I have finally gotten my own webpage and email.
Click on either link:
Refer to the new website/blog for new posts.
As you know, web logging, known more popularly as ‘blogging’, has grown tremendously. Much like social networks, such as Facebook and MySpace, bloggers develop web pages to share their thoughts and opinions, doings and activities and, of course, photos. Better than social networks, in my view, blogs are a more convenient way to stay connected with those that share the same interests.
Blogs are just another medium of communication. While we’re accustomed to the more traditional media – newspapers, radio, television, magazines, books, letters, mail and photo albums — the advent of the internet has enabled not only traditional media to evolve to a paperless and virtual real-time connection to their audience, but has it also enabled anyone to do the same, professionals and non-professionals alike.
At least to me, I think blogging really took off when the reporters of the mainstream media coined the phrase, “Pajamas Media”. It was then interpreted as an insult and an attack on the ‘unofficial’ reporting not produced by the traditional media, and that their fact-checking was subpar and opinions unworthy.
But what really brought blogging to center stage was a discredited news piece and the arrogant defense of it. On September 8, 2004, Dan Rather cited “exclusive information, including documents” to justify major CBS Evening News and 60 Minutes stories alleging that George W. Bush shirked his duties when he was in the Texas Air National Guard in the 1960s and 1970s. Within a few hours of those documents being posted on CBS News’ Web site, however, typography experts voiced skepticism that the documents had actually originated with their alleged author and Bush’s former commanding officer, the late Lt. Colonel Jerry Killian. Despite the source, what was important was that the document was proven to be written in Microsoft Word, something that didn’t exist during the time of Bush’s service.
Mary Mapes, the producer from CBS News was fired for her role in the 60 Minutes story about President Bush’s National Guard service. Dan Rather shortly thereafter retired. Just how confident and stubborn CBS’ Mapes and Rather were in defense to the accusations that the story was wholly was untrue, provided with evidence to the contrary that was not sourced by the mainstream media, but by the pajama media, convinced me that some bloggers are more informative – and timely — than traditional media, and thus valuable.
This is not to say that traditional media is bad: it demonstrates that quality news reports can come from anywhere, and that no one has a monopoly on it.
With that, there are several financial and stock market bloggers that are, in my view, precious. This list follows.
Zero Hedge (http://www.zerohedge.com). This blog is run anonymously by someone who calls himself, Tyler Durden. Yes, the Tyler Durden from the movie, Fight Club. His objective is similar: to challenge the Wall Street establishment, and to expose some of the cronyism that exists. Despite his position, what he/they post is surprisingly deep and knowledgeable. The volume of information and its direction is intriguing to me, someone who’s been in the financial business for nearly two decades.
Mish’s Global Economic Trend Analysis (http://globaleconomicanalysis.blogspot.com). Mike “Mish” Shedlock focuses on the global economy. He is a Registered Investment Advisor and thus a professional. Mish devours economic data, questions the sources and opines on its credibility and/or flaws. Investors like to quote the Goldman Sachs or the Morgan Stanley economist; they look to published government economic statistics. All well and good. But I read Mish. He has an uncanny ability to tear apart economic reports and their merit.
Naked Capitalism (http://www.nakedcapitalism.com). Yves Smith is not only knowledgeable, but she also links to other reports she deems worthy. Sometimes cynical (as most financial bloggers), she tries to rehash reports and get to the root of the matter.
Calculated Risk (http://www.calculatedriskblog.com). Much like Yves Smith, Bill McBride, digs deep and links to other worthy posts. With an MBA, he’s retired, which affords him the time to post frequently.
The Big Picture (http://ritholtz.com/blog). Barry Ritholtz is a professional investment manager and is a frequent guest on CNBC. He’s a prolific blogger. How he has the time, God bless him. But the data he provides is both timely and extensive.
Dr. Housing Bubble (http://doctorhousingbubble.com). From Southern California, Dr. Housing Bubble is also anonymous. While focused on residential California real estate in particularly, Doc posts very respectable data throughout the States. I see him as a hobbyist, but the time he’s spent collecting and rehashing data makes him a credible source.
Infectious Greed (http://paul.kedrosky.com). Paul Kedrosky is in California and enjoys focusing on economics, but he also posts stock-specific information as well. He’s a professional and has been on CNBC at times.
The Market Ticker (http://market-ticker.denninger.net). Karl Denninger lives on the Florida panhandle and is peeved. He has an uncanny ability to tear apart through government economic data. He staunchly believes that the federal government’s anecdotes to remedy the economic recession are squarely flawed. This is a bias that should be overlooked since his research is terribly informative, even convincing. Denninger was recently on CNBC and beat up a couple of reporters so successfully that I don’t think they’ll invite him back on the air.
The Business Insider (http://businessinsider.com). This blog is run by several participants, and spearheaded by former Merrill Lynch technology analyst, Henry Blodget. Back during the dot.com bubble, Blodget’s reports were widely regarded. And like every stocks market bust, there are fall guys. Blodget was one of them. Regardless, he’s demonstrated an improving knack on the not only technology stocks, but the market in general. His hoard is just as good.
Iamned (http://iamned.com). Ned is a financial news blogger much akin to the Drudgereport. He provides links to overlooked stories that might have unseen weight.
There are other financial blogs certainly worth noting. What’s nice about the blogosphere is that they all linked to each other. You can pick the good bloggers I didn’t list. But be mindful of the group think that develops as they all read each others’ posts. In other words, much like the bloggers having their judgments, you need to apply yours as well.
Financials blogs will continue to grow so long as the information and research provided is judged worthwhile to read. Some will improve; others will fall to the wayside. But there’s an up and coming blogger that just might have some entertaining and good reads: Reconnaissance Capital (https://monoki.wordpress.com). Check it out.
I share with you recent emails to colleagues and clients. The audience is more professional and thus the communications somewhat different than my usual posts. But I hope this provides a sketch of my current outlook.
22 June 2009.
Sent as a follow-up to a recent email, 10 June.
We might be at a pivot point and reversal in the [stock market] recent uptrend. On a technical basis, the SPX [S&P 500 Index] is below its 20-day moving average, has broken below the 200-day and is flirting with the round number 900. Fundamentally, forward P/E [price-to-earnings ratio] on next 12-months operating earnings seems a tad high at 18x, assuming, of course, that those earnings estimates are reasonable.
The weak dollar play is premature, in my view. Other fiat currencies vis a vis the dollar appear more weak, making the dollar the continued safe haven. Should the dollar shore up, even remain flat, then the commodities play appears legless, particularly since the fundamentals do not support a rise in prices. Having said that, although the dollar can be seen as strong relative to other currencies, it might also weaken on an absolute basis as worldwide purchasing power declines and deleveraging continues. If so, then gold might be the play. Below $900/oz, gold stocks might be attractive. Give it a couple of months because this thought might also be premature.
Please be wary of China. It is an economic paper tiger. While China stocks have risen, there’s no fundamental support for such a strong rise. Urban real estate excesses and export inventories on the docks imply that China still has problems. Reports are coming from China that demand for commodities has largely been due to nothing more than stock piling rather than based on increasing aggregate/end demand. In the future, should China enact another stimulus package, it could take away from demand for dollars and Treasurys, and possibly raise interest rates in order to entice demand for the stepped-up need for public debt to offset the decline in private aggregate demand (Keynesian economics).
Bloomberg reports today that insiders have been selling into this rally at a pace matching June 2007, two months before the credit markets [initially] froze. And during this rally, many fundamentally weak corporations — banks and REITS — sold additional shares to offset [pay down] debt, diluting [current] shareholders. While the success of these follow-ons propped stocks further, dilution concerns might reverse share prices.
My earnings capitalization model suggested a fair value on the S&P 500 at 810. That was when 10-yr Treasury was bumping against 4.0% (see June 10 email). At 3.60-3.70%, the model implies 858 as fair value. Technical breakdown, a tad high forward P/E and lack of improving corporate profits and growth supports at least a move to that level, in my view.
I remain in cash. Protecting principal and gains is paramount. Returns are a luxury.
From: Chris Monoki
Sent: Wed 6/10/2009 7:41 PM
Subject: An interim top?
Believe we might have seen the top of the current rally. Banks seem to have finished correcting from their near-demise price levels. Consumer discretionary [stocks], particularly retail and restaurants, have stalled, even after a decent consumer sentiment report. Technology has taken a back seat as well. The energy and commodity sectors have become the leaders, probably because of the prospects of a weak dollar, but certainly not on fundamentals. [The] 10-year US Treasury rates is near 4%, which has become increasingly attractive vis a vis equities.
I see no fundamental improvement on corporate profits. Aggregate demand has shifted down and to the left. Deleveraging of over-indebtedness continues. Corporate top lines remain weak; profits have largely come from expense controls. Valuations, in general, have risen to levels my earnings capitalization model had (1004 on the SPX). But with increasing interest rates and a technical stall in equities, stocks seem poised to go lower.
[My] earnings capitalization model [is] now at 810.
I remain in cash.
It’s been three weeks since I last posted. My hard disk drive on my laptop failed and it took dozens of hours to get all my data back. With the stroke of luck, I was able to retrieve everything.
I’m fairly diligent in backing up my files and photos, particularly of my 14-month old son, Viktor. I also have 18 years of my work – research papers, communiqués, spreadsheets and financial models, all of which are personally very valuable.
One night, my wife and I decided to consolidate all the photos and files between our two laptops. In the process of reorganizing the file folders, I cleared my external hard disk back-up drive so that we didn’t have redundant files and copies upon copies of photos. The 12 hours I exposed myself to no back-ups my laptop hard disk drive failed. Years of diligently backing up my files, the one day I risk reformatting the external hard disk drive and boom, my internal hard disk fails. Wow! What are the odds?
The situation reminds of the Black Swan. Former Wall Street stock options trader, Nassim Taleb, wrote his now famous book, The Black Swan, highlighting market risks that most financial models fail to incorporate. In the business, they’re known as fail-tail risk, the event of an event. Taleb correctly pointed out that risk is far greater and more frequent than current financial and statistical models estimate, and that investors fail to assess this catastrophic risk in valuing assets. I wrote about flawed financial modeling in my post, Mea Copula.
Most financial models use statistics, particularly regression analysis and the normal distribution curve. Generally, regression analysis and normal distribution take a series of data, say, past daily closing stock prices, finds the average daily change within a degree of volatility, known as the standard deviation. Thus, a stock that has an average daily price change of +1% and with a standard deviation of +/-2% should result in a -1% and +3% daily price range. In others words, 68.2% of the time, or just more than two-thirds, said stock is expected to fall within the range of -1% and +3% per day. At two standard deviations, or +/- 4%, the range should account for 95.4% of all daily prices changes around its average. Moving further, six standard deviations, or +/-12% from the average 1% gain, accounts for 99.999999% of all daily closing prices (Six standard deviations is more popularly known as Six Sigma and is also used in quality control of production in effort to keep defects down significantly).
Taleb points out that the fluctuation of stock prices do not fall into a normal distribution that modern financial statistics estimate. There are days that stocks fall more than 20%, perhaps on bad earnings, a labor strike or a sudden product recall, which are known as event risks. There are years that stocks can decline 90%, much like many financials and bank stocks did in 2008. Triggered by an ‘event of an event’ — in this case a perfect storm of the bursting housing bubble, ensuing credit crunch, resulting financial crisis and declining economic growth — stocks were figured to decline by the magnitude they did once in several centuries. Yet we’ve seen stocks collapse much more often – the 1987 Black Tuesday, the Internet Bubble and the recent stock market decline.
Since 1926, as measured by the S&P 500 Index, stocks, on average, increased roughly 10% per year with a standard deviation of about +/-18%. Thus, 68% of the time, the annual S&P 500 change should fall within a -8% and +28% range. At two standard deviations, or 95% of the time, the S&P 500 should fall within a -26% and +46% change. At three standard deviations, or 99.7% of the time, the Index should fall within an annual price change of -44% and +64%. The S&P 500 declined 38% in 2008, and from its October 2007 high of 1565, the S&P 500 fell to a low of 666 in March 2009, a drastic decline of 57%.
The odds of 2008’s stock market decline fall far outside what financial statistics predict. Even the untrained eye can see that. Yet, since the 1950s, Modern Portfolio Theory and financial modeling have for too long underestimated risk.
Just to be certain, I’m saving this post to my back-up drive to protect me from the risk of losing it.
Chrysler filed for bankruptcy, the first of possibly three. The economic consequences could prolong the recession. Consumers, aware of Chrysler’s bankruptcy, might be reluctant to purchase a Chrysler or Dodge, despite all the Federal government warrantee guarantees. Thus, demand could fall further (Chrysler sales were the worst recently, down 48% among all reported auto makers). Auto suppliers might curtail their business with Chrysler, hampering parts supply or perhaps raise costs. Advertising budgets might be curtailed, adversely affecting advertising agency business and TV and radio ad slots. Many dealerships might be forced to close, leaving empty commercial real estate lots. And, of course, more auto workers, parts makers and dealership personnel could see their jobs lost. But ALL stakeholders are at fault.
First up, policy-makers, the very constituent that paints itself as always trying to save the auto industry (from itself). Regulation upon regulation – whether it be labor, carbon emissions , CAFÉ standards, or safety laws – the auto industry has for too long been hampered by red tape and bureaucratic meddling.
Second, the United Auto Workers Union successfully squeezed every red penny it could from the Big Three, seemingly now at their own expense. The cost of domestic labor at Ford, Chrysler and GM far exceeds that of Toyota, Honda, and Nissan, among others, that have plants on American soil.
Third, meek and incestuous management teams repeatedly failed to adjust to any changes in the economy, demand or consumer tastes. Ironically, management also relied too much on policy makers to influence demand, even to protect them from foreign competition.
Of all the industries I follow, the American auto manufacturers have been the worst since I’ve been in the business. In my opinion, the Big Three have been more of a hindrance than a benefit to the overall economy. The lack of innovation and dynamism and too much bureaucracy finally caught up to them. This is a grim picture.
But more grim than Chrysler’s bankruptcy is the alleged strong-arm tactics by the current Administration in effort to keep Chrysler solvent. Supposedly, one of the bondholders thought that the negotiations were unfair, to put it mildly. I won’t get into the details, but three financial blogs, which I find reputable, have been reporting the story – Business Insider, Zero Hedge and Finem Respice. The DrudgeReport and ABCNews Blog, though late, have finally picked up on it. Please read.
If this story is true, or at least those that claim it is, are credible, then the unintended consequences can be quite negative. Banks that are participating in or have taken money from the TARP may want to back out (repay) quickly in order to avoid messing with the Treasury and the Administration. The Treasury’s PPIP/PPIF might find investors more leery to work with these programs, which are devised to entice private investment in weak and distressed assets. As a result, and without private investors, distressed assets could continue to weigh on bank balance sheets, curtail lending and prolong the current recession, unless the Federal government steps even more into private enterprise.
Early this morning I sold all stock positions and moved to cash.
The laundry list of reasons for opting to sit the bench for the foreseeable future is long. However, since stock and total portfolios have risen nicely (God bless) and are up for the year, it affords me the opportunity to sit the sidelines should my call be early or wrong. If the call is correct, then I will miss the downside, providing another opportunity to move back into stocks, perhaps at lower prices. Remember, preserving principal is primary; preserving gains is equally important. Here are my reasons for moving back into cash.
First, stocks have risen too far too fast, in my view. In the last six weeks, stocks have risen 27.8% since their 6 March intraday low of 666.79 on the S&P 500. This is a parabolic rise that, technically, is open to downside. As mentioned in a previous post, during a time of high flux and uncertainty, technical analysis takes precedence. Thus, in my view, it’s time to sit the bench.
Second, banks, which have skyrocketed and have lead this rally, have reported better-than-expected earnings. While this is great news, it was due, in part, by a retroactive accounting change (FAS 157 mark-to-market level 3), which has had a positive impact on earnings. Although there is much debate whether the Financial Accounting Standards Board (FASB) should have recommended (or was pressured by the House Finance Subcommittee) that accounting change (you know where I side), the fact that the change padded earnings cannot be denied.
Third, Government (bailout) money provided to AIG, in part, went out the backdoor to make counterparties whole. In other words, all the debt insurance contracts AIG wrote/sold (also known as credit default swaps, CDS) and was liable to ‘policy’ holders (counterparties), payments were made to those holders with taxpayer money. As a result, those counterparties profited from those contracts and largely posted those ‘earnings’ this quarter (Goldman Sachs, I congratulate you). Whether right or wrong isn’t the issue; the issue is that the payments on those contracts propped up earnings and are seemingly a one-time event.
Fourth, and a recent hot item, banks have really jacked up credit card interest rates and hidden fees. Poppa Government sees this and is now weighing on those credit card companies (banks) from ‘gouging’ their holders. If so, then credit card companies might feel obligated (or pressured) to lower credit card interest rates, which might reduce profits next quarter. Meanwhile, credit card delinquencies and losses are on the rise. This story is developing.
Fifth, I am NOT convinced that technology stocks will lead the market going forward. Technology is a productive instrument; investment in it is expected to have a quick return. But I see too many corporations cutting back on capital and information technology investments. With anticipated declining revenues, corporations continue to cut all expenses – labor and operating expenses, and capital and information technology investment. To me, this is not a resurging environment for tech stocks.
Sixth, the energy sector, on a year-on-year perspective, should continue to post poor results. Think of it, Exxon and its ilk posted fantastic profits last year on $100-150/barrel crude oil prices. Current prices are roughly two-thirds the previous last year. Comparable earnings will look weak relative last year’s profits.
Last – and this is important – commercial real estate is hurting big time. While there’s scant evidence that residential housing might finally be bottoming (but not improving), commercial real estate (CRE) is on the decline, and accelerating. Statistics (which I am not providing) show that CRE vacancy rates are increasing at an alarming rate. Thus, banks, which lend to commercial real estate developers, could suffer significant and unforeseen losses should this trend continue. If there’s one thing to take away from this post is be mindful of the commercial real estate market.
To sum, surprising first quarter bank profits might not repeat in the second quarter of the year. If investors get whiff of this, they might sell off bank stocks, something I was heavily invested in.
You might have noticed, the stock portfolio had a high beta. For those that do not know beta, it is a measurement of stock sensitivity to market moves. Should the market, as measured by the S&P 500, move 10%, a stock with a beta of 1.0 will likely move 10% as well. A stock with a beta of 2.0 will move twice as much, or 20%. A stock with a beta of 0.5 will move half as much, or 5%. The stock portfolio I devised was all high-beta stocks – financials, consumer discretionary (retail and restaurants), construction, biotech and some technology.
Underlying high-beta stocks is a hidden correlation. In other words, bank stocks and restaurants can move in tandem simply because they’re both very sensitive to overall market moves. Thus, a probability exists that should banks stocks decline (high-beta stock), there’s a likelihood that restaurants stocks (also high-beta) will decline as well. As a result, most of my stock investments have been dependent on banks improving; they go south, most stocks in the portfolio will, too.
The first quarter earnings season is essentially over. Investor focus, I think, will shift from company-specific concerns to overall market worries. In other words, economic issues will become priority as we move beyond the earnings season.
In a past post, I was hoping for the S&P 500 reaching 900. It just might do that. And I still see fair value on the S&P 500 around 1000. But this week’s market action has the ‘feeling’ of topiness. In other words, every S&P 500 gain seems more difficult to achieve. The fight between bulls and bears is more pronounced. Monday’s drop prompted my concerns. Tuesday was up, recouping roughly half of Monday’s loss, but on low volume. Wednesday and today seem less correlated. Tomorrow, should the market dip significantly, then, to me, it will confirm Monday’s drop, signifying a possible reversal in the current trend.
In early March, when the S&P 500 was nearing 700, I thought stocks were attractive enough to finally (re)invest, moving portfolios from a 100% cash position to roughly half stock, half cash. Portfolios are up significantly, God bless. For the first quarter 2009, the stock portfolios increased around 20% (as of this post, invested stocks are up roughly 34% year-to-date); estimated total portfolio returns are up around 11% (as of this post, total portfolio returns are up roughly 18% year-to-date). This compares to the S&P 500 being down 11.3% for the first quarter (as of this post, the S&P 500 is down 3. 8% year-to-date). As an investment manager, I am most humbly fortunate.
Although I am elated, I’m rather surprised stocks have quickly risen. Now, that fast and furious rise is a concern. One has to ask, have things really changed enough to warrant such an uptick in prices? Is economic output improving? Is employment increasing? Are consumers and households confident and spending more? Is the housing market at least steadying? Are banks still bleeding capital? Are the ever-changing policy implementations working? Is the global economy on the up? Conversely, has the global financial crisis pushed stocks down to such undervalued levels that they are merely recouping from that fear, yet still discounting a deep recession and bleak earnings outlook?
Based on my valuation model, I posted that stocks, as measured by the S&P 500, were fairly valued at 1004. The model only discounts earnings expectations and dividend payouts relative to the 10-year U.S. Treasury bond yield. What the model does not discount are political risks and investor behavior, among other things.
Thus, if the model suggests a fair value of 1004 (always subject to change) based solely on current earnings and growth expectations (+/-4% observed yet subjective margin of error), question: how are we to discount the ongoing financial crisis and uncertain changes in the playing field, i.e., policy making? It, thus I, can’t. Subjectively, I discount those concerns by 10%, which gets me to 900 on the S&P 500.
I’m hopeful that the S&P 500 will reach that level. But if and when stocks do, where do they go from there? Do they flatten out and tread at the 900 level, or do they dip, perhaps 10-20%? I don’t know. But what I do know is that I will be much less confident on any more upside and more worried of a potential decline in stock prices. In other words, the return/risk ratio changes for the negative. At that point, I would be more inclined to reduce exposure to equities, sell, and perhaps hide in cash.
Unlike Icarus, I don’t want to burn the wings that took portfolios to the scorching heights of the market sun. Save the wings to fly another time.