

Google Checkout

Thursday, June 29, 2006 | 06:45 AM

in Corporate Management | Finance | Investing | Retail | Web/Tech

The initial reports were wrong. The new service is not, as was previously stated, G-Buy or Google Wallet, but Google Checkout.

And the goal seems to be less of creating a direct competitor to PayPal than another way to generate targeted advertising search revenue, and improve the data and specificity of targeted search results. The San Jose Mercury News reports:

"If Google Checkout is successful, the company could reap big rewards. The transaction data for each person who makes a purchase, combined with their search history, could lead to advertising that takes into account their favorite stores and preferred brands. The more targeted the advertising, the more advertisers are willing to pay."

Since Google will waive the transaction fees for vendors who buy AdWords, the goal may simply be to create more search advertising. If Paypal gets dinged in the process, they are collateral damage.
>

>
Her's the cost structure: Sellers pay Google 2% of each transaction, plus a 20-cent fee. That's less than what they would pay MasterCard or Visa, who charge 1.95% plus 30 cents per transaction. PayPal charges a 2.9% plus a 30-cent fee (but Paypal's fees decrease when merchants sell over $3,000).

Google appears to be subsidizing transactions. The reason is ad sales: For every $1 in fees a company spends on search advertising, they will waive fees on $10 worth of purchases. That is about a 20% rebate on advertising spending.

As we noted previously, this is likely to inure to the benefit of consumers.

BusinessWeek reports

"this battle is bound to benefit consumers and merchants. By providing new and cheaper alternatives to credit cards for buying items online, these and other new online payment services could give buyers more confidence in a wider range of e-commerce sites. And coupled with e-commerce services from eBay, Google, Amazon.com, and others, they're likely to help smaller merchants who can't afford a credit-card merchant account to compete with bigger players."

There is a short video tour of Google Checkout at the demo sit (halfway down the page).

click for video

Sources:
Google Aims to Speed the Online Checkout Line
SAUL HANSELL
NYTimes, June 29, 2006
http://www.nytimes.com/2006/06/29/technology/29google.html

Google launches Checkout service to compete with PayPal
Elise Ackerman
Mercury News, Wed, Jun. 28, 2006
http://www.mercurynews.com/mld/mercurynews/business/14926295.htm

Google's eBay Challenge
Robert Hof
Businessweek, JUNE 28, 2006
http://www.businessweek.com/investor/content/jun2006/pi20060628_081708.htm

1/4 point, or . . . ?

Wednesday, June 28, 2006 | 10:00 PM

in Federal Reserve

I simply don't know how all this 50 basis point chatter got started and pinged around Wal Street like its a likely option.

Hell, why only 50 ? Why not 100, if the economy is so damn strong?

Let's open up a thread on this:

Does anyone think that much besides a 1/4 point is in the cards tomorrow? Major language change? And what might Mr. Market have to say about all this.

Discuss:

Global HNWI Grows

Wednesday, June 28, 2006 | 01:30 PM

in Economy | Finance

Earlier this week, I referenced the increasing concentration of wealth in the U.S., on both the individual and corporate level.

It turns out this phenomena is global in nature. From Metrics 2.0:

"The wealth of high-net-worth individuals (HNWIs), people with net financial assets of at least U.S. $1 million, excluding their primary residence and consumables, climbed to $33.3 trillion in 2005, an 8.5% increase over 2004, according to the 10th Anniversary Edition of the World Wealth Report, released by Merrill Lynch and Capgemini.

The Report found that the number of HNWIs grew by 6.5% over 2004, to 8.7 million, and that the number of Ultra-HNWIs — those who have financial assets of more than $30 million — grew by 10.2 percent, to 85,400 in 2005."

>
Sources of HNWI Wealth, 2005
click for larger chart

Interesting stuff . . .

Source:
Global High-Net-Worth Population Grows to 8.7 Million, Worth $33.3 Trillion
Metrics 2.0, June 20, 2006 11:03 AM
http://www.metrics2.com/blog/2006/06/20/global_highnetworth
_population_grows_to_87_million.html

Technical Analysis of STOCKS & COMMODITIES on The Big Picture

Wednesday, June 28, 2006 | 09:01 AM

in Financial Press | Weblogs

Technical Analysis of STOCKS & COMMODITIES magazine has an excessively nice review of The Big Picture in the July magazine, where your humble narrator gets favorably compared with James Cramer, and the blog itself gets kudos for its scope and breadth.

Here's an excerpt:

"Ritholtz's The Big Picture is an excellent contribution to what are known to some in the blogosphere as "expert blogs." While blogs have gained notoriety for both sociopolitical commentary and a certain professional-caliber narcissism (the two not necessarily mutually exclusive), the expert blog phenomenon is one that must be applauded by all of us who have found ourselves subtly (or not so subtly) getting a greater degree of our news and opinion from places other than the traditional news media. Like widely respected Middle East historian Juan Cole on Iraq, or University of California at Berkeley economist Brad deLong on economics, Barry Ritholtz has used the blog form as a way of making his knowledge of the world of finance and market behavior accessible to any interested party with a web connection.

Cramer, Cole and DeLong: Heady company to be compared to.

This paragraph very much resonated with me; I find it hard to recall how we invested and/or traded prior to the internet:

For those who have come of investing age during the information revolution of the past decade, it is hard to imagine how our trading predecessors managed without online brokers, real-time streaming quotes, fundamental corporate information within a mouse-click, and more technical analytical tools than keys on a grand piano. To that list, we can add the free insights available from men and women who for years have made the financial markets their home."

I am grateful and humbled by the review.

You can see the piece in its entirety here.

Source:
Websites for Traders
David Penn
Technical Analysis of STOCKS & COMMODITIES, July 2006
http://www.traders.com/Documentation/FEEDbk_docs/WebSites/Websites.html

PERMALINK (PDF)
http://www.traders.com/Reprints/PDF_reprints.html$RR_BIGPIC

Bloomberg Goes Black

Wednesday, June 28, 2006 | 08:30 AM

in Financial Press

I kinda like the new look of the Bloomberg.com site -- it stands out from the rest of the web clutter. Either that, or I am just not used to it, and it "pops."

I assume its a visual branding cue -- Bloomberg terminals are white/orange text on black background, and this very much picks up that look:

Bloomberg.com

Hedge Fund De-Regulation

Wednesday, June 28, 2006 | 06:58 AM

in Financial Press

Jesse Eisinger has a fascinating story in the WSJ this morn, which starts with this line: "Phil Goldstein, hedge-fund champion, is the unhedge-fund manager."

After the SEC decided to regulate hedge funds, the industry complained -- yet no one bothered to do anything about it. Despite the access to top legal talent, and the wealth needed to prosecute a case such as this, Goldstein was the only guy willing to challenge the SEC's jurisdiction in regulating hedgies.

No one else was willing to step up. So this single hedge fund manager decided to teach the SEC a lesson. He sued the agency, claiming the hedge fund regulation was "arbitrary."

And he won. Decisively. (The court said the rule was arbitrary, because it exempted funds with fewer than 15 clients).

Here's an excerpt:

"He stands out among hedgies not because he was raised in blue-collar Brooklyn; those bootstrap stories are fairly common in the industry. It may be that he was a New York City civil engineer for 25 years. Now 61 years old, he made the move from managing building projects to running money in 1992. These days, a city worker has less of a chance of managing others' wealth than Jeff Skilling has of ringing the opening bell of the New York Stock Exchange.

The clincher of his maverick status in the world of hedge-fund managers is that Mr. Goldstein will admit, on occasion, that there are things he doesn't do well.

"I was never a very good engineer. It wasn't until my mid-to-late forties that I decided what I wanted to do when I grew up," he explains. Even today, he says, "I'm not a valuation expert. I'm a good value investor, but not that good." He credits his partner with his small-time ($225 million) operation's best investing instincts. He calls his main investment technique -- buying closed-end funds trading at a discount to their asset value -- "investment for dummies."

But Mr. Goldstein is good at stirring up trouble. Although more than 1,200 hedge funds registered under the new rule, he detested it. So he decided to fight. No other hedge fund joined his suit. Few gave him much of a shot to prevail. The fight cost him and his partners $300,000 out of his own pocket -- not, he emphasizes, his investors' pockets."

I love a good human interest story, the lone gunner taking on a huge faceless bureaucracy -- and kicking its arse.

Goldstein was quoted after the decision "I don't want to sound gloating, but it was an incredible waste of time and resources, both for the hedge-fund industry and for the SEC."

I also agree with Jesse's conclusion:

"The SEC should have offered some carrot with its stick of registration. It still can. Let hedge funds advertise. Let them tout performance, as mutual funds do. Let them open themselves up to a wider variety of investors.

Then Congress should make them register."

Interesting stuff . . .

Source:
A David Toppled Hedge-Fund Rule, But Was Goliath Really So Bad?
LONG & SHORT
JESSE EISINGER
June 28, 2006; Page C1
http://online.wsj.com/article/SB115146105959792696.html

When Will the Rally Fail? (Managing the Trade, Part III)

Tuesday, June 27, 2006 | 11:30 PM

in RR&A

This note went out at 11:20pm to subscribers of RR&A. This is not investment advice, and has been posted in chronological order of when it was emailed as a courtesy to blog readers.

For more information, see the disclaimers at RR&A.

Our first follow up to the June 13 trading call advised raising your stop loss to break even; The next email alert advised moving your stops up to protect half your profits.

The reasons for this became clear in today's selloff. The action took us out of our QQQQ position. Assuming you followed the discipline, you were likely stopped out with a modest profit on the Qs. On the other hand, the Dow Diamonds (DIA) are still substantially above our buy points. (S&P is also above its halfway point -- but just barely).

This is rather telling. When the Nasdaq underperforms the Dow, it typically reflects that investors have been chastened and are starting to show some nervousness. When the crowd clings to biggest, blue chips -- the "safe" names -- it is out of fear. And, it can mean that more selling may be near at hand.

This raises a concern that this bounce off of the June 13 lows was just
that: a dead cat bounce. We are always on the watch for signs that an oversold rally may not last the 3 - 6 weeks that is typical. Today's action raises that possibility. We will continue to monitor the situation, and advise you how to proceed.

For now, we will be keeping our long DIA position open, but sticking closely to our stop loss discipline at 50% of the recent gains. As soon as any of our stop loss levels are violated, we sell the stock and close out that position. Missed opportunities can be made up much more easily than lost capital.

~~~~~~

Separately, look for a longer market commentary later this week.

~~~~~~

And in response to several requests, we have posted three "classic"
investing commentaries. These are not market calls, but are instead general "how to" investing advice:

"Contrary Indicators 2000 - 2003 Market" is a technical review of the signals that suggested the first phase of the Bear Market was ending; It makes for an interesting contrast with the present conditions;

"The Cult of the Bear" explains all the cyclical, technical and economic reasons we are concerned about a market selloff this year;

"The Zen of Trading" -- is a 10 point overview of our approach to investing;

These pieces are "weekend reading" and can be looked over at your leisure.
We hope you find them helpful and informative

eBay revisited

Tuesday, June 27, 2006 | 02:24 PM

in Corporate Management | Investing | Technical Analysis

Last month, I noted that Yahoo!, eBay, Amazon.com had all made 52 week lows, and explained why I don't like to buy stocks in that condition (fresh lows).

Today, eBay is, once again, making 52 week lows. The blame today goes to Google's GBuy, the forthcoming competitor to PayPal, eBay's online-payments market. Its hardly a secret, as there have been major stories out on this for months. I suspect some of the pending legislation vs. VOIP may also be hurting eBay, given their recent (expensive) purchase of Skype.

As someone who uses PayPal as a buyer on eBay, and as a seller of research, I cannot begin to tell you how thrilled I am with this. At the very least, competition in the space will be a very good thing for buyers and sellers alike, as it will reduce part of the transaction cost of buying goods and services online. Add to that the less than stellar history of PayPal's customer service, and you have a competitor very likely to take market share away.

Paypal has been a huge cash cow for eBay, responsible for 25% of revenue an even a bigger chunk of profits. That forward P/E of 28 could suddenly get a lot more expensive if their earnings drop.

And that's before any anti-trust complaint from Google, if and when eBay refuses to allow a competitive service for payments on its auction site.

4 Year Presidential Cycle

Tuesday, June 27, 2006 | 10:31 AM

in Data Analysis | Politics | Psychology/Sentiment | Technical Analysis

I have always wondered how the Presidential Cycle plays out in the 2nd term of a Presidency; Unfortunately, there are not enough post-war 2 termers around -- Eisenhower, Reagan, and Clinton -- to draw any firm conclusions as to how this year's cycle may unfold this year.

Regardless, this is an informative chart from Birinyi Associates:

>
Average S&P 500 Performance During Year Two of a Presidential Term: 1962 - 2006
click for larger chart

Source: Birinyi Associates, Inc.

>
We've discussed this phenomena many times in the past; Note the big failure year for the cycle was 1986, with the correction low postponed to 1987.

Birinyi Associates observes:

As the table [below] details, there is some truth to this theory as the second year has been the worst of the four-year cycle in over half of the 11 full cycles since 1962, and it is the only one with an average negative return. We also plotted the YTD performance of the S&P 500 this year vs. the average second year return since 1962. As the chart (above) shows, there is a good degree of similarity between the patterns of this year vs. prior years.

>

>

UPDATE June 28, 2006 5:58am

Some skepticism about the 4 year cycle leads me to show these additional charts and table. Note that the 2nd year low presents an unusually good buying opportunity:

Table: 1919 - 1998

>
This chart runs from 1950 to 1998; I find it rather persuasive:

I first posted the original larger version here.

The Increasing Pressure on the Middle Class

Tuesday, June 27, 2006 | 07:36 AM

in Data Analysis | Economy | Employment

In yesterday's RM column, I referenced a chart from the Sunday NYT (below).

>
click for larger graphic

Courtesy of the New York Times

>
The key takeaway from this is the ongoing increasing pressure on the middle class; Dan Gross called this the cram down decade.

Since the theme of the column was "Ignore Statistical Oddities at Your Peril," here is one to mull over: How much of an economic aberration is a large middle class?

For most of history, there has been landed gentry and working knaves. The middle was relatively narrow slice -- larger in numbers than the wealthy, but obviously less numerous than the poor.

During the Roman Empire, the merchant class fully developed, including soldiers, traders, and all manner of craftsmen. The Middle Ages saw the rise of Guilds, as Coopers, Smiths, Innkeepers all rose above the indentured servants and free field hands. Perhaps some of our more knowledgable readers with a better grasp of histpory than I can address this in comments.

Following WWII, the United States saw an explosion in the number of people moving into the Middle Class. Those numbers may now be slowly reversing.

The funny thing to me is how your perspective can get easily skewed by your surroundings. To be in the top 1% of earners in the U.S., you need an annual wages/income of $237,000. Here in NYC, where there is an enormous concentration of wealth, you are (barely) upper middle income at that salary level -- certianly not wealthy. And on Wall Street, half the people I personally know earn at least that much -- and complain about it.

>
How this wealth distribution plays out may have significant repercussions on a variety of sectors -- especially the balance between luxury and discount goods.

It is definitely worth keeping an eye on this in the near future . . .

Source:
Economic View: Income Inequality, and Its Cost
ANNA BERNASEK
NYTimes, June 25, 2006
http://www.nytimes.com/2006/06/25/business/yourmoney/25view.html

Media Appearance: Kudlow & Company (6/26/06)

Monday, June 26, 2006 | 04:15 PM

in Media

Since I am out of town later this week, I'm on Kudlow tonite.

The topics will be all the M&A activity, the big Warren Buffett / Bill gates charitable foundation "merger," and the housing market.

I'm scheduled to be on from 5:20 to 6:00 pm -- Pat Dorsey of Mornignstar, Michael Thompson of Thomson Financial, and Keith Wirtz of Fifth Third .

Be forewarned: good haircut, bad tie. >

New Real Money Column: Ignore Statistical Oddities at Your Peril

Monday, June 26, 2006 | 03:24 PM

in Data Analysis | Economy

I have a new column up at Real Money: Ignore Statistical Oddities at Your Peril

It is essentially a follow up to last week's discussion of the Underleveraged American Family by James Altucher. Its my attempt to dissect this issue of not enough family debt.

Here is an excerpt from the column:

"Any time an unusual event repeats, it behooves us to consider the similarities and differences. Because Altucher laid out how the two eras are different, I want to concentrate on a few disturbing parallels. We are not in an identical period to 1932-33, but the similarities should not be blithely dismissed.

To begin with, each period of a negative savings rate came on the heels of a major market crash. From 2000 to 2003, the Nasdaq lost 78% of its value. That is roughly equivalent to the loss the Dow Jones Industrial Average suffered following the 1929 crash over a similar period. To me, that is the most significant factor tying the two periods together.

Second, each period followed an era of consumptive excess. In the first instance, it was the "Roaring '20s," in the second, the "Dot-Com '90s." In both cases, the population continued its high-spending ways long after the flush times of the prior good times had ended.

I suspect the reason for this is psychological. We are creatures of habit, and when we became accustomed to a certain lifestyle, it is difficult to downshift. We grow used to our lattes, navigation systems and iPods. Our sense of self-worth too often gets tied up in these material objects. It's not easy to tighten our belts suddenly or go without, especially after a period of conveniences and luxury.

Alas, these traits have led to a failure to adapt economically in the post-crash environment. Despite real income being negative, many families have yet to adjust their consumption. Cheap money a la Alan Greenspan has allowed us to party like it's 1999. Only it is no longer the '90s -- it is once again a post-crash world.

Hence, we have a negative savings rate. This failure to recognize a significant shift in the economic environment is worrisome. Consumer spending accounts for nearly 70% of GDP. If the U.S. consumer suddenly finds himself out of cash and/or out of credit, the economy will be in a heap-o-trouble."

See also this chart courtesty of Michael Panzner of Collins Stewart:

>

UPDATE JUNE 28, 2006: 11:29AM

This is not just an individual phenomena, but a corporate one as well:

"Incidentally, a similarly disproportionate distribution of cash exists among public U.S. corporations. Thomas McManus of Banc of America Securities did a fascinating analysis last year of corporate America's cash-rich balance sheets -- estimated to be as high as a trillion dollars. Mr. McManus looked at the S&P 1500 companies (excluding those classified as financials) that are in control of over $900 billion in cash and equivalents. He discovered that most of the stash was concentrated among very few companies. More than 25% of the $900 billion is held by only 10 companies, while 29 more control the next 25%."

Source:
Ignore Statistical Oddities at Your Peril
RealMoney.com
6/26/2006 2:56 PM EDT
http://www.thestreet.com/p/rmoney/marketanalysis/10293756.html

Pragmatic Relationship with Data

Monday, June 26, 2006 | 11:24 AM

in Financial Press | Markets | Psychology/Sentiment

Something I have been wanting to address for some time now is the tendency amongst many market observers to “anthropomorphize” one’s relationship with market and economic data. For example, I recently read this sentence: “If you want to look at the following chart and be depressed, then be my guest.”

This is problematic. In the Apprenticed Investor series, I have repeatedly cautioned against having an emotional relationship with any company, stock, or even an econometric measurement. A data point shouldn’t make you depressed or elated – all it should do is make you intellectually curious as to how this fits into the larger picture. It should just “be.”

Investors should get no more excited about Non-farm Payrolls or CPI or New Homes Sales than they should the summer solstice. It is a periodic phenomena, and your job as the steward of your own finances is to put it into the proper context.

I try to interpret events accurately, especially within the context of how most of Wall Street and the financial media covers economic and market events. I hope I am not tilting at windmills. Too many investors rely on misleading headlines, they fall prey to faulty interpretations, or they overlook major issues.

This often leads me to stake out positions some have called contrarian; others have termed it pessimistic or excessively negative. I find it to be neither.

It is not negative to say it will dark out at night, nor is it pessimistic to point out that up north, it is often cold and snowy in the winter. That’s how I read the data, as cyclical phenomena that gets better and worse on a periodic basis; It ain’t called the Business “Cycle” for nuthin’.

These have led me in the past to:

-Rail on (and on) about inflation, while for the longest time, most of Wall Street ignored it;
- Describe this jobs recovery as sub-par, while the Street raved about it;
- Identify option expenses as significant threat to Prices (based on reported P/E); - Positively discussed the impact of accelerated depreciation of capital spending;
- Describe Real Estate as an over-extended asset class – but not a bubble;
- Place double digit earnings growth, dividend increases, share buybacks and M&A activity into proper context.

An investor should be neither a cheerleader nor a jeerleader. However, given the overwhelming bullish bias of Wall Street, and the tendency of people to take headlines at their face value, I often find myself pushing back against the mainstream, if only to put these things into context.

This is not pessimistic – it is pragmatic.

Its opposite – dogma – is a great enemy of investors.

CPI Null Set (via The Economist)

Monday, June 26, 2006 | 06:30 AM

in Data Analysis | Federal Reserve | Financial Press | Inflation

This is a classic example of working the refs: If enough long-only fund managers/sell side pundits spew the same misleading nonsense long enough, it will eventually find resonance somewhere in the mainstream media.

Today's case in point is from The Economist, a publication that ought to know better. They not only focus on the Core CPI, but they take it a step further: Core CPI ex Housing OER.

First off, I need someone to explain why food and energy is considered volatile -- if the volatility has been exclusively in one direction. That's not merely volatility, that's a trend.

Second, let's credit The Economist with creating a whole new category of measuring increasing prices: Inflation ex inflation (ex inflation). That's right, we take the basic measure of inflation, remove the vital components of life consumed by every living human being (food and energy). Then, just in case that is still too inflationary, remove Housing (see chart below).

That's Inflation ex inflation (ex inflation).

We should take it a step even further. I propose a whole new category to measure inflation: CPI Null Set. Start with the basic CPI, then go to the Core, removing food and energy. Then take out housing. Then remove everything else. Ta-da! No inflation!

Here's an excerpt:

"But much of that jump is thanks to a sharp rise in the cost of housing (which makes up almost 40% of core CPI), particularly the category of “owners' equivalent rent” which estimates the cost of living in a house by looking at rents charged on similar properties. Although this measure makes sense in theory (by living in your house you forgo rental income), it may now be overstating inflationary pressure.

As the housing market has slowed, fewer people are buying property, choosing to rent instead. That has pushed up rents. In turn, owners' equivalent rent has risen too, even though homeowners have seen no change in the actual costs of owning their house. Because owners' equivalent rent is estimated net of utility prices, recent falls in gas and electricity bills have paradoxically made matters worse.

Statistical quirks, in short, are distorting the picture. But what should central bankers do about it? Some suggest that owners' equivalent rent should simply be dropped from the inflation index. That is what European statisticians have done. But credible central bankers cannot suddenly ignore an inflation component when it starts behaving in ways they do not like. That was the mistake made in the 1970s, when officials deluded themselves that inflation was under control by excluding ever more prices from their indices."

Funny, I do not recall The Ecomomist discussing how OER understated inflation over the past 5 years. Where were you guys? Oh, that's right, no one was working the refs then. I guess quirks in reporting standards only matter if it impacts someone's portfolios/bonuses.

As poorly considered as that was, the Brits do manage to redeem themselves with a paragraph towards the end of column:

"The bigger point is that even if you take out housing costs the recent acceleration in core consumer prices does not disappear (see chart). And a variety of other gauges suggest that underlying inflation is on the high side and rising. The deflator for core personal-consumption expenditure (PCE), Fed officials' favoured index, was up 2.1% in the year to April. The “trimmed-mean PCE deflator”, calculated by the Dallas Fed, which excludes those prices that have risen and fallen the most before taking a weighted average of the rest, is up 2.4%. The “median consumer-price index”, calculated by the Cleveland Fed, is up 3%. Look at these figures and the surprise is less that the central bankers are now so jumpy about inflation than that they sounded so sanguine earlier this year." (emphasis added)

Glad to see someone across the pond hasn't drank the kool-aid.

Hey guys: You were on the verge of being punk'd. Get with it.

Source:
American inflation: Feeling the heat
Jun 22nd 2006 | WASHINGTON, DC
From The Economist print edition
http://economist.com/finance/displaystory.cfm?story_id=7090305

Linkfest!

Sunday, June 25, 2006 | 05:30 PM

in Weblogs

Its as if each week is a contest to see if it can top the previous week's zaniness. How long can these "interesting times" go on? Its getting to be exhausting . . .

The mergers in the Oil patch at a hefty premium ensures that the sector will remain an investor focus. And I heard something about some meeting this week (Weds/Thurs?) that might be important. I'll look into it and get back to you in the event anything interesting comes of it. And what is it about Florida that attracts whackos and terorists? This group of idiots wanted to blow up the Sears Tower? Other than that -- quite a week

Well, no rest for the weary: Its a rainy Saturday morning, and you know what that means: Its the festivus for the rest of us: linktime!

• Barron's Alan Abelson notes that former Fed Chair Alan Grenspan urged consumers to get adjustable mortgages at precisely the worst possible moment. (If no Barron's, go here);

• The Fed meeting this week will be the obvious focus; 1/4 point is a done deal, tho some think an "explanation mark" i.e, half a point, is possible. Bloomberg notes what the end of accomodation means in Fed Steals Punchbowl, Party Ends, Hangover; Rex Nutting asks Are the Fed's hawks going overboard in their zeal to slay inflation? Dave Altig asks: Is Core CPI A Lagging Indicator? Mark Thoma queries Which Measure of Inflation is Best for Monetary Policy?;

• A study by former Fed Governor Laurence Meyer and former senior Fed economist Brian Sack found that Chairman Bernanke is moving markets more than Greenspan;

• Two-Year Yields at 5 1/2-Year High Lure Investors; The small but growing “6 percent” club;

Enough fed chatter, we'll be hearing it all week anyway. On to more interesting stuff:

• Why the Real Estate Slow Down Matters So Much (See also: Mortgage rate hits 4-year high; Foreclosures May Jump as ARMs reset); Also, this moves to the free section of the WSJ Slowing Sales, Baby Boomers Spur a Glut of McMansions;

• Billionaire Ron Lauder Pays A Record $135 Million for a Klimt; Slate's Dan Gross asks Is art a good investment? Our own Tero Kuittinen ponders whether art auctions signal major stock and/or property market peaks?

• How important is stock selection? As it turns out, not very.

• For the month (ending June 15), short-selling jumped to an all time record at the NYSE; This happened "during a reporting period in which U.S. stocks pulled back broadly amid fears of higher interest rates and weakness in overseas financial markets."

• Mark Hulbert discusses a Deceptively Simple Timing System

• From the UK, here are Fifteen favourite investing fallacies

• Lost in all the debate about Microsoft and Goole is this simple investing truism: Old Stars Don’t Lead New Bulls (I'll have more on this soon);

• A study by EIA sees world oil demand rising 37 pct by 2030; See these charts and this PDF Energy projections; The audio of the presentation is here;

• Meet the Men who managed to fleece the ~~idiots~~ brain trust who once ran Enron, buying "old school" divisions which they then turned into huge profit centers;

• Hard tho this may be to believe, Michael Dell made his first ever purchase of Dell Stock ($70m). Don't get all that excited, Dell's worth 18.7 billion dollars, and its the equivalent of you buying 100 shares (really); Plus, It turns out that Insider Trading is "Iffy" as a stock-picking aid;

• The Media continues to go Blog Crazy!

• Ask Henry Kissinger: Is power sexy?

• Who is Hiram Bingham -- and why is he getting a USPS stamp?

• Pardon talk for Libby begins; VP Cheney may testify

Lots of Science and Technology news this week:

• Wicked Fast: Super-cooled IBM computer chip shatters speed record

• A self propelled, 200 mpg, 20 mph wheel, from RevoPower

• The Doomsday vault: an Arctic isle will hold all of the world's seeds in deep freeze

• Robert X. Cringely thinks Microsoft is in crisis; (My take is here)

• Climate Scientists Spotlight Arctic Warming, Plight Of Polar Bears (See also It'