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

Richard W. Arms, Jr., is one of the world’s most respected Stock Market personalities. His technical work is used worldwide and he has been a guest speaker on four continents. His books have been translated into a number of other languages, and his methodology is familiar to most Stock Market traders and professionals in every financial center. He makes frequent appearances on financial television, nationally and internationally. He is one of only ten living recipients of the highest recognition in the technical analysis field – The annual Market Technicians’ Award. In 2008 he received the Traders Library Halll of Fame award.

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February 22 2011

First the Fed, now the B of E:

Spencer Dale, the Bank of England’s Chief Economist, is joining hawkish bankers Andrew Sentance and Martin Weale. The three have voted for an interest-rate increase.

The debate is (of couse) over inflation, and like the Fed, the B of E is now threatened with splitting into two camps: A Weak Economy/Deflation bankers vs the Fear of Inflation Bankers.

“For three members, the case for removing some monetary stimulus at this meeting was compelling,” according to minutes of the Feb. 10 decision published today in London. “Of those members not favoring a rise in bank rate, some thought that the case for an increase had nevertheless grown in strength.”

Among members pushing for the first interest-rate increase since July 2007, Dale and Weale voted for a 25 basis-point move from the record low of 0.5 percent, while Sentance increased his call to 50 basis points. Adam Posen maintained his vote to add 50 billion pounds ($81.2 billion) to the bank’s 200 billion- pound bond-purchase plan. The other five members voted for no policy changes. The pound rose after the minutes were published.”

Must be nice to have an appreciating currency when you travel — where I am, I get two Bajan dollars for each American greenback — but the Brits get 3 Bajans for every pound.

Hence, the island is mostly Brits and Canadians. Us Yanks are few and far between…

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Source:
Dale Joins Sentance, Weale in Push for BOE Rate Increase
Svenja O’Donnell and Jennifer Ryan
Bloomberg, Feb. 23 2011
http://noir.bloomberg.com/apps/news?pid=20601087&sid=agt8pgTzRfZ0&pos=1

Gaddafi’s Rule Appears in Jeopardy

Libyan leader Muammar Gaddafi’s four-decade-old rule appeared in increasing jeopardy on Monday as anti-government protests reached the capital of Tripoli for the first time. Reuters’ Jon Decker reports.

2/21/2011 5:15:06 PM

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Libya Crisis Makes Diplomatic Waves

U.N. chief Ban Ki-moon and the Libyan envoy to India react to reports of Libyan warplanes targeting civilians during mounting unrest. Video courtesy of Reuters.

2/22/2011 12:53:56 PM

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Source:
Dictator Loses Grip in Desert
CHARLES LEVINSON in Tobruq, Libya, MARGARET COKER in Abu Dhabi and TAHANI KARRAR-LEWSLEY in Dubai
WSJ, FEBRUARY 23, 2011
http://online.wsj.com/article/SB10001424052748703775704576161712936171594.html

Its likely a coincidence, but my travel history has the markets doing odd things when I roam. The 2000 top and 2003 bottom, the October 2007 highs while I was in some far away city; most infamously, the Flash Crash took place while I was airborne at 30,000 feet.

Hence, if the markets do something screwy this week, at least you were warned (Heh heh).

-2.20.11 Traveling !

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Oops . . . My bad . . . sorry.

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Let’s use as an excuse to open the floor up to the crowd, and see what this might mean:

What does today mean to the next 3 – 6 months of market action?

Was this merely a twitch, a warning tremor, or the beginning of something much more ominous?

What say ye?

Tim du Toit is the editor and founder of Eurosharelab. He has more than 20 year of institutional and personal investing experience in emerging and developed markets. He previously published the terrific James Montier Resource page. Tim is based in Hamburg,. Germany. More of his articles can be found at Eurosharelab (www.eurosharelab.com).

Republished here with permission.

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I have been an avid reader of Michael Mauboussin’s research since about 2004 when he started working for Legg-Mason.

If you want to learn what successful investing is really about, along with the research to back it up you cannot do better than read Michael’s work.

I have unfortunately not had the pleasure of meeting Michael but it is something I would really like to do.

To get to know his work I have put together this resource page, a listing of all Michael’s articles I could find on the internet along with a short description.

First something on Michael’s background.

Michael Mauboussin Bio

Michael Jacques Mauboussin is the Chief Investment Strategist at Legg-Mason Capital Management Inc. He joined the firm in 2004.

He is also Chief Investment Strategist and Senior Vice President at Legg Mason Funds Management Inc.

Prior to joining Legg-Mason he was a Managing Director and Chief U.S. Investment Strategist at Credit Suisse First Boston (CSFB). He joined CSFB in 1992 as a packaged food industry Analyst.

Michael is the former President of the Consumer Analyst Group of New York and was repeatedly named to Institutional Investor’s All-America Research Team and the Wall Street Journal All-Star survey in the food industry group.

His latest book, Think Twice: Harnessing the Power of Counter intuition was published in the fall of 2009.

He has also written “More Than You Know: Finding Financial Wisdom in Unconventional Places” and was co-author of “Expectations Investing: Reading Stock Prices for Better Returns”.

He has also been an Adjunct Professor of Finance at the Columbia Business School since 1993.

Business Week’s Guide to the Best Business Schools (2001) highlighted Michael Mauboussin as one of the school’s “Outstanding Faculty,” a distinction received by only seven professors.

In 2004, SmartMoney magazine named him as one of its Power 30, a list of “the most influential people on Wall Street”.

Mr. Mauboussin is on the Board of Trustees at the Santa Fe Institute. He holds a B.A. in Government from the Georgetown University.

Now on to Michael’s research

2011

In the article, “The Real Role of Dividends in Building Wealth” dated January 25, 2011, Michael Mauboussin argues that for dividends to be included as a source in accumulating capital, the investor must reinvest dividends. Research has shown that this is unfortunately not the case with the majority of private investors.

In this January 12, 2011 article called “Blaming the Rat” Michael Mauboussin talks about the relationship between incentives and behaviour.

Social scientists often assume that poor behaviour is a result of faulty incentives and that good behaviour reflects well-structured incentives.

Ironically, management literature shows that the relationship between incentives and behaviour is more complex that what these scientists originally thought. In most cases, drive and mindset are more important than the incentive program.

For investors, the objective is to find driven leaders who have good capital allocation skills and have a substantial stake in the company. A good example is Warren Buffett who receives a relatively modest compensation as CEO. Since nearly all of his net worth is invested in Berkshire Hathaway, he has the motivation and incentive to perform well.

2010

In the July 15, 2010 article called, “Untangling Skill and Luck” Michael Mauboussin provides framework on how to differentiate between skill and luck. One of the most difficult things a fund investor has to do. And something you have to test your own performance against all the time. Was the return you generated based on luck or was it skill?

In this article, Michael Mauboussin discusses what comprises a good investment process – finding gaps between expectations and fundamentals and gives guidelines as to the correct sizing of investments.

In a presentation at the CFO Executive Summit titled “It’s all about Managing for Value” dated June 11, 2010, Michael Mauboussin discusses that the primary goal of a corporation is to maximize its long-term shareholder value.

In corporate strategy, the litmus test is whether the strategy will ultimately increase shareholder value.

In this article on “The Colonel Blotto Game” dated May 12, 2010 Michael Mauboussin draws lessons from the Colonel Blotto game on how to compete when you are the underdog.

For a company with fewer resources than its competitor, the best strategy is to compete in a non-traditional way in order to expand the number of battlefields thus changing the basis of competition.

Another lesson from the game is that the “best” team does not necessarily win the game. The winner is usually the one who has effectively played to its strengths and weaknesses.

In “A Surge in the Urge to Merge” Michael Mauboussin writes in January 12, 2010 that a Mergers and Acquisitions (M&A) wave is currently brewing.

While research shows that company making acquisitions in the early part of the cycle deliver the best returns the focus of any investor in evaluating M&A deals is whether the acquiring company adds shareholder value from the acquisition. In economic terms (do the synergies exceed the premium paid) not just looking at accounting based measures.

Read the rest of this entry »

While I am traveling, its going to be The Chart Store week here at the Big Picture. I will feature a different TCS graph every day. If you become a subscriber of theirs ($239 per year), you gain access to their massive repository of great weekly chart porn, and their library of more than 5,000 charts.

In light of today’s Case Shiller data, lets look at a few Housing Start charts you may not have seen before: The first rebases the post WWII housing cycles from peak to trough; the second is a straight up look at  current starts:

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Last week, we discussed data that suggested the NAR has been dramatically overstating home sales and understating stating inventory. I have a much longer piece in the works, tracing how the NAR’s data errors were discovered and by whom — but today’s must read MSM article is in the WSJ:

The National Association of Realtors, which produces a widely watched monthly estimate of sales of previously owned homes, is examining the possibility that it over-counted U.S. home sales dating back as far as 2007.

The group reported that there were 4.9 million sales of previously owned homes in 2010, down 5.7% from 5.2 million in 2009. But CoreLogic, a real-estate analytics firm based in Santa Ana, Calif., counted just 3.3 million homes sales last year, a drop of 10.8% from 3.7 million in 2009. CoreLogic says NAR could have overstated home sales by as much as 20%.

One key correction: The NAR tracking error did not begin in 2007, as the WSJ suggests, but dates bacl to their lst benchmark in 2000.

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Previously:
Is the NAR Overstating RE Sales ? (February 17th, 2011)

Source:
Home Sales Data Doubted
Realtor Group May Have Overstated Number of Existing Houses Sold Since 2007
WSJ, FEBRUARY 22, 2011
http://online.wsj.com/article/SB10001424052748704476604576158452087956150.html

Mike Konczal is a fellow with the Roosevelt Institute, and is a blogger at the Rortybomb Blog and New Deal 2.0.

Check out William Worthington Fowler’s description of Wall Street, circa 1870:

“To the merchant and banker it is a financial centre, collecting and distributing money, regulating the exchanges of a continent and striking balances of trade with London and Frankfort. To the outside observer and novice it is a kind of work-shop thronged by cunning artisans who work in precious metals, where vessels of gold and silver are wrought or made to shine with fresh luster, and where old china is fire-gilt as good as new. The moralist and philosopher look upon it as a gambling-den, a cage of unclean birds, an abomination where men drive a horrible trade, fattening and battening on the substance of their friends and neighbors—or perhaps a kind of modern coliseum where gladiatorial combats are joined, and bulls, bears and other ferocious beasts gore and tear each other for public amusement. The brokers regard it as a place of business where, in mercantile parlance, they may ply a legitimate trade, buying and selling for others on commission. To the speculators it is a caravansera where they may load or unload their camels and drive them away betimes to some pleasant oasis. To the financial commanders it is an arsenal in which their arms and chariots are stored, the stronghold to be defended or besieged, the field for strategy, battles and plunder.”

-William Worthington Fowler
Ten years in Wall Street or, Revelations of inside life and experience on ‘change, 1870

Ten years in Wall Street is also available at Google Books

“The Investment Answer” is broken down into five main principles:

1. Hire a fee-only, independent financial advisor, not a broker who is compensated for selling you company products. This is an issue both Goldie and Murray felt strongly about.  “[Murray] didn’t care for the retail side of Wall Street; he felt that was the side of Wall Street that was really hurting people,” Goldie says. ”This book was his attempt to try to educate people and help level the playing field.”

2. Diversify among stocks and bonds, buying both large and small caps and value and growth.

3. Divide foreign and domestic investments.

4. Decide if you want to own passive or actively managed mutual funds. Goldie and Murray both encourage passive investing. “Over time a passive strategy on average will outperform an active strategy,” says Goldie.  This concept was hard, even for Goldie, to understand at first.  “I was brought up under the idea that if you worked harder and you were smarter and better, you would perform better. But it doesn’t hold with investing.”

5. Rebalance your portfolio.