Analysts, Gurus & Pundits
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» Normxxx - Paul Krugman Says. . .
Questions of Interest
By PAUL KRUGMAN | April 20, 2004
Yes, the republic is in danger," a friend said. "But what's going to happen to interest rates?" O.K., let's take a break from politics.
Over the past two years, interest rates have been very low. Last June the 10-year bond rate hit a 48-year low. Even three weeks ago the rate was still below 4 percent, a level last seen in 1963.
If the economy fully recovers — or even if investors just think it will — interest rates will rise sharply. In its World Economic Outlook report, to be issued tomorrow, the International Monetary Fund urges the Federal Reserve to prepare the economy for higher rates to "avoid financial market disruption both domestically and abroad."
But how far will rates rise? Let's not get into Greenspan Kremlinology, parsing the chairman's mumbles for clues about the Fed's next move. Let's ask, instead, how much rates will rise if and when normal conditions of supply and demand resume in the bond market.
My calculations keep leading me to a 10-year bond rate of 7 percent, and a mortgage rate of 8.5 percent — with a substantial possibility that the numbers will be even higher. Current rates are about 4.3 and 5.8 percent, respectively; you can see why the I.M.F. is worried about "financial market disruption."
Why 7 percent? Well, in the past 20 years the average yield on 10-year bonds has, in fact, been about 7 percent. Why shouldn't we think of that as the norm?
Some people say that unlike past interest rates, future interest rates won't include a premium for expected inflation. Indeed, over the past 20 years the average inflation rate was 3 percent, considerably higher than recent experience. But in the first three months of 2004, prices rose at an annual rate of more than 5 percent. That number included soaring gasoline prices, but even the "core" price index, which excludes food and energy, rose at a 2.9 percent rate.
More to the point, investors expect considerable inflation over the next 10 years. The spread between "inflation protected" bonds, whose payments are indexed to the Consumer Price Index, and ordinary bonds indicates an expected inflation rate of 2.5 percent during the next decade.
So you can't claim that interest rates will be far below historical levels because inflation is gone. And on the other side, we need to think about the impact of budget deficits.
That last sentence will send the deficit apologists to battle stations (sorry, I can't avoid politics completely). For many years, advocates of tax cuts have insisted that the normal laws of supply and demand don't apply to the bond market, and that government borrowing — unlike borrowing by families or businesses — doesn't affect interest rates. But there's no argument among serious, nonideological economists. For example, a textbook by Gregory Mankiw, now the president's chief economist, declares — in italics — that "when the government reduces national saving by running a budget deficit, the interest rate rises."
The Congressional Budget Office estimates this year's structural budget deficit — what the deficit would be if cyclical factors like a depressed economy went away — at 3.9 percent of G.D.P. That's almost twice the average during the past 20 years. Standard estimates say this should push up 10-year interest rates by around one percentage point.
Finally, there's the upside risk. As I've pointed out before, the twin U.S. budget and trade deficits would set alarm bells ringing if we were a third world country. For now, America gets the benefit of the doubt, but if financial markets decide that we have turned into a banana republic, the sky's the limit for interest rates.
Now for the obvious point: many American families and businesses will be in big trouble if interest rates really do go as high as I'm suggesting. That's why the I.M.F. is urging the Fed to get the word out.
And one suspects that the fund, which, like Alan Greenspan, tends to convey messages in code, is firing a shot across Mr. Greenspan's bow. A number of analysts have accused Mr. Greenspan of fostering a debt bubble in recent years, just as they accuse him of feeding the stock bubble during the 1990's. Just two months ago, Mr. Greenspan went out of his way to emphasize the financial benefits of adjustable-rate, as opposed to fixed-rate, mortgages. Let's hope that not too many families regarded that as useful advice.
-- posted by Normxxx
» pbradford6 - SCOTT BURNS / The Dallas Morning News
Stick with your sense of balanceThe best market-timing tool may just be a fixed-asset fund
08:06 PM CDT on Monday, July 5, 2004
By SCOTT BURNS / The Dallas Morning News
Good market-timing calls are a bit like flying-saucer sightings: Few survive close examination.
When good calls are made, they are milked for all they are worth. A few years of annual fees for brilliant market calls usually convince most investors that the charges and transaction expenses exceed the illusory gains.
Even so, C.M., a reader in Plano, is frustrated.
"Financial planners almost always tell me that trying to time the stock market is fool's folly," she wrote. "They say the best strategy is to invest in quality funds/stocks and hold on for the long haul.
"On the other hand, it seems logical to me that a strategy of shifting among asset classes, in and out of the market, with a reliable indicator of stock performance, would surely net higher returns, with less risk.
"The trick is, What is the indicator and how good is it? While the financial planner may not have this ability, there must be services or people that do.
"How does an average investor find someone who can successfully manage a portfolio in such a way as to get into and out of the markets in a timely manner to maximize returns and lower the risk of being fully invested at all times, even when the market environment is negative?"
The short answer is simple.
You don't find that someone; you listen to the financial planner. You appreciate his or her humility.
The long answer is pretty simple, too.
The best market-timing tool I've seen in action is having a fixed-asset allocation. Major asset classes seldom move entirely in tandem. If you have half of your portfolio in equities and half in fixed income, a big year in either class will change your allocation. Rebalancing your fixed allocation will have you moving money out of the assets that have appreciated and into the assets that are depressed.
That's not very dramatic, but it has the virtue of being automatic. Talk with any financial planner, adviser or portfolio manager, and you'll hear lots of stories of clients who wanted to move every dime they had into common stocks just as they peaked in 1999.
On autopilot
Can an autopilot asset-allocation plan work?
Check the evidence. Over the last 10 years, Vanguard Balanced Index mutual fund (ticker: VBINX) has done better than 75 percent of its managed peers. Low costs and a fixed 60/40 allocation seem to work rather nicely.
Is it possible for the average investor to do still better? Perhaps.
Strong record
Dodge and Cox Balanced (DODBX), a no-load fund with $15 billion in assets and a modest expense ratio of 0.54 percent, has a splendid record over the last 12 months, three years, five years, 10 years and 15 years. This fund beat 92 percent to 98 percent of all competing funds in every time period.
But it doesn't stop there. Go back 20 years, and this fund is the only balanced fund that actually did better than the S&P 500 index. Over the 20-year period that ended May 31, for instance, this fund provided a compound 14.01 percent annual return. It did better than the S&P 500 – but with two-thirds of the risk.
It also did better than the S&P 500 over the last 15 years, beating it by 1.35 percentage points. In a universe of 9,681 domestic equity funds of all types – including every specialized fund category – only 531 beat the S&P 500 index. Only 226 did better than Dodge and Cox Balanced. So this fund did better than 97 percent of all domestic equity funds over the last 15 years – with far less risk to boot.
Three other no-load managed balanced funds have 20-year records that make them worth considering. They are: Mairs and Power Balanced (ticker: MAPOX); Vanguard Wellington (VWELX); and Fidelity Puritan (FPURX).
Scott Burns answers questions of general interest in his Thursday columns. Write Scott Burns, The Dallas Morning News, P.O. Box 655237, Dallas, Texas 75265, or send an e-mail to sburns@dallasnews.com.
--------------------------------------------------------------------------------
Online at: http://www.dallasnews.com/sharedcontent/...
-- posted by pbradford6
» Normxxx - Goldberg: THE HERD OF BULLISH STOCKS IS THINNING OUT
THE HERD OF BULLISH STOCKS IS THINNING OUT
A Technical Look at the Funeral Sector full text<img Align="Left" src="http://www.financialsense.com/Market/gol...">
by Martin Goldberg | 07.08.2004
Tonight I will present additional evidence that the long-of-tooth secondary bull correction within a secular bear market is coming to an end. I don’t wish to sound too much like a broken record, yet in the backdrop of bullish hype that is being espoused in the media, perhaps this bearish commentary is healthy to bring readers a fair and balanced perspective. There is presently a tremendous contrary opinion play – the presidential election effect on the stock market– where everyone, bulls and bears alike, are thinking the same thing at the same time. While it has been lonely and for some, expensive, to be a contrarian over the last 20 months, I feel that contrary opinion may finally pay off between now and the election. This case is made stronger by the weight of yet additional bearish intermediate term technical evidence, some of which I will present tonight. (And some of which I presented previously in a and b.) Following this discussion is a technical analysis of a small but potentially profitable sector where bullish chart patterns are forming. While these stocks are as yet, largely below the Wall Street radar screen, their chart patterns are suggesting that they are being quietly accumulated.
Contrary Opinion Theory Serves Up a Hanging Curve – The Presidential Election
Through the Bull Run, stock market contrarians have focused on the “bullish” and “bearish” figures such as those from Investors Intelligence, which indicated overwhelming bullish consensus opinion throughout the rally. Contrary opinion theory, suggests that the crowd is usually wrong, and therefore the market should have sold off a long time ago. Yet the market has advanced in spite of the crowd’s atypical correctness. So is contrary opinion one more technical tool that needs to be thrown away as new era thinking is embraced in the stock market? Is the crowd now all of a sudden right? I think that the consensus “bullish” and “bearish” statistics have perhaps been misused. In the book, Stan Weinstein’s Secrets for Profiting in Bull and Bear Markets, Weinstein provides a good perspective on the use of contrary opinion (page 304, my emphasis in bold):
“…I want to caution you. Contrary opinion (CO) is a very valuable tool when used properly. Unfortunately, not one investor in a hundred really understands it, although everybody and his broker wants to be sophisticated and thinks they are using CO. Do not make the mistake of so many contrary-opinion buffs and try to force an answer from CO every week or even every few months. A true CO signal may not arise for a year or more. It is only valid when a prevailing theme starts to play through the media and is thoroughly accepted from Wall Street to Main Street. …The trick is to wait for a very obvious one-sided opinion to form, whereby everybody suddenly believes he knows something, and then to become suspicious of that conventional wisdom. I thoroughly believe in the slogan that says, “When everybody knows something, it isn’t worth knowing.”
It appears as though the conventional wisdom that everyone now knows is that the stock market will perform well at least until the presidential election. While those currently bullish and those bearish may disagree with each other on the state of the economy, Fed policy, market technicals, and a host of other issues, everyone seems to agree that the stock market will be propped up until at least November. You only have to read the latest edition of the Barron’s roundtable to experience the heard mentality that is now spread from here to Wall Street. So while on the surface contrarians appear to have been wrong for a while, I think we now (finally) have the “very obvious one-sided opinion”. EVERYBODY KNOWS the market will do well until the presidential election. In spite of some previous anxiousness on the part of fundamental bears to use CO, I think we now have the proverbial “hanging curve ball”. Careful use of market technical indicators may (finally) pay off for contrarians before the election.
more. . .
The content of this message is not to be construed as constituting market or investment advice. It is intended for educational purposes only. Individuals should consult with their own advisors for specific investment advice.
-- posted by Normxxx
» Normxxx - Henry Blodget an Evil Genius?
Was Henry Blodget an Evil Genius?By Rob Walker | Thursday, May 16, 2002, at 10:35 AM PT
In early 1999, I set up an appointment to meet the newish Internet analyst at Merrill Lynch. I'd been following his rise in the papers, and I thought he might be a good story for the magazine I was working for at the time. As it happens, that story never got off the ground because (the consensus was) not enough people were interested in Henry Blodget.
Today, everyone is interested in Henry Blodget. But he doesn't work for Merrill anymore, and most of the interest is in his words and actions in 2000 and early 2001, when Internet stocks melted down. Eliot Spitzer, the New York state attorney general, has been pressing an investigation against Merrill that paints Blodget as a sort of evil mastermind: He knew all along that this or that Net stock was bound to fail, but he lied to the public about it for the benefit of his firm's investment bankers, padding his own compensation in the process.
After reading the e-mails and sections of deposition transcripts provided by Spitzer's office, I don't really agree with the attorney general's affidavit's evil mastermind portrait. To me, Blodget comes off more as a guy who got in way over his head.
This is actually not so surprising if you've followed his odd career. Practically no one had ever heard of Blodget before he made a wildly bullish call on Amazon.com—which promptly came true. Suddenly he was a minor celebrity and was hired by Merrill. The latter event was a surprise because Merrill was a stuffy old firm, but it's pretty clear what it was getting: somebody who could make a positive case for Net stocks because the negative case was making Merrill look bad. In those days it was easy to make a name on the basis of little more than a kind of wide-eyed belief that we lived in a wonderful time, that great things were afoot, and that much money would be made. The ugly truth that Blodget was confronting in 2000 was that this period was over. Before, he could blithely say that most Net companies would fail, but a few would be home runs. Now came a harder question: Which ones?
In the e-mails, Blodget doesn't seem well-positioned to give an answer; on stocks that are the focus of the affidavit, he relies on the thinking of his staffers, who in turn seem to rely a great deal on the management of the companies they're covering. For example, Merrill had initiated coverage of InfoSpace with a buy in December 1999, when it was at around $150. It rose to $260 in early March, then stated to fall. In July a staffer sent Blodget a draft of a research note reiterating a strong buy on the stock. Blodget thought it was too bullish, and in one of the most-reprinted comments from the affidavit, wrote, "I don't mean to be a pain on this one, but this stock is a powder keg, given how aggressive we were on it earlier this year and given the 'bad smell' comments so many institutions are bringing up." But the staffer countered, "I have to react to fundamentals, not rumors, and the quarter will be good and the outlook is strong." The research bulletin carried the buy-reiteration language as proposed. Blodget comes across not as an investment banking collaborator but as someone who got in a staring contest with his staff and blinked. (Today InfoSpace is a penny stock.)
In August of that year, there was a brouhaha within Merrill about InfoSpace's place on a list called the Favored 15. When an e-mail about this got to Blodget, he asked, "What is the 'Favored 15' and why is INSP on it?" An amusing round of e-mails follows, in which no one will actually take credit (blame) for the list, but apparently it was compiled through a not-very-impressive-sounding screening process whose formula supposedly considered quantitative, technical, and fundamental analysis. This list changed often and was distributed by Merrill's "marketing" department to brokers in "the field." (One Merrill guy adds: "The Fav 15 was designed to be a VERY high octane, VERY high risk portfolio with VERY high turnover. My guess is that has not been transmitted to the field too well.") Blodget begged to get the stock removed. "I am getting daily hate-mail from brokers," he moaned.
By November, he's whining to his boss for clarity on "what the heck these ratings mean," asking for "a verbal description of what you—research [management]—believe every single rating combination means and in what circumstances it should be used." Elsewhere we find Blodget grousing that he needs to be given more time to focus on research, and we find his staff bending over backward to avoid upsetting tin-pot Internet honchos with ratings that might be insulting.
The investment bankers had more power than the supposedly influential Blodget, and so did the CEOs of the companies he was supposed to cover. Brokers reamed him in e-mails, and his staffers brushed aside his concerns. On a Saturday in February of 2001, apparently while in Florida, Blodget had an exchange with another researcher in his group who wrote, "Don't tell me you've been at your computer the whole time." The presumably vacationing Blodget replied in part: "I'm going to have to work like crazy for the next few months. Definitely have that burned-out feel. This just ain't a low-stress job." Later that year came word that he was leaving Merrill.
The documents make it painfully clear that there's nothing like a "Chinese wall" between research and banking at Merrill, and the hunger to get a piece of the late 1990s investment banking bonanza led it and other Wall Street firms to make some very bad judgments. (Whether anybody should be surprised, let alone outraged, about that at this late date is a question for another time and place.) But I still don't buy the idea of Blodget as the great villain of the age: He's really a bit player, who was both created and destroyed by events way bigger than him.
As for my planned meeting with Blodget back in '99, it never came off. I was just about to leave my Midtown Manhattan office when his assistant called to say that the star analyst couldn't make it. Apparently he had lost his briefcase. We'd have to reschedule. We never did.
-- posted by Normxxx
» Normxxx - Slothower’s View
The View from Slothower’s Seat
High oil prices and fears over terrorism aren’t new strains on the economy. However, when you add those factors to the weakest month of the year historically, then you have quite a few worried people. Dennis Slothower, editor of the Stealth Stocks newsletter, takes a closer look at these challenges.
The bounce Dennis Slothower was expecting going into the Republican convention came right on cue. However, it does not make up for the technical damage that was inflicted on the market over the past few weeks. Before this bull can charge ahead, the market needs to repair itself. Falling crude oil prices also helped the market climb over the past few sessions. When everyone was calling for $50 a barrel, the smart money started to sell, and crude oil plunged close to 15% in a single week. The United States and other nations started to float stories that they will release their emergency reserves of oil. Those rumors acted like a brick wall and stopped the parabolic rise of crude oil … for the moment.
The only hope that Slothower sees for the stock market in the terrible month of September is a drop in crude to the mid-$30 range. He highly doubts that will happen given that September has a history of being the weakest month of the year for stocks. Rallies in late August have been notorious for setting up downturns in the September/October time period.
Slothower’s sources on Wall Street tell him that traders are concerned about another terrorist attack occurring in September. And why shouldn’t they be? Many of those traders were there on 9-11 and saw firsthand what many of us watched on TV. They are still pretty much on edge. Another area of concern he is watching very carefully is the nuclear reactors buildup in Iran. Do they really think we believe it is for peaceful purposes?
Having studied the Middle East for some time now, Slothower’s opinion is that the center of fundamental Islamic terrorism was never Iraq; it was Iran. Iran is feeling very threatened in its determination to build and obtain nuclear facilities and weapons. Iran’s government, ruled by radical fundamental clerics, knows a showdown is coming over its nuclear program, especially if President Bush is reelected as president.
With U.S. military bases in Afghanistan, to the east of Iran, and U.S. military bases in Iraq, to the west of Iran, the ruling clerics of Iran believe the United States and Israel are readying themselves to strike the Iranian nuclear facilities after the election. Rather than wait, Iran is threatening its own preemptive strike and may bring on the battle before the presidential election in order to damage Bush’s reelection possibilities.
Slothower thinks this is an extremely dangerous situation, and Iran’s control of al-Qaeda and radical Shiites in Iraq make this a powder keg that could explode at any time. He is on guard for something to happen before the election. He can’t imagine Iran would be so foolish as to pick a fight with the most powerful nation on earth. But the clerics may believe Iran can gain strategic long-term benefits if it can damage President Bush’s reelection chances. Slothower is sure they will try to commit an act of terror between now and the election; he prays each night that he is wrong.
The contents of this letter/report does not necessarily reflect the opinions or viewpoint of normxxx. They are provided for informational/educational purposes only.
The content of this message is not to be construed as constituting market or investment advice. It is intended for educational purposes only. Individuals should consult with their own advisors for specific investment advice.
-- posted by Normxxx
» passenger - Peter Bernstein invterview on Money Magazine
http://money.cnn.com/2004/10/11/markets/...-- posted by passenger
» Normxxx - The Trouble With CNBC
The Trouble With CNBC and Smart Money and …
The financial media's undisclosed conflict of interest.
By Henry Blodget | Thursday, Nov. 11, 2004, at 8:20 AM PT
Read Henry Blodget's detailed disclosure statement here. To read previous installments in the Complete Guide to Wall Street Self-Defense, click here.
And now we turn to the biases and hazards of the financial media, the filter through which Wall Street is usually viewed. On this topic, I should begin by saying that I am burdened with even more than the usual conflicts. Having once been a popular "It boy" in the financial press—and now being a part-time member of it—I might be tempted to give this constituency a free pass on its (usually unacknowledged) role in encouraging millions of rookies to drink themselves silly at the market party a few years ago. On the other hand, having also been strafed by more than a few reporters and editors, I also have to be wary of sour grapes.
Let's start with the positive: The press plays a vital role on Wall Street. It polices and exposes sleazy financial practices, informs and educates investors, and generally offers a mind-boggling amount of information and commentary at a reasonable price. Without the media, Wall Street would surely be even more dangerous to the uninitiated than it already is, and many practices deserving of reform would never be noticed. (Regulators and prosecutors read the papers, too, and often base their investigations on what they read.) Without the press, debates about the direction of markets, economies, commodity prices, interest rates, and house prices, et al., would be imprisoned within professional circles, and we would have to phone the stock exchange to figure out where the market was doing.
Of course, there's no free lunch, and as we feast on gripping stories of price moves, dueling predictions, and conflicts-of-interest, we should keep in mind that financial journalists face conflicts of their own. First and foremost? To stay in business, they must persuade us to read, watch, or listen. Why is this a conflict? Because responsible investing is about as entertaining as watching bread rise.
As described in previous pieces, the way to give yourself the best chance of success in the markets is to diversify, buy low-cost funds, and hold them forever. That's it. Markets will crash; markets will soar. Amazons and eBays will blast off; Enrons and WorldComs will crater. Some people will get rich; others will get frog-marched to jail. The stories will be captivating, outrageous, nauseating—you won't be able to turn them off or put them down. As far as your investment decisions are concerned, however, they should be little more than noise.
The sad truth is that sound investment policy is boring. Diversify, reduce costs, aim to earn the market rate of return—even Stephen King would have trouble telling stories about that. But for the financial media to survive—at least the financial media devoted to helping you "profit" from reading/watching/listening—they have to suggest, over and over again, that there are exciting new places to put your money or dangerous places to remove it from. They have to tantalize you with the latest, greatest mutual funds or the "Ten Hot Stocks for 2005." They have to make you drool by observing, again and again, that every dollar invested in Microsoft's IPO in 1986 would be worth about $300 today. (Next time, it will be you!) They have to enumerate new ways to refinance your house, consolidate your debt, track your investments, pick better stocks, beat the pros, buy treasuries, retire rich, or make millions. They have to keep you watching, listening, and reading, or else they—not you, they—will go bankrupt.
Unfortunately, the underlying message of such commentary—Do something!—is often hazardous. Once you have gotten the investing basics right, you should do almost nothing. Every time you make a change, you incur costs—transaction costs, tax costs, psychological costs, and opportunity costs. You also, in many cases, decrease your odds of success. The least predictable investment decisions are those focused on the short term (months and years). The most predictable, meanwhile, are those focused on the long term (decades). To the media, of course, the long term is death. How often will you pay or tune in to be told that you shouldn't do anything, that nothing has changed? Answer? Never. So the media must find other ways to keep you entertained.
They must tell you what the markets have done and what they might do (this is entertaining, but irrelevant). They must tell you which stocks are hot and which stocks are not (entertaining, irrelevant). They must stage bull-bear debates (entertaining, irrelevant). They must worship those who have been right lately and trash those who have been wrong (entertaining but misleading: Those who have been right lately are actually more likely to be wrong in the future). They must trot out an endless parade of tools and statistics that you might use to whup the market (entertaining, usually irrelevant). They must pounce on the latest scandal, swindle, or fraud as shocking evidence that the world is going to hell in a handbasket and that, if you don't pay attention, you will go with it (fraud, sadly, has been with us since the dawn of time, as have bankruptcies and market crashes). They must blame your losses on everyone but you (we yearn to hear that it was someone else's fault). They must promise to divulge the secrets of "insiders" (in truth, there really aren't any "insiders," at least not any who know what the market is going to do). They must pander, forever, to the part of you that wants to believe that, by watching this show or reading this research or listening to this analyst or avoiding this mistake or following this strategy, etc., you, too, can strike it rich (unlikely).
A few years ago, when it was fashionable to associate one's business with all the money being made in the stock market, the slogan of the most famous financial TV network, CNBC, was "Profit From It." If your definition of "profiting from it" was loose enough to include "being entertained," the network could, indeed, have made you rich. If your definition was making more money, however, you would have been better off picking up the remote, turning off the TV, and getting back to work. A similar strategy, unfortunately, makes sense with much financial commentary.
The contents of this letter/report does not necessarily reflect the opinions or viewpoint of normxxx. They are provided for informational/educational purposes only.
The content of this message is not to be construed as constituting market or investment advice. It is intended for educational purposes only. Individuals should consult with their own advisors for specific investment advice.
-- posted by Normxxx
» Normxxx - 11/5 BEST OF RICHARD RUSSELL
11/5 BEST OF RICHARD RUSSELL
www.dowtheoryletters.com | November 5, 2004
Writes the Wall Street Journal in today's lead editorial -- ". . Mr. Bush has been given the kind of mandate that few politicians are ever fortunate enough to receive. The voters expect him to use it."
So what's coming up and what can we expect? For one thing, we can expect enormous government spending and equally enormous deficits. For a starter, the Treasury just announced that the US government will borrow $147 billion for the first three months of 2004. This is a new quarterly record -- with much, much more to come. Here's something else to ponder -- Federal tax revenue was $100 billion lower this year than when President Bush first took office -- but spending was $400 billion higher.
If the Bush tax cuts remain in place, budget deficit over the next ten years could add up to $5 trillion. That could put the squeeze on what the Prez can do.
Aggravating the budget deficits would be slowing business, higher oil prices and, of course, the wars in Iraq and Afghanistan -- plus the "war or terror" in general.
As I see it, there are two "musts" in the immediate picture.
US short rates MUST be held at low levels. If short rates start breaking out to the upside -- it will be -- "fun's over."
US consumers MUST continue to buy, buy, buy. If consumers begin to cut back on their buying and start to save, it'll be a whole new ball game -- and not a pleasant one.
President Bush promises that he'll create an "ownership society." I'm all for it, because what we own now is debts, debts and more debts. The Prez wants to turn over some of Social Security to privatization. and he wants to produce a "simpler" tax system, whatever that means -- and it could mean a push for a national consumption or sales tax.
Here are a few Russell suggestions which will never come about -- jettison the whole damn Federal Reserve system, get rid of the debt-backed Federal Reserve Notes, and let the US government issue it own US Government Notes. And make these Notes backed by a portion of gold so they act like real money.
Get full-speed into alcohol instead of gasoline for car fuel (Brazil is doing that now, big-time). Institute a policy of easing out of the Mideast and at the same time go all-out into research for hydrogen fuel.
So a lot of "ifs" and "why don't we do this instead of that." In the meantime, I have to deal with what is happening, not what I think should be happening. Which, of course, is why I'd never be a politician.
Mr. Bush will also, in due time, have to deal with the fact that our creditors are rapidly buying up both our assets and our debt. The fantastic system in which we print up credit and ship it to China in exchange for China's goods and merchandise serves a purpose. It supplies the US with billions of dollars worth of low-priced Chinese goods while at the same time China builds up its productive and research facilities and keeps millions of Chinese people employed.
It's only a matter of time before China and other Asian nations decide that they've got all the dollars and US Treasury bonds that they want. When that happens they'll start diversifying out of dollars or worse -- they'll start unloading some of their trove of Treasury bonds, which in turn will run up US interest rates.
What about the rising US government deficits? I've been writing that this is where the "balance sheet recession" comes in. Corporations are fixing their balance sheets. Corporations are cautious, and they are not on any kind of sending spree. US consumers could be on the verge of cutting back on their spending. Their assets are in their homes, and home prices are in the "bubble" phase.
That leaves the US government to keep the punch bowl bubbling. I'm sure that Greenspan is well aware of this. I think Bush has been told about this, and I think the top-echelon of the Bush administration knows this. Thus, Greenspan may occasionally mumble about the deficits, but count on it -- the deficits will continue. The defense budget alone guarantees it. The deficits are needed to keep the US economy from tanking.
(858) 454-0481
Richard Russell’s Dow Theory Letters
The contents of this letter/report does not necessarily reflect the opinions or viewpoint of normxxx. They are provided for informational/educational purposes only.
The content of this message is not to be construed as constituting market or investment advice. It is intended for educational purposes only. Individuals should consult with their own advisors for specific investment advice.
-- posted by Normxxx
» Normxxx - Why Wall Street Hates the "S" Word
Why Wall Street Hates the "S" Word
The real reason there are so few "sell" ratings.
By Henry Blodget | Tuesday, Oct. 19, 2004, at 10:58 AM PT
Read Henry Blodget's detailed disclosure statement here. To read previous installments in the Complete Guide to Wall Street Self-Defense, click here.
During the Wall Street research scandals a few years ago, the paucity of "sell" ratings was cited as prima facie evidence of corruption. In early 2000, the vast majority of stocks covered by brokerage firms were rated "buy" and less than 1 percent were rated "sell." After the crash, there seemed only one explanation for the disparity: Wall Street analysts were fraudulent shills, gleefully touting the lousy stocks of investment-banking clients.
So regulators restructured the industry, skewered alleged miscreants (yours truly), and steered hundreds of millions of dollars to independent research firms, where analysts were free from investment-banking conflicts. And two years after the delousing, are half of stocks rated "sell"?
Nope.
American Technology Research, one of the new breed of independents—a firm "dedicated to delivering quality, unbiased, fundamental research"—recently rated a whopping 4 percent of stocks it covers "sell." On the brokerage side, Merrill Lynch rated 6 percent "sell" (including, notably, 17 percent of banking clients). In other words, despite the $1.4 billion settlement, new rules, a barrage of lawsuits, and the creation of independent firms, the percentage of sell ratings has hardly budged. We can draw one of two conclusions: 1) Even after the reforms, Wall Street analysts are frauds; or 2) The paucity of "sell" ratings wasn't (and isn't) the result of a conflict of interest between banking and research.
The banking-conflict explanation for the rating disparity has by now been repeated so often that most people regard it as fact: Analysts, hungry for underwriting fees, guaranteed "buy" ratings to butter up banking clients. But as the continuing lack of "sells" suggests, the explanation is far more complex.
To begin with, there is selection bias. Wall Street analysts don't usually cover all the stocks in an industry, or even the majority. Covering a stock costs time and money. Most investors are "long only," meaning that they just own stocks, they don't sell them short (a way of betting the price will drop). Consequently, most investors don't want or need to hear about dogs. Back in the bubble days, for example, the average Internet analyst covered less than 10 percent of the more than 400 Internet stocks in the market. Had each analyst also rated the other 90 percent, there would have been more "sells."
Second, as I've discussed, ratings aren't action recommendations; they are judgments about how a stock might perform over a defined time frame. In some cases, this performance is relative (better or worse than the S&P 500, for example); in others, it is absolute (will the stock go up or down). In a bull market, the rising tide lifts most boats, and analysts who make judgments about absolute performance must take this into account. In a bear market, meanwhile, when most stocks are dropping, long-only investors still have to own something—a mutual fund can't just park its assets in cash. In this case, analysts don't help fund managers by opining that every stock in the sector is going to drop; they help by identifying the stocks that will drop least. In relative rating systems, these stocks deserve "buy" ratings even though they are going down.
Third, analysts are subject to the usual human psychological tendencies, such as herding: It feels safe and comfortable (and right!) to be part of a crowd. When the majority of analysts are wildly enthusiastic, a pessimist may worry that he or she is missing something or that a low rating will be seen as overly negative (akin to a "C" grade at a college where the average grade is "A-minus"). A recent study, in fact, found that "peer effects" were the most important factor in shaping analyst ratings on Nasdaq stocks from 1998-2003. (The same study found that the impact of the banking conflict was not statistically significant.)
Fourth, when the crowd is optimistic, being pessimistic can be disproportionately risky to an analyst's livelihood. In the research reforms, regulators focused on one potential source of conflict—bankers—but ignored the other two. For most analysts, even back in the bubble days, the loudest complaints and threats came not from bankers but from companies and investors.
The most valuable commodity on Wall Street is information, and no matter how many laws require companies to disseminate information to everyone, relationships still matter. A press release can't convey a CEO's facial expression when he or she is startled by a pointed question—and yet such expressions can transmit more information than a 100-page SEC filing. Smart investors and analysts cultivate relationships with company managers, and these relationships can evaporate in an instant when the analyst goes negative. The first time I downgraded a stock that other analysts loved, the company's management shut me out for three months. Although such blatant retribution is rarer now, companies still exact revenge. One of the most valuable services brokerage firms provide for big investors, for example, is arranging for company managers to visit their offices. Many companies refuse to go on the road with firms that are negative.
Investors, too, carry big sticks, and, like companies, don't hesitate to swing them. Major fund companies pay the Street hundreds of millions of dollars a year—way more than even the biggest banking clients. When a fund company owns, say, 5 percent of GE, and an influential brokerage-firm analyst trashes the stock, the fund managers don't usually call the firm and say, "Thanks for the tip." Instead, they usually say something like, "Your analyst is an idiot, and thanks to his big mouth, our funds will be down this morning." An analyst who routinely takes potshots at an institution's holdings won't be regarded as helpful for long, especially if he or she is wrong. (If the analyst is right, that's a different story, but the institutions have analysts, too, and if they thought the brokerage analyst was right, they wouldn't own the stock.)
These realities create what might be described as Pascal's Wager for Brokerage Analysts, a risk/reward equation that, when everyone else is positive, makes it risky to be negative:
There is a final reason for the current ratings disparity, one that requires some historical perspective. As Warren Buffett has observed, most investors make decisions based on the "rearview mirror": Specifically, they expect more in the future of what they have seen in the recent past. In 2000, when fewer than 1 percent of stocks were rated "sell," the market had been rising for 18 years. Analysts, investors, brokers, and commentators under 40 had experienced nothing but a bull market, and those over 40 could be forgiven for thinking that the nasty '70s were, thankfully, ancient history.
Long bull markets breed optimism: Investors are far more bullish at the end of them than at the beginning. The last few years have been painful, but the memories of 1982 to 1999 remain fresh, and most analysts and investors still expect a return to this happy trend. Unfortunately, as Buffett has also observed, the rearview mirror is not a crystal ball. In 10 years, if the market has remained stagnant, investors and analysts will gradually get more bearish, and the percentage of "sell" ratings should finally increase.
The contents of this letter/report does not necessarily reflect the opinions or viewpoint of normxxx. They are provided for informational/educational purposes only.
The content of this message is not to be construed as constituting market or investment advice. It is intended for educational purposes only. Individuals should consult with their own advisors for specific investment advice.
-- posted by Normxxx
» Normxxx - Re-Balancing Act
Commentary: Start the year with better balance
But beware of tax issues when timing sales
By Paul Merriman, FundAdvice.com | 12:01 AM ET Dec. 1, 2004
Paul Merriman is founder of Merriman Capital Management and editor and publisher of FundAdvice.com. Merriman just released a DVD titled, "How to Invest in Turbulent Times." (fundadvice.com)
SEATTLE (CBS.MW) -- In the world of investing, inertia can be one of the biggest hurdles.
Many investors carefully consider the amount of risk they can afford to take when they build a portfolio of stocks and bonds, or of funds that invest in them. And then, for no good reason except apathy, they let that risk get out of hand.
Millions of investors, if they had habitually employed a simple once-a-year process known as rebalancing, would have avoided at least some of the financial grief they suffered at the hands of the fierce bear market in 2000, 2001 and 2002.
But I'm discouraged to have to report that most investors never rebalance. Typically, they'll set their portfolios up in an appropriate fashion at the start, then forget about the whole thing. The result is that over time, the risk of their holdings gradually rises. This is the opposite of what should be happening: Generally, as investors get older, people have less tolerance for risk, not more.
Gains vs. risk
A simple example will show how this happens. Imagine you inherit $500,000 from your Uncle Jim and you conservatively and prudently decide it should be equally divided between stock funds and bond funds. This 50/50 combination, which works well for many people approaching retirement or already retired, will give you growth and income while keeping your risk level moderate.
So far, so good. Over time, the stock market tends to outperform the bond market in a majority of years. (After 2004, U.S. stocks will most likely have outperformed U.S. bonds in 16 of the most recent 20 years.)
You may wonder what's not to like about that. Well, how about a nasty three-year bear market?
Imagine that 500 grand from your Uncle Jim had arrived in 1990 and you invested it at the start of 1991, splitting it 50/50 between the Standard & Poor's 500 Index (SPX: news, chart, profile) and an index of intermediate-term U.S. bonds. Then imagine you left it alone without any rebalancing except for reinvesting all dividends and capital gains (and assume that you paid any taxes due from other sources).
Your $250,000 initial investment in bond funds would be worth about $655,000, while your equal investment in U.S. stocks would be worth about $1.23 million.
The problem? Stocks at this point would make up 65 percent of your portfolio instead of half, exposing you to much more risk than you initially determined you should take. Meanwhile (here's the bad news you may not want to think about), you are 15 years older than when you acquired that inheritance. According to all the conventional wisdom, you should be taking less risk, not more, as you get older.
The solution is simple: Rebalance the portfolio once a year. When stocks have been more productive, you'll be taking some of your profits (selling high) and buying more bonds (buying low). That's exactly the way to make money over the long term. And by bringing your portfolio balance back to 50/50 every year, you'll be keeping your risk where it ought to be.
Stick to the process
Of course it's easy to see that in the past 15 years you would have made more money without rebalancing. This argument, however, is meaningless, because the purpose of rebalancing is not to make more money; it's to keep your level of risk where it ought to be.
By not rebalancing, investors essentially place heavier and heavier bets over the years that the stock market will outperform the bond market.
Over very long periods of time, that's a pretty reliable bet. But over shorter periods, sometimes as long as a decade, the stock market can be enormously disappointing. If one of those periods occurs when you have just retired, you can suffer irreparable financial damage.
The rebalancing process is simple: total your portfolio, then allocate that total among your asset classes in the right proportions. The resulting numbers tell you what a balanced portfolio will look like. Buy or sell enough of each asset class to bring it into line with the numbers you just calculated. Then leave it alone for a year.
Rebalance now?
As we wind up 2004, it's important to note that not everybody should rebalance before the end of the year, for a simple reason: taxes.
Rebalancing requires you to sell your winners, and that means setting yourself up for potential capital gains taxes. If you rebalance a taxable account this year, you'll owe taxes on those gains in April 2005. If you wait until January, you won't owe those taxes until April 2006.
In a retirement account, rebalancing now is an excellent idea if you haven't done so within the past 12 months and if you can do so without incurring redemption fees or other charges. The tax consequences will be the same whether you do it now or next year. So you might as well do it now while you're thinking of it. Also, mark you calendar for one year from now so you can rebalance again.
No matter what 2005 brings, if you do this by early January, you'll be in proper balance.
The contents of this letter/report does not necessarily reflect the opinions or viewpoint of normxxx. They are provided for informational/educational purposes only.
The content of this message is not to be construed as constituting market or investment advice. It is intended for educational purposes only. Individuals should consult with their own advisors for specific investment advice.
-- posted by Normxxx
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