The Big Picture | Investing

Nasdaq Podcast

Friday, May 16, 2008 | 02:30 PM

in Investing | Markets | Podcast | Technical Analysis

A few readers have suggested doing a VLOG or podcast. The idea being I can finish a sentence without interruption. I have taken that under consideration, and may start that after the redesign rolls out. In the meantime, whenever I can do an interview that is a podcast/mp3/video roll, I will.

Earlier this week, I did an extended interview with the Nasdaq, and you can hear it in all its nasal glory below.

click for audio

Play mp3

Only 5% of Wall Street Recommendations Are "SELLS"

Friday, May 16, 2008 | 09:00 AM

in Investing | Psychology/Sentiment | Valuation

Here's a fascinating data point:

Only 5% of the fundamental research of the brokerage firms is a sell. That's up from 2% in the 1990s. Despite having paid $1.4 billion to settle the analyst/banking scandals of the 1990s and early 2000s, Wall Street is still disproportionately afraid of the word "Sell."

That's rather low, when you consider how many stocks underperform their respective indices each year.

There's a small sign of a potential change in this attitude: Merrill Lynch: "Starting in June, Merrill will require that its analysts assign “underperform” ratings to 1 out of every 5 stocks they cover. About 12 percent fall into that category now."

NYT excerpt:

"The bank [Merrill] analyzed stock performance over a decade and determined that from 1997 through 2007, on average, 37 percent of stocks in the MSCI world index and 40 percent of stocks in the Standard and Poor’s 500-stock index declined each year. The bank covers about 75 percent of the stocks in those indexes.

Under its new system, analysts cannot assign “buy” ratings to more than 70 percent of stocks they cover, “neutral” to more than 30 percent and “underperform” to less than 20 percent. (An underperform rating suggests the analyst believes the stock will either fall within 12 months or will rise less than competing companies with higher ratings.)

But some in the financial industry say it may be too late for research departments at Merrill or other investment banks to reclaim the credibility and prestige they lost after the technology stock bust. Hedge funds, which account for up to 75 percent of trading on some markets, conduct much of their own research and often pay twice the going rate on the Street for analysts. Many banks, by contrast, have cut research budgets." (emphasis added)

40% of the SPX? wow, that's higher than I would have guessed.

It would be a interesting to see a longer data run -- more than the 1997-2007 period, as it contained the bubble and crash period.

Also, I'd be curious to see how many stocks underperform, in terms of their marketcap as well as their trade weighted volume percentage on the NYSE and the Nasdaq.

Source:
Merrill Tries to Temper the Pollyannas in Its Ranks
JENNY ANDERSON and VIKAS BAJAJ
NYT, May 15, 2008
http://www.nytimes.com/2008/05/15/business/15place.html

Positive Thinking vs Skepticism in the Markets

Wednesday, May 14, 2008 | 06:25 AM

in Credit | Investing | Markets | Psychology/Sentiment

Today we have an an interesting guest commentary from Jack McHugh.

I found it thought provoking, and thought you would too. Call it The Power of Positive Thinking, Market Edition.

"It makes sense to approach life with a positive frame of mind. Positive thinking lightens the load at work, makes the goals in life feel easier to achieve, and allows both friends & family to more often enjoy your company. Even family pets know the difference between a smile and a scowl.

But when it comes to investing, I've always tried to be a little more demanding, even skeptical. As a result, some may mistake the tone or subject matter of these commentaries as more properly belonging to a sourpuss of the Doubting Thomas school of economic thought than to one who looks forward to each and every day. I humbly disagree, and as evidence I offer up more than just my usually sunny disposition: I always maintain net long positions in my personal portfolio (hedged to various degrees, yes, but always net long).

These scribblings are mostly about risk management, and as such, I will always be on the lookout for the next problem, the dangers which may not be clear and present, and the events which can otherwise harm the returns of investors -- especially those trusting souls who believe in things like the "Greenspan/Bernanke put". I subscribe to the adage: "Be trustworthy to all and optimistic in all your dealings, excepting those of a financial nature."

The trusting and the skeptical have been doing battle all year, and the stark contrast offered by the market action on Friday and today are only the latest examples. That AIG has sprung a second and massive leak of red ink in as many quarters (which prompted its former Chairman to claim the company is "in crisis" -- see below) was the news that sat so poorly with Mr. Market on Friday. Today looked like it would fare little better when Fed Ex announced yet another shortfall over the weekend and MBIA served up another loss this morning (also below). Market participants would have none of it, and after an opening dip, they powered stocks higher almost all day. Not even a prediction from one of their heroes, Jamie Dimon, that the "recession is just starting" could deter the optimists, nor could a pronouncement from the Carlyle Group that "enormous bank losses" still have yet to be recognized (see below). The rally came, saw, and conquered because of the final quartet of news items you see posted below. HSBC reported lower write-downs than had been feared, Apple announced it was running out of I-Phones, and it was revealed that HPQ has an amorous interest in EDS. It also helped that some retailers posted better than expected results, causing many to think a recession won't visit these shores (see these charts).

These " it's all about the future" thoughts are nicely summed up by the following quotation:

Continue reading "Positive Thinking vs Skepticism in the Markets"

Raiding the 401(k)

Monday, May 05, 2008 | 05:30 PM

in Economy | Investing | Markets | Psychology/Sentiment

Wow, I found this shocking:

"Borrowing from retirement plans is surging.

At the end of last year, 18% of workers had loans outstanding from their plans, up from 11% in 2006, according to a survey of 2,011 full-time employees released in February by the Transamerica Center for Retirement Studies, a nonprofit corporation funded by Aegon NV's Transamerica Life Insurance Co.

With home prices falling nationwide, the loans may be a sign that cash-strapped consumers are raiding their nest eggs to stay afloat, no longer able to tap their houses for cash and up against their credit-card limits . . .

Last year, 52% of workers with annual incomes of $50,000 to $100,000 said they planned to rely primarily on 401(k) plans and IRAs to pay for living expenses in retirement, up from 46% in 2006, according to the Transamerica survey. The percentage counting on Social Security also increased, to 19% from 13%, while those counting on a company-funded pension plan dropped to 11% from 18%."

Sounds bullish to me . . .

Source:
Raiding the 401(k) Nest Egg
JENNIFER LEVITZ
WSJ, May 5, 2008; Page R1
http://online.wsj.com/article/SB120994246231866045.html

FT: John Authers on Correlation Across Markets

Friday, April 04, 2008 | 03:00 AM

in Investing | Markets

Equity Fund Flows, Market Correlation, Yen, and Euro

click for video:

Source:
Short View
FT, March 27, 2008
http://www.ft.com/cms/bfba2c48-5588-11dc-b971-0000779fd2ac.html?_i_referralObject=697966559&fromSearch=n

The Bet: Gold=$1,650 by 2011; The Wager $1M

Wednesday, April 02, 2008 | 02:00 PM

in Commodities | Investing | Psychology/Sentiment

My S. African pal Prieur du Plessis informs us of this interesting wager from Jim Sinclair: A $1 million wager for the price of gold over the next 3 years.

Assuming this is more than a marketing stunt, here are Sinclair's terms:

My position on timing and price is that Gold will trade at USD $1650 before the second week of January 2011.

I am offering a $1,000,000USD wager to a financially qualified party that this will occur within the stated timeframe. Any party on Bloomberg, CNBC or CNN-Business stating an opposite opinion on the price of gold should be informed of this challenge.

Please communicate to ANY vocal bearish so-called gold expert that I challenge them to put their money on their views.

Any commentator unable to financially meet this challenge should not be opining. If they really knew the gold and currency market they could easily meet the challenge.

The technical procedure of a serious wager is:

Prove you can in fact wage the challenge by an attorney's letter.

Segregate the funds in cash or near cash kind in the hands of your attorney.

Execute an agreed upon binding contract stating the terms of the wager.

I have been a bull on commodities and Gold for quite some time. But there are plenty of Gold Bears out there. Will any of them rise to the bait?

~~~

UPDATE: April 3, 2008 6:43am

Neal informs us this is not a marketing ploy for several reasons:

1. Jim Sinclair is the CEO of TRE
2. His website www.jsmineset.com is a free website
3. He has been bullish on gold since the upper $200's
4. He has been dead on with his accuracy of where gold is going.
5. He is tired of the top callers of gold anytime gold has a correction
6. He is one of the country's top gold traders.

Source:
A $1 million wager for gold bears
Prieur du Plessis
Investment Postcards from Cape Town, April 2, 2008
http://www.investmentpostcards.com/2008/04/02/a-1-million-wager-for-gold-bears/

Good Advice During Turbulent Times

Sunday, March 23, 2008 | 08:39 AM

in Apprenticed Investor | Investing | Psychology/Sentiment | Trading

What happens when markets suffer a panic?

Well, a lot of things: investors deal with emotional outbursts, a frenzy of talking heads, and lots of really bad advice. At the same time, these dislocations create opportunity -- if you manage to keep your wits about you.

From an interesting article in the WSJ this week, comes this modified list.

1. Invest during a panic: When panic hits the front pages, put a toe in the water.

2. Don't speculate: Look for securities that offer modest, but predictable gains. Think Warren Buffett, not Steve Cohen.

3. Don't make too many bets: Feel free to sit most hands out. You should only place your bet when you really like the odds. You can be diversified without owning every asset class.

4. Be very wary of any boom: Remember, Price matters. Avoid buying tinto the hockey stick part of a surge -- that's way late in the cycle. If you are early into a sector, you should sell off 10% into each quarterly surge.

5. Don't put too much weight on expert financial analysis: Learn to become a self-sufficient investor. We have seen too many examples of where most Economists got the big picture way wrong, and when analysts were compromised by their firms.

6. Do you really need to pick individual stocks? Most people suck at stock picking. Givent he universe of ETFs, you have a lot of options without the indiviudal stock risk.

7. Invest in stages: 99% of people will not pick the bottom; even less get out right at the top. Use dollar cost monthly averaging with indexes, and invest over time.

8. Only invest for the long-term: That means five years or more. On rare occasions, it means 10-15 years. Daily moves are noise; focus on the signal.

9. Consider a really good active fund manager: They do exist, but they are rare. Look for mutual funds where the manager has a terrific long term record -- ideally 10 years or more.

10. Everything has risk -- even cash: Try thinking about what inflation is going to do to you if you sit in cash on the sidelines. There are, literally, no risk-free places to hold money.

A few caveats to the above:

a) Your own retirement timeline is very important. If you are 10 years or less from retirement, you need to be more conservative.

b) Know thyself. If you cannot deal with being underwater,then you must adjust accordingly. Long term is really very long term. That may mean patiently waiting for a decade or so -- think Japan in the 1990s, or the US from 1966 to 1982.

c) Inflation is pernicious, always present -- even when its less than 2%.

d) The time you have to manage your assets will determine how active you can be. Dollar cost averaging requires the leastamount if time and effort.

e) Simpler is better.

Source:
Opportunity in Credit Crisis
BRETT ARENDS
WSJ, March 19, 2008
http://online.wsj.com/article/SB120587859011946567.html

~~~

Investing in a Post-Fact Society (a/k/a, Were the Good Times a Mirage?)

Saturday, March 22, 2008 | 09:43 AM

in Investing | Markets | Psychology/Sentiment

One of the concerns we have expressed here over the years is that there was much more -- and less -- to the post 2001 recession recovery than met the eye.

Several years ago, this was a controversial position. We first suspected we were on to something, however, when the many critics of this view found it much easier to use epithets (negative, naysayer, perma-bear) than to do the credible critiques of our positions, or any kind of critical analysis. It reminded me of an old lawyer's joke: "When the facts go against you, stress the law; when the law is against you, emphasis the facts; when your case has both the law and the facts against it, call the other lawyer an asshole."

As of March 22, we are still in the early stages of any sort of widespread understanding about this post-recession recovery cycle. Many people are just starting to realize how much fertilizer has been spread around.

Many of the stated economic gains have been a false ghost. Whether it was overstated job creation (NFP), understated inflation (CPI) or "inflated" growth (GDP), a shocking amount of the debate about the economic expansion has been primarily spin.

That's what attracted me to this book by Farhad Manjoo: Learning to Live in a Post-Fact Society. That such a book is even necessary boggles the mind. Consider the myriads of benefits and standards of living improvements we have seen from the reality-based community -- and by that, I mean Scientists (Physicists, Biologists, Medical Doctors) and Engineers (Technology, materials and mechanical). Why so many people would turn their backs on this belief system leads me to Arthur C. Clarke's 3rd law: "Any sufficiently advanced technology is indistinguishable from magic."

While a "Post-fact society" might being intellectually appealing for the slavish followers of a given political or religious order, the same philosophical approach invariably proves very costly for investors -- if not financially fatal.

Consider these elements that are of interest to investors:

1) What objective reality is;

2) The variant perception: What the widespread belief system is versus this objective reality;

3) How far these two are out of alignment;

4) And most importantly to Traders, when the variant view recognizes its error and embraces either a more realistic, or an even more fantastic, view on reality.

For example, as weak as many of the traditional metrics have actually been, some sectors of the economy have enjoyed strong legitimate gains: Everything energy related has been on fire for at least half a decade; the entire agricultural explosion has been for real; all things China related have enjoyed strong growth (tho it certainly became frothy this past year). Metals and Miners have done well, and Transports have had a terrific run, be they rails or shipping. If the economy was truly strong and healthy, these sectors would be ones to avoid.

Consider also the US industrials -- they boomed courtesy of a weak dollar (not healthy) and improved production management (very healthy). What is being called Web 2.0 is seeing genuine innovations, functional business models, and increasing significance in the economy (also healthy).

If you correctly identified where things were healthy or not, the right themes before the crowd caught on, there was plenty of financial gains to be had.

Philosophically, I want to explore -- beyond the legitimate gains mentioned above -- a nagging question about the spin and artifice. Why have we as a nation been increasingly reluctant to confront objective reality? What is it about the present social mood, political leadership, and economic environment that has so totally led us to a world of denial? Up is down, black is white, good is bad -- its all very Orwellian.

One of the world's great cautionary lessons are the significant contributions made towards mathematics by the Islamic Arab Empire, circa 8th century to 15th century. While European intellectual progress had ceased -- blame the rise of church extremism -- enormous gains were being had elsewhere. Sometime around 18th or 19th centuries, the cultural roles seem to reverse. After the Age of Enlightenment, the Europeans rejected religious extremism, and prospered, while the Arab Empire embraced extremism, and suffered -- at least until the discover of Crude Oil. There are societal lessons to be learned from this.

I have long railed against superficial headline data that belied the weakness underneath. There were a parade of syncophants and cheerleaders who, despite knowing better, continued to cheerlead punk data. These pundits, politicos and pinheads are now confronting the ugly reality they can no longer ignore. Consider the progression the motley crew of fools and liars went through: First they denied what was happening, then we got the whole contained thingie, then they blamed da Bears. Now, they have unwittingly embraced Marx, and have successfully pled for the central planners to rescue them from their own stupidity.

~~~

Here's my question: Are we stuck with these fantasists? Has Truthiness replaced Truth? Are we going to be saddled forever with these damaging, hallucinatory hacks?

Source:
Worries That the Good Times Were a Mirage
DAVID LEONHARDT
NYT, January 23, 2008
http://www.nytimes.com/2008/01/23/business/23leonhardt.html

History of Panic Buying

Friday, March 21, 2008 | 02:15 PM

in Investing | M&A | Psychology/Sentiment | Trading

Nice bit of chart porn via Forbes, which writes: "JPMorgan's Jamie Dimon may prove to be the latest in a line of investors to turn panic into profits. But it's a risky business."

click thru for bigger graphic

Source:
When Blood Is on the Street
Neil Weinberg, Bernard Condon and Emily Stewart
Forbes, 04.07.08, 12:00 AM ET
http://www.forbes.com/forbes/2008/0407/034.html?partner=magazine_newsletter

Bearish Blogger Too Optimistic!

Friday, March 14, 2008 | 06:54 AM

in Investing | Markets | Trading

I've been way too optimistic.

That may come as a surprise to some friends (Paul!) and other blog watchers in the media.

But its true -- going by the numbers, I was too bullish in my expectations for the indices this year. My mid-year and year end expectations (see this post for the 2008 forecast) was for a 10-15% selloff by mid year (video here).

The market's surpassed those numbers before the first quarter was even over. And, while we are now in oversold rally mode, as of the beginning of the week, just about all of the major US markets were already below my targets for July 1:

>
2008 Market Forecasts

ndex	2008 Mid-Year	2008 Final	March 10 Close
DJIA	11,900	12,800	11,740.15
S&P 500	1275	1350	1,273.37
NASDAQ	2275	2400	2,169.34
Russell 2000	580	639	643.97
10-year yield	3.75%	4.10%	3.56%

Other than the Russell, the market shave exceeded the forecast to the downside.

There you have it. My big flaw: Too Bullish!

Today's Rumor: Bear Goes Belly Up (Who's next?)

Thursday, March 13, 2008 | 09:30 PM

in Corporate Management | Finance | Investing | Valuation

A few years ago -- around 2001-02 -- I had strongly recommended Bear Stearns (BSC).

They had a great franchise, they had lagged the rest of the banking sector for no apparent reason, and overall, the quality of management under Ace Greenberg seemed to be terrific. The stock was $54-57.

Subsequently, Bear ran to $170+. I have long since been gone from the stock.

Today, we witnessed it complete the round trip as it careened through that $54-57 range. At one point, today, Bear was down $10, on a rumor that they were going to go belly up.

I have no opinion or special insight as to the truth of that . . . Hey, it could happen, it really wouldn't surprise me, but I don't know, and we have no position in BSC.

But that rumor raises a more interesting question: What companies could take the long dirt nap? Who out there is ripe to be absorbed, merged, taken over (hostile or not). There has to be a long list of mortally wounded firms out there that simply haven't keeled over yet. What CEOs are dead men walking? What stocks are waiting to be euthanasized?

~~~

What say ye?

(I want names and stock symbols!)

~~~

Would You Buy This Chart?

Tuesday, March 04, 2008 | 08:00 AM

in Investing | Markets | Psychology/Sentiment | Technical Analysis | Trading

Here's a fun test, via famed market technician Dick Arms. It challenges your investing acumen, as well as your mental agility.

The following is an unknown stock or index, and the period covers recent history.

The test is quite simple: Is it a buy, sell or hold?
>

UNKNOWN EQUITY, 2002 - 2008

click this for a jumbo version .PNG

Here is what Dick has to say:

At first glance this chart certainly has the look of a great buying situation. We have a long decline, triple bottom, and then a breakout through both the descending trendline and the last point of resistance with big volume and a wide trading range. Since that breakout it has pulled back on much lighter volume, and has gone to just about the trendline.

That's quite the hint.

Here's the fun part of this chart reading experiment: If you notice the price scale in very small print at the left margin, you will see that it is inverted. This is an up-to-date weekly chart of the Dow Industrials.

Dick references Bob Evans of the Wyckoff school of Technical Analysis. One of the things Bob used to suggest was that if you were ever unsure of a given chart, simply turn it upside down! Doing so eliminates your bull/bear prejudices, and can be quite revealing.

Dicks technical service is subscription only, but over the years I've found him to be very insightful, and his books quite instructive. His latest is called Stop and Make Money: How To Profit in the Stock Market Using Volume and Stop Orders and I'll se eif we can't get an excerpt posted in the coming months.

Source:
Stop and Make Money: How To Profit in the Stock Market Using Volume and Stop Orders
Dick Arms
Wiley, January 2, 2008
http://www.amazon.com/exec/obidos/ASIN/0470129964/thebigpictu09-20

Previously:
Nasdaq Trend Break
December 2006
http://bigpicture.typepad.com/comments/2006/12/nasdaq_trend_br.html

Consumer Spendables Indicator

Monday, March 03, 2008 | 07:00 AM

in Consumer Spending | Data Analysis | Economy | Investing

I'll give TrimTab's Charles Biderman credit: He is not the one trick pony I previously pegged him as.

To review: Back in August, I read this horrifically ugly quote from Biderman in Marketwatch:

"Fear and ignorance seem to be gripping retail investors these days," said Charles Biderman, chief executive of Santa Rosa, Calif.-based TrimTabs on Thursday. "There's no credit risk; no bank is going to lose money on this subprime fear," he added. "Income-tax collections are strong, and you don't have a housing collapse when wage income and job growth are surging. This is a complete panic by individual investors," he commented. "They just don't know what's going on."

That was a stunningly ignorant comment, and I was set to write off both Biderman and TrimTabs.

Bidderman proved skeptics like me wrong. Instead of merely remaining in consumer weakness denial, he went back to the drawing board to create a "by-the-numbers" quantitative method of tracking consumer spending. The NYT's Gretchen Morgenson discusses the details:

"TrimTabs calls its new measure the Consumer Spendables Indicator, and it sensibly includes these crucial sources of consumption cash: after-tax wages; after-tax income from nonwage sources, like capital gains, dividends, pensions, partnerships and self-employment; and net equity extraction from consumers’ homes, either through property sales or mortgage refinancing.

For the first time since the fourth quarter of 2003, TrimTabs estimates, consumers will have less money to spend this quarter on a year-over-year basis. The firm expects this figure to fall 0.6 percent from the same period in 2007.

While that may not seem like a meaningful decline, it becomes more significant when compared with the increases the index showed during the real estate boom.

Back when homes were everybody’s favorite A.T.M., mortgage equity extraction propelled the TrimTabs consumer indicator. Beginning in late 2004, quarterly comparisons with year-earlier periods shot up; they peaked at a growth rate of 17 percent in the first quarter of 2006. During that period, consumers had $1.69 trillion to spend; equity extraction accounted for $191 billion then, TrimTabs said, its peak amount."

That sort of intellectual flexibility is worth noting.

Biderman believes the recession has already started, and will not last much longer than the end of 2008. Quote: “I see this thing lasting longer than the bulls think but not as deep as the bears expect.”

I may not necessarily agree with that, but it is an intellectually defendable position. If Biderman;s forecast turns out to be true, then the window for your ideal equity buying opportunity will open up sometime between May and July . . .

Previously:
Blaming the Retail Investor
Wednesday, August 01, 2007 | 11:45 AM
http://bigpicture.typepad.com/comments/2007/08/blaming-the-ret.html

Source:
The Buck Has Stopped
Gretchen Morgenson
NYT, March 2, 2008
http://www.nytimes.com/2008/03/02/business/02gret.html

The Sham of Sovereign Wealth Fund Negotiations

Tuesday, February 26, 2008 | 07:34 AM

in Investing | Politics | Psychology/Sentiment

While I am running around this morn, we have a guest post from naked capitialism, on all of those well meaning, non-meddling, only interested in return maximization Sovereign Wealth Funds:

The Sham of Sovereign Wealth Fund Negotiations

The Wall Street Journal reports today in "U.S. Pushes Sovereign Funds To Open to Outside Scrutiny," that the US Treasury Department talking to two large sovereign wealth funds, Singapore's Temasek and the Abu Dhabi Investment Authority, as the first steps in a process to ""draft rules to oversee the behavior of such funds, without discouraging them from investing."

Let's see if I get this straight. The US is running a chronic current account deficit, which means we are dependent on the kindness of foreigners to maintain our lifestyle. In other words, we have to run a capital account surplus, which is tantamount to having other countries buy our real or financial assets. And while the fall in the dollar has reduced our current account deficit somewhat, it's still at a high level. Ergo, we need our money fix.

Brad Setser, who monitors the international capital data closely, has been reporting for some time that the private demand overseas for US assets has fallen considerably. The key buyers now are foreign governments. And those governments, who used to be content to buy low-returning Treasury bonds, are now looking to diversify their holdings and earn higher returns. Enter the sovereign wealth funds.

What is comical about this whole idea is the idea that we have any say in this matter. Of course, the US can nix individual deals, as we did to Dubai Port World's purchase of UK P&O Ports. Dubai Ports had to divest five US port operations; the UK imposed no such requirement. Similarly, the US blocked Chinese oil company CNOOC's bid for Unocal blocked, which ruffled quite a few feathers.

But we've already let foreign banks make substantial investments into our troubled financial sector, which one can argue gives them strategic leverage. Yes, these are minority stakes, the investors don't hold any board seats. Nevertheless, as eminence grise Felix Rohatyn pointed out, “You don’t need to appoint two directors to a board to have influence when you own 10 percent of the company.”

Continue reading "The Sham of Sovereign Wealth Fund Negotiations"

Forbes vs Peter Schiff: Petty Smackdown

Friday, February 22, 2008 | 06:42 AM

in Commodities | Currency | Financial Press | Investing | Psychology/Sentiment

Forbes magazine:

"Herein is a formula for making a lot of money as a money manager. Have a shtick, get known, wait for your sector to get hot. In the 1970s James Dines acquired fame and fortune by being a gold bug. In the 1990s George Gilder minted money as a fan of technology stocks. In the past six years Renee Haugerud's Galtere International Fund ( FORBES, Jan. 20, 2003) has grown from $1 million in client capital to $1.5 billion by being in commodities . . .

That was the reductio ad absurdum paragraph from what I can only describe as a really weird hit piece from Forbes on Peter Schiff. I'm not sure why they are took this route, but the column is rather unsatisfying in both its critique and its proof:

"Schiff's Chicken Little take on the U.S. economy--that it is on the brink of collapse--isn't new. He's been serving up the same spiel for a decade. But these days he's getting more applause than eye-rolling from jittery investors. He's also getting a lot of attention from financial media outlets, in part because he has mastered the delivery of three-alarm sound bites. ("The consumer is in great trouble!" "Things are worse than in the 1970s!")

Schiff perfected his rant in stock newsletters in the late 1990s, when few investors had heard of him or Euro Pacific. He posted commentaries on his Web site and started sending them to CNBC. His first big media hit came in April 2005, when CNBC asked him to appear on Squawk Box. Schiff faced a hostile panel when he said the dollar would lose half its value--which still hasn't happened. That first interview ended with the host, Mark Haines, saying: "I don't know whether to shoot him or shoot myself."

Now, if Schiff is really such a perma-bear who has been negative and wrong on US stocks for 10 years, that would be worth discussing. There must be 100s of examples of his bad calls if that's the case. But oddly, Forbes cites exactly zero examples online. (I haven't seen the dead tree version).

Such bald accusations make for poor journalism. If you are going to make that claim, then back it up. Is it asking too much to pull a few wrong trades as evidence? Can you show me the guy was Bearish on Tech in 1998, hated dividend payers in 2002, avoided firms Oil firms in 2003, sold industrials in 2004, dissed the miners in 2005, shorted exporters in 2006? Just imagine what a similar hit piece on Jim Cramer would have to include.

Anyone who works on Wall St. long enough should be able to pull a long list of pretty bad calls over the years. (My own list of market boners is extensive). If you are any decent at running money/doing stock or market analysis, however, the good ones should outweigh the bads ones.

What's so very odd about this whole affair is, at its core, a critique of a strategy that is making investors money. Weird.

I'm not looking to defend Schiff -- he's a big boy, and can do that on his own. My beef is with Forbes -- its a sloppy work.

What I was singularly disappointed with involved the lauding of George Gilder's 1990's success. What Forbes failed to mention was what came after: From 2000 forward, Gilder's readers lost 44%, then 43%, then 56% in each successive year (WSJ). Apparently, it was okay for George Gilder Newsletter to lose 89.4% of his readers money, because he was permanently bullish.

Oh, and one other thing: Gilder's newsletter is a joint publishing venture with Forbes, another disclosure also somehow misplaced in the column. Shame on Forbes for omitting that disclosure; if Schiff had done that, it would be worthy of an SEC/NASD investigation.

According to this article, making money by identifying risk is somehow not good, but losing nearly all of it by cheerleading the tech bubble is A-okay. That doesn't seem very much like the Forbes "free market" ideology I know from over the years. Then again, it is an election year.

Capitalist tool? The article makes them look more like capitalist fools to me . . .

UPDATE: February 23, 2008 9:29am

Schiff discusses the Forbes piece in a radio interview here.

Source:
Spin Cycle
Michael Maiello
Forbes, 03.10.08
http://www.forbes.com/forbes/2008/0310/072.html

Previously:
Where Are They Now: George Gilder
MARCELO PRINCE
WSJ, May 8, 2006
http://online.wsj.com/article/SB114433479738318882.html

George Gilder: So THAT explains it
Tuesday, May 09, 2006 | 07:15 AM http://bigpicture.typepad.com/comments/2006/05/george_gilder_s.html

Gilder Technology Report
Gildertech: "GTR is published by Gilder Publishing, LLC in association with Forbes Inc., 1996-2007"
http://www.gildertech.com/

50 Years of Market Swings

Monday, February 18, 2008 | 10:00 AM

in Investing | Markets | Technical Analysis | Trading

Cool interactive graph, via Fortune

Credit Default Swaps and Financial WMDs

Monday, February 18, 2008 | 07:34 AM

in Credit | Derivatives | Investing

Gretchen Morgenson's NYT article yesterday offered a good primer about Credit Default Swaps (CDS):

Few Americans have heard of credit default swaps, arcane financial instruments invented by Wall Street about a decade ago. But if the economy keeps slowing, credit default swaps, like subprime mortgages, may become a household term.

Credit default swaps form a large but obscure market that will be put to its first big test as a looming economic downturn strains companies’ finances. Like a homeowner’s policy that insures against a flood or fire, these instruments are intended to cover losses to banks and bondholders when companies fail to pay their debts.

As the graphics explain, counter-party risk is an ever present factor.
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click for larger graphics

graphic courtesy of NYT

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What's truly astonishing is the size of this market: The market for these securities is enormous. Since 2000, it has ballooned from $900 billion to more than $45.5 trillion — bigger than the US equity markets, US Treasuries, and Mortgage Securities -- COMBINED.
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click for larger graphics

graphic courtesy of NYT

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CDS are thinly traded, have huge counter-party risk, are difficult to analyze, and are unreguylated insurance products. This leadsme to this money quote:

"As with other securities that trade privately and by appointment, assigning values to credit default swaps is highly subjective. So some on Wall Street wonder how much of the paper gains generated in these instruments by firms and hedge funds last year will turn out to be illusory when they try to cash them in."

Sounds kinda familiar . . .

Source:
Arcane Market Is Next to Face Big Credit Test
GRETCHEN MORGENSON
NYT, February 17, 2008
http://www.nytimes.com/2008/02/17/business/17swap.html

Don't Follow Wealthy Investors, Part 14

Sunday, February 17, 2008 | 07:00 AM

in Apprenticed Investor | Investing | Psychology/Sentiment

We have counseled readers time and again not to follow in the footsteps of various Billionaires, like Warren Buffett, Michael Dell, Eddie Lambert, Wilbur Ross, or Bill Gates. The ultra wealthy have different motivations and goals when they are "deploying capital" -- what you and I call investing. Capital deployment may not necessarily have as its goal straight up return maximization.

When Michael Dell buys his own stock, it is as much a PR move as it is an investment. He gets benefits from that purchase (Media coverage, analyst approval, retails sales promotion) that does not accrue to you.

Remember Kerkorian's bid for GM ? The old man was trying to wrest control of one of the most storied names in American Industry. That's an enormous ego stroke that you don't get for your 1,000 or even 10,000 GM shares. I suspect the short term returns were inconsequential to him.

How about Joseph Lewis' 7% stake in Bear Stearns? Taking a big stake in Bear made him a bold player in the high stakes game of Wall Street control. The loss of $500 million to Lewis is inconsequential; how'd that trade work out for those people who tagged along? Eddie Lambert's investment in Citi (C)? A disasterous bet he is now unwinding.

Don't imagine the Sovereign wealth funds are any better -- they have their own agendas, political or otherwise. Besides, from what we have seen so far, they ain't so hot anyway.

My point isn't that these guys are dumb (they are not) or bad investors -- history shows otherwise. No, the point is that thy have different motivations, tools, and terms than you, and blindly following them into any investment is simply foolishness. (when Warren Buffett makes a deal, you can rest assured he gets slightly better terms than you).

I was reminded of this issue again yesterday, thanks to an article about the newspaper business in Editor & Publisher.

I recall wondering in these pages why a bright guy like Bruce Sherman would ever want to get involved in a ~~dying~~ transitional industry like Newspapers. The nasty emails and comments from his acolytes were both amusing, while being astonishing naive. According to these folk, Bruce could do no wrong. Thus, I was an idiot for even thinking about criticizing this investment. Clearly, only a moron doubts anything about Mr. Sherman. Only Sherman -- and Chuck Norris -- never buys any stock that goes down. Oh, and on top of that, newspapers were cheap on a P/E basis, thus providing additional proof of my cluelessness.

Well, it seems Mr. Sherman has thrown in the towel. According to Editor & Publisher, recent SEC filings reveal Mr. Sherman's current newspaper holdings to be 0.0%.

Here's an excerpt from E&P:

"Bruce Sherman, whose Private Capital Management (PCM) investment firm nearly single-handedly forced the sale of Knight Ridder -- ushering in the era of Wall Street antipathy toward newspaper stocks -- formally bid the sector goodbye in a series of regulatory filings Thursday.

In documents filed with the Securities and Exchange Commission (SEC), PCM said it no longer owned any stock in The New York Times Co., Lee Enterprises or Belo, and that it was effectively done as an investor in The McClatchy Co. . .

It was remarkable to see all those 0.0% ownerships of class in filing after filing because PCM not long ago had serious stakes in the nation's biggest publishers. In September of 2005, for instance, PCM owned a gigantic 37.61% of McClatchy common stock. Thursday, the firm reported that it directly owned no shares at all, and was simply managing on behalf of an investor a tiny portfolio of 9,164 shares. In that same period, PCM owned a 15.07% stake in the Times Co., an 18.96% stake in Lee, and a 22.31% stake in Belo. It also had substantial positions in Gannett and a small amount of Tribune Co. stock."

Some of the emails about Mr. Sherman bordered on myopic hysteria over criticisizing any of his investments. These folks definitely have the first half of Strong Opinions, Weakly Held down pat. For their sake, I hope they are intellectually flexible enough to understand the second half. Perhaps the dittoheads who aped Sherman's march into media were at least smart enough to follow his retreat out of them . . .

I emphasize this again and again, but we might as well say it once more for the record: LEARN TO THINK FOR YOURSELF. The importance of this cannot be stated enough.

Source:
Sherman's March: Man Who Forced Knight Ridder Sale, Says Goodbye to Newspapers
Mark Fitzgerald
February 15, 2008 5:40 PM ET updted Friday
http://www.editorandpublisher.com/eandp/news/article_display.jsp?vnu_content_id=1003711330

Sovereign Wealth Funds

Thursday, February 14, 2008 | 04:00 AM

in Investing | Politics

Tim Iacono points to this cool WSJ map of Sovereign Wealth Funds:

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click for interactive map

WTF Headline of the Day: "Dow 18,500? Believe It"

Wednesday, February 13, 2008 | 06:58 AM

I got a huge kick out of this headline last night:

Dow 18,500? Believe It
http://biz.yahoo.com/ms/080212/228434.html?.v=1

Morningstar based this number on the "fair value estimates" of the index's components. I have no idea how fair value is derived -- earnings? ROI? cash flow?

Regardless, this is Morningstar's forecast over the next 3 years; that translates to 14.8% annualized price return, excluding dividends. With divvies, returns are 17% per year.

And why I was so amused? Well, first off its precariously close to exactly half of the infamous Dow 36,000 book by Glassman & Hassett we all know and love so much. Could the timing of that book have been any better, published as it was on October 1, 1999?

Second, I find that high degree of certainty in the headline, well, cute. It ignores the basic reality of forecasts, that no one knows what the future will bring. And that is always amusing to me . . .

Source:
Dow 18,500? Believe It
Jeffrey Ptak, CFA, CPA
Morningstar, Tuesday February 12, 7:00 am ET
http://biz.yahoo.com/ms/080212/228434.html?.v=1

Previously:
Apprenticed Investor: The Folly of Forecasting
Barry Ritholtz
TheStreet.com, 06/07/05 - 01:05 PM EDT
http://www.thestreet.com/_tscana/comment/barryritholtz/10226887.html

Money:Tech NYC Conference

Wednesday, February 06, 2008 | 09:00 AM

in Investing | Technology

As previously mentioned, I am a panelist at the Money:Tech conference today and tomorrow in NYC. (Blogs, Analysts, and the Future of Equity Research)