The Big Picture - Macro Perspective on the Capital Markets, Economy, Technology, and Digital Media

A few months ago, I did a WSJ panel with Jon Najarian in Chicago. He’s a nice guy, a canny options trader, and the founder of Option Monster.com. (He and his twin bro are regular panelists on Fast Money).

As a trader, Jon points out what a horrific deal the taxpayers got for their bailout “investments.” Warren Buffett bought into Goldman Sachs about the saame time as Uncle Sam did. The difference is in the terms and the returns: Buffett earned 120% on his money, while Hank Paulson, on behalf of the taxpayers, picked a paltry the 23%.

Here are the details:

“The federal government let the trade of the century slip through its fingers at the depths of the financial crisis. Worse, Warren Buffett had already drawn up the perfect blueprint, in steps so easy even a Treasury secretary could follow. Doesn’t that make the government a candidate for worst trader of all time?

Long before his acquisition of the Burlington Northern Santa Fe (ticker: BNI) railroad, the Oracle of Omaha agreed, on Sept. 23, 2008, to invest $5 billion in Goldman Sachs (GS) through a purchase of perpetual preferred stock. The shrewd chairman and CEO of Berkshire Hathaway also got warrants to buy up to $5 billion of Goldman common shares at $115 each, some 8% below where the stock was trading at the time.

In a single bold stroke, when Goldman and the global markets needed it most, Buffett put his money and reputation on the line. He stood to own roughly 10% of the bank, and his convertible shares also pay a fat 10% dividend.

Yet even with this trade serving as a very public model, what did then-Treasury Secretary Hank Paulson ask for? When the Wall Street giants had their backs to the wall, he gave them billions of our taxpayer dollars for a relative pittance . . .

Great stuff — thanks Jon!

>

Source:
The World’s Worst Trader?
JON NAJARIAN
Barron’s NOVEMBER 16, 2009

http://online.barrons.com/article/SB125815667838947645.html

David R. Kotok co-founded Cumberland Advisors in 1973 and has been its Chief Investment Officer since inception. He holds a B.S. in Economics from The Wharton School of the University of Pennsylvania, an M.S. in Organizational Dynamics from The School of Arts and Sciences at the University of Pennsylvania, and a Masters in Philosophy from the University of Pennsylvania. Mr. Kotok’s articles and financial market commentary have appeared in The New York Times, The Wall Street Journal, Barron’s, and other publications. He is a frequent contributor to CNBC programs. Mr. Kotok is also a member of the National Business Economics Issues Council (NBEIC), the National Association for Business Economics (NABE), the Philadelphia Council for Business Economics (PCBE), and the Philadelphia Financial Economists Group (PFEG).

~~~

Good Morning, Vietnam!
Sent from Hanoi, November 16, 2009

Robin Williams’ movie scenes are nothing like modern-day Vietnam. At 6 AM the streets are already teeming with people, scooters, buses and cars. Many Hanoi city folks gather to exercise in the early morning. Badminton games are everywhere and exercise groups of all types are ubiquitous, almost as ubiquitous as the cell phones.

By 8 AM the workday has commenced and the traffic is chaotic but not truly a “jam.” Somehow it works. There are 3 million scooters in this city of 6.5 million people. Many intersections have neither stop signs nor traffic lights. There is a remarkable order in the how the scooters and pedestrians and buses all seem to accommodate each other. Ask anyone who has been here and they will describe this cacophony to the reader who hasn’t yet put Vietnam on the top of the list of places to visit.

Vietnam is an emerging-market success story. Our GIC (Global Interdependence Center, www.interdependence.org) delegation has visited the stock exchange, where 400 listed companies now trade with a combined market cap of 50% of GDP. We met privately with the chairman of the VN version of the Securities and Exchange Commission. They were formed in 2007 and are dealing with the growing pains of rapidly expanding private-sector markets in a newly emerging country. This looks like a mini-China of a few years ago. Under present plans there will be 1500 companies trading soon, as the government sheds its state-owned industries and privatizes the economy. There is one Vietnam ETF in the US. It was launched in September and bears watching closely. The issue is that half of its weight is in the financials, and therein one finds an ongoing global problem. It also has limited liquidity because of newness. Cumberland hasn’t bought it yet, but it is on the watch list for future positioning in our global portfolios.

Back to Hanoi. Segue to history.

Bill Stone of the Philly Fed is in our delegation. He served in South Vietnam in 1970. I was lucky enough to be assigned elsewhere by the US Army in the 1960s. Our group visited the “Hanoi Hilton” and shared some thoughts about the experience. By agreement, Bill will speak for himself; the following impressions are mine alone.

The visit to war history here is sobering. There is the photo of John McCain on his return visit and another of him lying on a stretcher while he was a prisoner. There are other powerful photos. And there is the story of the war told through the Vietnamese lens. They call it the American War; the obverse of what we call the Vietnam War. The Hanoi Hilton was originally built by the French to be a prison for Vietnamese dissidents. VN war history shows that VN treated their American prisoners better than the Vietnamese were treated by their French occupiers.

We also visited the war museum and saw the defeat of the French in the 1950s. In the next section, Dien Bien Phu history was followed by the memorial to the defeat of the Americans. Yes, we Americans were resoundingly defeated.

In my view and as a retrospective, we were misled by our politicians. There are so many questions unanswered. What if Eisenhower had responded positively to Ho Chi Minh? Would HCM have sought out the communist Russian alliance, or was that his last resort to escape what had been brutal French occupation and colonization?

Remember, this history here is told through the Vietnamese lens. It is clear that the internal story of Vietnam is one of repelling conquest by China or France or America or others. Vietnamese youth are taught that they have always resisted the invader and that they have never aspired to conquer others. That is the first message one hears here.

The second, and my personal one, is a feeling of good luck. I wasn’t sent here. I didn’t die here. Many Americans were not and are not as lucky. “There but for the grace of God, go I” has resonance to this writer as he stands and looks at the history with his own eyes.

Lastly, the sense of the futility of war is very powerful here. Why are politicians so engaged in these acts of madness? Was Kennedy convinced because the southern part of the country was dominated by a Roman Catholic minority in power, and they prevailed on his religiosity and that got us into the Vietnam War? Did the so-called Harvard brain trust really think they were making the world safe for democracy by expanding the Vietnam War, as we call it? Did anyone believe that bombing Hanoi would lead these people to capitulate, after they had resisted invaders for several thousand years? Did they take the time to understand history?

And lastly, the debate in our group centered on American policy as we presently know it. President Bush’s war is now becoming President Obama’s war. We discussed the parallels and differences between Vietnam then and Afghanistan now. Has anyone throughout history occupied and successfully pacified Afghanistan? Will that be Obama’s failure? Does the “domino theory hold with Pakistan?” It certainly didn’t hold in Southeast Asia.

Personally, I expect Vietnam to be a booming emerging market. These younger folks do not want war. They have moved from bicycle to scooter, from hand writing notes to cell phones. They do not want to lose what they have and they reject the violence of the past.

Can we find a way to introduce that notion of stakeholdership elsewhere in the world? In Afghanistan? In Iraq or in Iran? I am convinced that the task is enormously difficult and fraught with many obstacles. But it is the noble purpose of the GIC to try to avoid war by developing stakeholders who are invested in the peace. We do that in economic and financial terms. That is why we came to Vietnam.

The trip was well worth the effort. Come see for yourself.

We finish with meetings with the Finance Ministry here, and then off to Singapore for the public conference that GIC is holding in partnership with the University of Chicago. Readers may find me as guest host on CNBC’s Worldwide Exchange at 5 AM New York time on Wednesday morning. Safe journey to all. For now we wish you Tam Biet.

David R. Kotok, Chairman and Chief Investment Officer, email: david.kotok@cumber.com

U.S. Week Ahead: Retail Results, Economy In Focus 11/13/2009

Retailers including Home Depot and Target will report results and key economic data will include retail sales and industrial output. Meanwhile, nine speakers from the Federal Reserve will offer their views on the economy. Stacey Delo reports.

~~~
Asia’s Week Ahead: Obama Tour, Data In Focus 11/13/2009

U.S. President Barack Obama will tour the region, making stops in Japan and China to start with. Japan will release gross domestic product data and the Bank of Japan will make a decision on interest rates.

~~~

Europe’s Week Ahead: Air France-KLM Report 11/13/2009

Airbus owner EADS reports quarterly results along with airline Air France-KLM. In the U.K. luxury-goods group Burberry will provide an update.

~~~

There is a substantial take-down of pedantic bore Ayn Rand in GQ. They tease it thusly:

2009′s most influential author is a mirthless Russian-American who loves money, hates God, and swings a gigantic dick. She died in 1982, but her spawn soldier on. And the Great Recession is all their fault.

I love that because it is both funny and touches upon so many subtle truths; Here is a longer, funnier excerpt:

“This is because there are boys and girls among us who have never overcome the Randian infection. The Galt speech continues to ring in their ears for years like a maddening tinnitus, turning each of them into what next year’s Physicians’ Desk Reference will (undoubtedly) term an Ayn Rand Asshole (ARA). They constitute a relatively small percentage of Rand readers, these ARAs. But they make their reading count. Thanks to them, the Rand Experience is no longer limited to those who have read the books. It’s metastasized. You, me, all of us, we’re living it. Because it’s the ARA Army of antigovernment-antiregulation puritans who have spent the past three decades gleefully pulling the cooling rods out of the American economy. For a while, it got very big and very hot. Then it popped. And now the rest of us have to spend the next decade scaling the slippery slopes of the huge suppurative crater that was left behind.

Feeling fisted by the Invisible Hand of the Market lo these past fifteen months? Lost a job lately? Or half the value of your 401(k)? Or a home? All three? Been wondering whence the too-long-ascendant political and economic ideas and forces behind Greenspanism, John Thainism, blind Wall Street plunder, bankruptcy, credit-default swaps, Bernie Madoff, and the ensuing Cannibalism in the Streets? Then you, sir, need to give thanks to Ayn Rand Assholes everywhere—as well as the steely loins from which they sprang.”

Brilliant.

I haven’t read Rand’s work for decades, but I do recall two things: A) It was a giant pedantic bore; 2) Debating it with people in College was always a hoot. The thing that struck me most was the lack of rigor in the arguments — it was more religion than logic, more wishful thinking than reality based observations of how humans actually behave.

You can the concentration of ARAs in a certain groupings. These are the folks who blame the CRA for the collapse of the economy; ARAs tend to be hardcore idealogues; many are rabidly partisan. All too many are deeply uninformed. They breathje co0gnitive dissonance they most people breathe oxygen. When confronted with facts, data, reality that challenge their ideology, they make up new facts.

I imagine that Freud would bluntly use Randian logic to note they inhabit a guise of superiority in part to compensate for vast and deeply felt inferiorities and insecurities. That’s right, those of you who feel compelled to talk about how big your junk is are typically are sporting selections from the wee person’s aisle.

Malcolm Gladwell is a guy who knows how to write compellingly readable stories. The takeaway in his book Outliers The Story of Success is quite unRandian — it is that luck plays an enormous factor in out-sized success. That is a factor the Randians prefer to ignore.

What I find so weird about Rand is that there are more than a few people I respect who gobbled up her work. These are not ARAs — but are otherwise rational folks who never quite went full tilt into ARA-hood. But they have a huge respect for her work. Me? I prefer “lessers” like Adam Smith, Thomas Jefferson and John Maynard Keynes.  I prefer John Stuart Mill’s Harm Principle of Liberty over Rand’s Objectivism.

Dangerous Minds contextualizes the pedantic bore portion of the Rand legend:

“It’s Rand’s dialogue that seals her reputation as an author you just can’t take seriously. To be fair, she was writing in her second language, but the problem with her books is that no one actually speaks to one another, they just make speeches at each other. Hectoring, long-winded speeches. It’s fine to read stuff like that as a teenager, but when I crack open one of her books today, I shake my head in disbelief at how bombastic and horrible her writing is.”

Bombastic and horrible? You are being too kind . . .

My actual problem with Rand — behind her blindingly horrific prose — is that she was pushing back against a totalitarian system in the Soviet Union, a corrupt and morally indefensible system she had every right to be infuriated by. But she applies that righteous fury and outrage to a Democracy, whose economy is Free Market based. Hence, rather than challenging the politburo, she challenges Unions. Cooperative behavior seems to be hard for her to grasp. One suspects she would have disliked Consumer Reports, or Zagats, or Amazon’s user ratings.

Worst of all, Rand’s Objectivism has become the rationale for all manner of morally repugnant behaviour. However, I did take one personal lesson from Atlas Shrugged to heart: Anytime I see a parked car with a John Galt bumper sticker, I like to knock off one of the sideview mirrors, and leave it on the hood. I include a note stating my selfish, random act made me feel good, and therefore should be a perfectly fine act in their world.

I assume the recipients miss the irony . . .

>

Sources:
The Bitch is Back
Andrew Corsello
GQ, October 27, 2009

http://www.gq.com/entertainment/books/200911/ayn-rand-dick-books-fountainhead

Ayn Rand Assholes
Dangerous Minds, 11.11.2009

http://www.dangerousminds.net/index.php/site/comments/ayn_rand_assholes/

Cool graphic, from Information is Beautiful:

click for larger graphic

chart courtesy of Information is Beautiful

Interesting New York Times article about the overall markets’ valuation:

“Market valuations are another consideration. By almost every measure, stocks are far cheaper at Dow 10,000 today than at Dow 10,000 in March 1999.

Back then, the price-to-earnings ratio for domestic stocks stood at a very high 41.4. That’s based on 10-year average earnings, a conservative measure that smoothes out short-term swings in corporate profits. Since then, using the same measure, the market’s P/E has fallen to 18.9. While that’s not necessarily a screaming bargain — the market’s long-term average is closer to 16 — stocks are trading at a discount of more than 50 percent to their 1999 prices.”

That would seem to argue for the value player’s approach to investing. And over long periods of time (decades), the value approach is indeed valid.

However, academic studies have shown conclusively that it is your asset allocation strategy that is the greatest determiner of your returns. The best stockpickers out there got crushed if they were 100% long US equities in 2008; The worst bond mangers still did well relatively.

Consider:

“The return to 10,000 also serves as a bitter reminder that stocks have gone virtually nowhere, on balance, for more than a decade. It was in March 1999 that the Dow first climbed above 10,000, before soaring as high as 14,164 two years ago and plummeting as low as 6,547 this past March . . .

Look a bit deeper, though, and you’ll find that there have been some changes in the domestic market, too, in the last 10 years — and largely for the better. Some of them, however, are hard to see at first glance.

For example, a majority of sectors have actually posted positive returns since the end of 1999 — in some cases sizable gains. On average, including dividends, energy stocks have returned nearly 150 percent, shares of consumer staples companies (like Procter & Gamble and others that sell necessities) have gained nearly 65 percent and utility stocks have risen nearly 50 percent . . .” (emphasis added).”

What is also be worth looking at are other investable asset classes beyond US equities: How did emerging markets do? Convertible Bond Arbitrage? Private Equity? Real Estate? Commodities? Munis? Gold?

Even within the equity slug of your allocation, there are small cap value, big cap tech, alt.energy, etc. that may have outperformed the overall market over the same time period.

And when all of the above asset classes become correlated and start to head down, as they did last October, that is your signal to move aggressively to cash.

The overall conclusion of this article, which the Times did not explicitly state, is that most investors would be better off with an asset allocation strategy rather than sticking to the traditional stock picking or even index approaches so common amongst mom and pop . . .
>

Source:
10 Years Later, a Much Less Expensive Dow 10,000
PAUL J. LIM
NYT, November 14, 2009

http://www.nytimes.com/2009/11/15/business/economy/15fund.html

Richard Ambrose is the author of some amusing financial humor. He is the original author of The Lloyds Prayer that was widely circulated without proper attribution last week (my apologies, Richard!)

His most recent work takes a poke at one of my favorite CNBC curmudgeons, Mark Haines:

How To Be An Agreeable Guest Of Mark Haines on CNBC:

Each trading morning, CNBC’s anchor agrarian has two
guests he asks one simple question: “So, What Do You Think Of The Market?”

If you are chosen, you¹ll only have 20 seconds to answer so practice
practice practice!; Here¹s how to make sure you get it right!

“Good Morning Mark! ­ I’m (pick ONE)

a)  Very Bullish
b)  Bullish
c)  Bullish But A little Cautious (Use ONLY if market is currently down)

on the markets here because we believe (pick TWO)

a)  interest rates are going to stay low,
b)  there is real growth in the GDP,
c)  the rally is still intact,

And (pick ONE)

a)  stocks are a great value at current levels.
b)  the market will continue to go higher from here.
c)  stocks are undervalued at these levels.

We¹re bullish on (pick up to THREE)

a)  Technology
b) Energy and Commodities
c)  Blue Chip Industrials
d) (Insert Stock Names You Already Own At Lower Prices)

Mark will make some short meaningless comment signaling your time is up, then repeat your name and firm; SMILE and remember to reply:

“Thank you for having me on.”

Amusing stuff, Richard. Thanks!

Words from the (investment) wise for the week that was (November 9 – 15, 2009)

“Words from the Wise” this week comes to you in a shortened format as I do not have access to my normal research resources while on the road in Europe. Although very little commentary is provided, a full dose of excerpts from interesting news items and quotes from market commentators is included.

While the Dow Jones Industrial Index and other benchmark indices reached 52-week highs last week and pleased Wall Street, the cartoonists reminded us that worrisome economic issues remained in Main Street …

Source: Jeff Parker, Comics.com, November 11, 2009.

The past week’s performance of the major asset classes is summarized by the chart below – a mixed bag, so to speak, with government bonds, equities, corporate bonds and gold closing the week in positive territory.

Source: StockCharts.com

A summary of the movements of major global stock markets for the past week and various other measurement periods is given in the table below. With the exception of only a few indices – notably the Japanese Nikkei Dow that recorded a third consecutive down week – most global stock markets made headway last week, adding to the gains for the month.

Read the rest of this entry »

Sapolsky’s outstanding Stanford lecture on “The Uniqueness of Humans”

Stanford primatologist and anthropologist Robert Sapolsky scores big with this grad lecture on “The Uniqueness of Humans,” a humbling, inspiring and sweet 30 minutes on what it is about humans that makes us unique from our animal cousins, and how many of the seemingly unique features of humanity can be found elsewhere.

Class Day Lecture 2009: The Uniqueness of Humans (Thanks, Avi!)

One of the weirder things about writing for an outside publication is that the Headlines to your articles are typically written by someone else.

Whether its a bored, detached editor, or just the opposite — someone trolling for salacious spin to capture page views — very often the title slants the point of the article. Sometimes, it misses it entirely.

Such is the case in a Sunday NYT Real Estate article about apartment sales in New York City: Bidding Wars Resume.

Had the editors paid closer attention, they might have picked up the more nuanced story within the story. Following a few anecdotal examples 0f dubious value, they actually get to the meat of the article:

“In many cases, the jousting buyers start and end below the asking price. But in others, multiple bidders are pushing prices well above list price. To add a confounding twist, many of the bids are being made by buyers willing and able to pay all cash.

Brokers say that bidding wars are almost always set up by listings that are “priced well,” and by that they mean 20 to 30 percent below the high-water marks of early 2008.

Jonathan J. Miller, the president of the appraisal firm Miller Samuel, estimated that two-thirds of the roughly 4,000 apartments for sale in Manhattan are priced too high for the current market.

“So,” Mr. Miller said, “you have this weird situation right now where you have above-average inventory, but people are fighting over the ones that are priced correctly.”

Our man Jonathan Miller drops the truth bomb, and to make sure no one will miss it, I shall repeat it here in bold print: Two-thirds of inventory is priced too high for the current market.

That is the key lesson that I have been hammering on for nigh over 3 years now; it is why the big 4 foreclosure states (CA, NV, AZ, FL) have seen a huge surge in activity, why foreclosure moratoriums are counter-productive, and why most mortgage mods are doomed to failure: PRICES REMAIN TOO HIGH.

>

Previously:
Residential Real Estate Price Freefall (January 27th, 2009)

http://www.ritholtz.com/blog/2009/01/residential-real-estate-price-freefall/

Homes: Still Too Pricey to Stabilize (February 18th, 2009)

http://www.ritholtz.com/blog/2009/02/homes-still-too-pricey-to-stabilize/

No Housing Recovery Before Further Price Declines (February 21st, 2009)

http://www.ritholtz.com/blog/2009/02/no-housing-recovery-before-further-declines/

The Elusive Housing “Fair Value”  (April 24th, 2009)

http://www.ritholtz.com/blog/2009/04/housing-fair-value/

Median Income vs Median Home Price  (April 23rd, 2009)

http://www.ritholtz.com/blog/2009/04/median-income-vs-median-home-price/

Updated: Case-Shiller 100-Year Chart  (July 1st, 2009)

http://www.ritholtz.com/blog/2009/07/update-case-shiller-100-year-chart/

Source:
Bidding Wars Resume
VIVIAN S. TOY
NYT, November 13, 2009

http://www.nytimes.com/2009/11/15/realestate/15Cov.html