Mar 22th

Gallup Poll Reinforces Underemployment Concern

Author: Kenn Lamson

Comments: 0

Following up on earlier posts regarding the comprehensive U-6 unemployment and underemployment rate (“Slamming on the Brakes”, 3/17/10; “17.9 Percent Real Unemployment”, 3/7/10; “U-6 Is Not A Rock Band”, 1/25/10):

Gallup recently released a poll showing that as of mid-March their underemployment measure reached 20.0%. While the calculation does not mirror the official Bureau of Labor Statistics figure, it underscores the slow pace of economic recovery as measured by “on-the-ground”, tangible results.

Mar 20th

“House and Stock Prices Only Go Up…”

Author: Kenn Lamson

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From NPR.org, a backgrounder on the couple that run the urban myth-busting website Snopes.com. In the interest of disclosure, I’ve used the site from time to time to investigate items I’ve read online, usually forwarded by a friend or family member who’s well-meaning but less skeptical than yours truly. Wonder if the Mikklesons ever tracked down the myth “house and stock prices only go up”…

Mom-And-Pop Site Busts The Web’s Biggest Myths

March 20, 2010

Did you hear about how criminals use drug-soaked business cards to incapacitate their victims? Turns out, that’s not true.

How about the claim that Jesus will be portrayed as gay in an upcoming film? Also false.

Or that Oliver North warned Congress about Osama bin Laden years ago? Wrong again.

You’d think it would take an army to truth-squad the rapid-fire rumors of the World Wide Web. But at Snopes.com, that task falls to husband-and-wife myth debunkers David and Barbara Mikkelson.

Snopes.com is the go-to Web site for debunking the hottest rumors, hoaxes and urban legends, attracting roughly 5 million viewers a month. NPR’s Guy Raz visited the Mikkelsons at their world headquarters — a modest, pre-fab home next to a creek in Agoura Hills, Calif.

The Mikkelsons may be Internet pioneers, but David and Barbara use plenty of old-fashioned tools in their work — like books. Lots of them. Books on word etymologies, history and urban legends, stacked two-deep in the couple’s library.

“Our contractor thought I was a little bit odd when I said, ‘I want these shelves built so sturdy that you could lay a dead body on each of them,’” Barbara says.

In the living room, a cat and computer are close at hand. A trio of live rats play in their cage nearby (they lost their roaming privileges after chewing too many wires). In the back is David’s “office,” which he says “is actually a bedroom for cats — in which they have graciously consented to sublet space.”

The Mikkelsons estimate they have several thousand articles on their site right now. Their list of the “25 Hottest Urban Legends” is regularly updated with new myths and some “dopplegangers” — stories that have been around forever in one form or another.

“They’re kind of like the equivalent of Pink Floyd’s Dark Side of the Moon on the Billboard chart,” says David. “They’re just there for years, and they never go away.”

It’s hard not to notice trends if you’re a rumor reporter. Stories that stick around for years often involve computer viruses or missing children. Rumors involving immigration or terrorism tend to recirculate with the times.

David even made up an urban legend of his own once — that the famous Mr. Ed was actually a zebra. Zebras are more docile, he argues, than horses.

And sometimes, it turns out that the urban legends the Mikkelsons debunk are actually true.

“Several years ago, there was this narrative going around,” David tells Guy Raz. “It was about some group of FBI agents who had supposedly taken over a psychiatric hospital.”

“It was this wonderfully funny narrative about an agent trying to convince a pizza delivery place to send a dozen pizzas to a psychiatric hospital full of FBI agents, none of whom had any cash on them, so by the way, will you take a check?”

David tracked down an agent involved in the case, who corroborated the story. It was a debunker’s lesson in suspending disbelief.

“What we’ve learned over time is there’s pretty much nothing that you can immediately dismiss as too absurd to be true,” David says.

Mar 20th

“Schooling Greenspan”

Author: Kenn Lamson

Comments: 0

Barry Ritholtz recently posted to his blog a response to former Federal Reserve Chair Alan Greenspan’s Brookings Institution paper on the financial crisis.  Greenspan apparently accepts that regulatory failures contributed to the crisis but argues that low interest rates, which of course his Fed (and he, specifically) argued for and maintained, did not contribute to the problem at hand.

Ritholtz response is not only spot-on, but it concisely explains what readers are paying hundreds of dollars to purchase (and hundreds of hours reading) in the heaps of books economists and others are spewing on the topic. I’ve reprinted Ritholtz’s comment below.

1. Starting in January 2001, the FOMC began lowering rates, eventually to 1%. They kept rates below 2% for 36 months, and at 1% for over a year. This was unprecedented.

2. While these rates had myriad effects, lets focus on just two: The impact on Housing, and on global bond managers.

3. Since homes are (typically) a leveraged credit purchase, lowering the cost of that credit has an inverse effect on prices — i.e., cheaper mortgages = more expensive houses. Since most people budget monthly, carrying costs are more important than actual purchase prices. Hence, a big drop in interest rates can cause a spike in home prices, with monthly payments remaining fairly similar.

Bottom line: Ultra low rates were the initial fuel sending home prices higher.

4. At the same time, bond managers were scrambling for yield. Pension funds, trusts, foundations require a certain annual gain, and without it, they have issues. Note that most of these managers by their own charters cannot purchase junk, they can only buy investment grade paper.

5. Wall Street had been securitizing collateralized debt for years. They turned credit cards, student loans, auto financing, and of course, mortgages into paper.

6. Making loans to people with weaker credit scores, lower incomes, or more debt was a risky proposition, and hence, generated higher yields for that risk. By collateralizing these subprime mortgages, Securitizers could generate higher yielding paper for the managers of bond funds. And because the rating agencies — Moody’s, S&P, and Fitch were totally corrupt — the securitizers could purchase AAA ratings. Hence, all manner of unqualified junk paper could be sold to these funds that were only allowed to purchase investment grade paper.

Here is the first point where lack of oversight comes in (vis-à-vis the ratings agencies). But we never would have gotten to that issue BUT FOR the ultra low rates.

Read the rest of Ritholtz’s article here.

Mar 20th

“Comparing Rallies”

Author: Kenn Lamson

Comments: 0

Courtesy of ChartOfTheDay.com via Ritholtz.com, a comparison of the current stock market rally (as measured by the DJIA) to historical rallies. As Barry Ritholtz mentions in his post, there is a fundamental difference between secular bull markets (1949 and 1990, for instance), which tend to be long and low trajectory, and short but sharp bear market rallies.  Like Ritholtz, we remain convinced we’re in the latter and continue to look for the 20%+ correction that typically concludes such a run-up.

Mar 20th

“The More Things Change…”

Author: Kenn Lamson

Comments: 0

I was “rummaging through the attic” at Harmonic Investment Advisors this Saturday morning and stumbled across this editorial I wrote for the Idaho Statesman in late 2008, shortly after we opened our firm. The economic collapse was well underway, fear reigned and in the financial markets there was “blood in the streets.” Great time to open an investment management and research firm!

While the article was written almost a year and a half ago, and the figures have changed, my conclusions remain the same: The ongoing crisis is one driven primarily by the unwinding of 20+ years of debt accumulation, a naturally deflationary event, and that comprehensive reform is preferable to the piecemeal and politically-driven “solutions” that continue to be offered.

My business partner in Harmonic Investment Advisors, Kevin Jones, CFA, and I appreciate the observations Dr. Crabb makes in his November 19, 2008 column on the financial crisis and welcome the opportunity to join the discussion on the topic.

It’s critical to acknowledge that there IS an economic problem – a very big one. Readers with no formal training in economics understand that more layoffs, closing businesses and difficulty in borrowing for big-ticket household expenditures are signs of a struggling economy.  Those wishing for a more analytical view might note only a few data points from economic segments that are driven by consumers and businesses evaluating their economic futures:

  • Housing starts recently hit their lowest level ever
  • Consumer confidence has fallen off a cliff
  • Consumer spending stopped cold (one might observe the current plight of the automakers as indicative of this fact)
  • The manufacturing sector, as measured by the Institute of Supply Management, is off sharply
  • Most troubling for the average American, the unemployment rate rising.

We aren’t in the least surprised about the recent announcement that the US has probably been in recession since late 2007.

The crisis in the economy is feeding off the crisis in the bond market and vice versa.  Although the problem is centered in the credit markets, the larger issue is the deleveraging of the global economy.  The world lived a credit-fueled lifestyle for roughly the past 25 years; as anyone with a credit card, mortgage or other loan knows, sooner or later debts must be repaid.

Despite the massive amount of loans and other funding provided by the US and other governments to financial companies, October’s Consumer Price Index declined 1% month-over-month and economic growth may decline as much as mid-single digits in the final quarter of 2008.  However, such enormous liquidity inflows should theoretically be highly inflationary.  Why this apparent divergence? The government’s liquidity injections aren’t working because the transmission mechanism, the financial system, is badly damaged. Companies and individuals are simply not spending and investing those funds but rather “hoarding” them in fear of a long cold financial winter.

The New York Times figures that $7.8 trillion has been injected into the economy in an attempt to put out this financial fire1.  According to Bianco Research, that’s roughly the combined inflation-adjusted costs of:

  • The Marshall Plan
  • Louisiana Purchase
  • Race to the Moon
  • S&L Crisis
  • Korean War
  • The New Deal
  • Gulf War 2 / War on Terror
  • Vietnam War
  • NASA
  • World War II

We calculate that less than 5% of the $7.8 trillion has been directed at nonfinancial companies. Obviously, the cause of the crisis is not the demise of all of corporate America, it’s the collapse of the financial system.

The crux of the problem the global economy now faces is massive individual, corporate, municipal, and governmental leverage that’s now unwinding.  The investment markets are only a reflection of the larger US and global economies. Unless the systemic problems are repaired the healing cannot begin.  In our view massive government intervention in markets is like giving morphine to a seriously injured patient – it makes the pain go away but doesn’t cure the injury.  Government intervention that short-circuits capitalism by arbitrarily wiping out equity owners isn’t a long-term fix, nor is a haphazard and incremental approach to solving a global systemic crisis.  A more comprehensive approach to stemming the crisis involves not only a rationalization of the global regulatory environment but a resetting of long-term expectations by borrowers and investors of all types.

1 “US Details $800 Billion Loan Plans”, November 25, 2008

Mar 19th

Boise-Nampa Idaho MSA Unemployment, January 2010

Author: Kenn Lamson

Comments: 0

The US Bureau of Labor Statistics today released January 2010 Unemployment data for the 372 metropolitan statistical areas (MSAs) it surveys. According to the BLS the non-seasonally adjusted unemployment rate for the Boise-Nampa MSA was 10.9% for the month of January, an increase of +2.6% from January 2009. Over that period, the number of unemployed workers in the Boise area employment rose by +7200, from 24,500 to 31,700, while the labor force shrank from 293,500 to 291,500.  The rate rose a sharp +1.2% from December 2009.

At 10.9% Boise’s seasonally unadjusted unemployment rate was higher than the national (10.6%) and state average (10.7%) and most other areas surveyed within the state.  Boise’s +2.6% year-over-year change in the unemployment rate was also more dramatic than the national average (+2.1%) but slightly lower than the average of the Idaho cities surveyed (+2.8%).

In January 363 of the 372 MSAs had unemployment rates higher than a year earlier, and 225 MSAs had lower unemployment rates than Boise. The MSAs with the lowest unemployment rates nationally were Fargo ND (4.8%) and Bismarck ND (4.9%). Those with the highest rates were El Centro CA (27.3%), Merced CA (21.7%) and Yuba City CA (20.8%).

The largest decrease in the year-over-year rate were seen in Kokomo IN (-4.1%) and Elkhart-Goshen IN (-3.6%), while the largest increase were in Rockford IL (+5.8%), Peoria IL (+5.5%) and Weirton-Steubenville WV/OH (+5.5%).

Mar 19th

Independent Market Commentary

Author: Admin

Comments: 2

I have been amazed at the strong advance the markets have been experiencing in the last month or so.  Having watched equity portfolios for over 22 years now, I have developed what Kenn calls “Spidey” sense.  Well, my “spidey” sense has been telling me that there has been a distinct change in the character of the markets during this period. 

I must have been asleep on February 8th, but if you look at the two charts below, you can see that investor’s perception of the world changed drastically starting that day.  The first chart shows the Russell 1000 versus the Russell 2000 Value.  This is akin to charting a “high quality ” Index (Russell 1000), versus a “low quality” Index (Russell 2000 Value).  As you can see in the first chart, the two indices were tracking each other fairly well until February 8th, but on that day the two began to diverge with the Russell 2000 Value starting to outperform.  The second chart shows the magnitude of this divergence, and as you can see the total return of the two from February 8th through yesterday is drastically different.

What is this telling us?  There are number of plausible explanations.  First, it could be that the recent upswing in positive economic news has increased investors confidence and as a result they are taking a more offensive than defensive posture.  The companies in the Russell 2000 Value are arguably more economically sensitive, so this would make sense.  Second, the weighting of financials in the Russell 2000 Value is significantly higher than that of the Russell 1000 and a large proportion of the performance within the 2000 Value has been driven by this sector.  This indicates that investors feel that the worst is over for the financial sector.

Honestly, I cannot believe that the world changed on February 8th.  My feeling is that we are seeing investors starting to chase performance as there are likely many managers who are lagging their indexes year to date, and thus are increasing risk to catch up.  That is akin to treating investing as if it were a game of golf, where when you are behind you start hitting at pins you otherwise wouldn’t.  There is obviously no clear picture; however, my experience tells me that inflections like this bear paying attention to.   At HIA we pride ourselves on our disciplined method of investing, and believe that over the long term our approach will continue to be successful.

 

Mar 19th

Cartoon of the week

Author: Chris

Comments: 0

Mar 19th

Beyond Traditional Asset Classes: Exploring Alternatives

Author: Chris

Comments: 0

Beyond Traditional Asset Classes: Exploring Alternatives

Stocks, bonds, and cash are fundamental components of an investment portfolio. However, many other investments can be used to try to spice up returns or reduce overall portfolio risk. So-called alternative assets have become popular in recent years as a way to provide greater diversification.

What is an alternative asset?

The term “alternative asset” is highly flexible; it can mean almost anything whose investment performance is not correlated with that of stocks and bonds. It may include physical assets, such as precious metals, real estate, or commodities. In some cases, geographic regions, such as emerging global markets, are considered alternative assets. Complex or novel investing methods also qualify. For example, hedge funds use techniques that are off-limits for most mutual funds, while private equity investments rely on skill in selecting and managing specific businesses. Finally, collectibles are included because the value of your investment depends on the unique properties of a specific item as well as general interest in that type of collectible.

Each alternative asset type involves its own unique risks and may not be suitable for all investors. Because of the complexities of these various markets, you would do well to seek expert guidance if you want to include alternative assets in a portfolio.

Hedge funds

Hedge funds are private investment vehicles that manage money for institutions and wealthy individuals. They generally are organized as limited partnerships, with the fund managers as general partners and the investors as limited partners. The general partner may receive a percentage of the assets, fees based on performance, or both.

Hedge funds originally derived their name from their ability to hedge against a market downturn by selling short. Though they may invest in stocks and bonds, hedge funds are considered an alternative asset class because of their unique, proprietary investing strategies, which may include pairs trading, long-short strategies, and use of leverage and derivatives. Participation in hedge funds is typically limited to “accredited investors,” who must meet SEC-mandated high levels of net worth and ongoing income (individual funds also usually require very high minimum investments).

Private equity/venture capital

Like stock shares, private equity and venture capital represent an ownership interest in one or more companies. However, unlike stocks, private equity investments are not listed or traded on a public market or exchange, and private equity firms often are involved directly with management of the businesses in which they invest.

Private equity often requires a long-term focus. Investments may take years to produce any meaningful cash flow (if indeed they ever do); many funds have 10-year time horizons. Like hedge funds, private equity also typically requires a large investment and is available only to investors who meet high SEC net worth and income requirements.

Real estate

You may make either direct or indirect investments in buildings–either commercial or residential–and/or land. Direct investment involves the purchase, improvement, and/or rental of property; indirect investments are made through an entity that invests in property, such as a real estate investment trust (REIT). Real estate not only has a relatively low correlation with the behavior of the stock market, but also is often viewed as a hedge against inflation.

Precious metals

Investors have traditionally purchased precious metals because they believe that gold, silver, and platinum provide security in times of economic and social upheaval. Gold, for instance, has historically been seen as an alternative to paper currency and therefore may help hedge against inflation and currency fluctuations. As a result, gold prices often rise when investors are worried that the dollar is losing value, though prices can fall just as quickly.

There are many ways to invest in precious metals. In addition to buying bullion or coins, you can invest in futures, shares of mining companies, sector funds, and exchange-traded funds (ETFs).

Natural resources

Direct investments in natural resources, such as timber, oil, or natural gas, can be done through limited partnerships that provide income from the resources produced. In some cases, such as timber, the resource replenishes itself; in other cases, such as oil or natural gas, it may be depleted over time. Timberland also may be converted for use as a real estate development.

Commodities and financial futures

Commodities are physical substances that are fundamental to creating other products or to commerce generally. Commodities are basically indistinguishable from one another. Examples include oil and natural gas; agricultural products such as corn, wheat, and soybeans; livestock such as cattle and hogs; and metals such as copper and zinc.

Commodities are typically traded through futures contracts, which promise delivery on a certain date at a specified price. Futures contracts also are available for financial instruments, such as a security, a stock index, or a currency. Though the futures market was created to facilitate trading among companies that produce, own, or use commodities in their businesses, futures contracts also are bought and sold as investments in themselves, and some mutual funds and ETFs are based on futures indexes.

Futures allow an investor to leverage a relatively small amount of capital. However, they are highly speculative, and that leverage also magnifies the potential loss if the market does not behave as expected.

Art, antiques, gems, and collectibles

Some investors are drawn to these because art, antiques, gems, and other collectibles may retain their value or even appreciate as inflation rises. However, those values can be unpredictable because they are affected by supply and demand, economic conditions, and the quality of an individual piece or collection.

Why invest in alternative asset classes?

Part of sound portfolio management is diversifying investments so that if one type of investment is performing poorly, another may be doing well. As previously indicated, returns on some alternative investments are based on factors unique to a specific investment. Also, the asset class as a whole may behave differently from stocks or bonds.

An alternative asset’s lack of correlation with other types of investments gives it potential to increase or stabilize a portfolio’s return. As a result, alternative assets can complement more traditional asset classes and provide an additional layer of diversification for money that is not part of your core portfolio, though diversification cannot guarantee a profit or ensure against a loss.

Tradeoffs you need to understand

Alternative assets can be less liquid than stock or bonds. Depending on the investment, there may be restrictions on when you can sell, and you may or may not be able to find a buyer. Performance, values, and risks may be difficult to research and assess accurately. Also, you may not be eligible for direct investment in hedge funds or private equity.

The unique properties of alternative asset classes also mean that they can involve a high degree of risk. Because some are subject to less regulation than other investments, there may be fewer constraints to prevent potential manipulation or to limit risk from highly concentrated positions in a single investment. Finally, hard assets, such as gold bullion, may involve special concerns, such as storage and insurance, while natural resources and commodities can suffer from unusual weather or natural disasters.

A financial professional can advise you on whether alternative assets have a role in your portfolio, and which types might be appropriate for you.

Mar 18th

“Battle of the Banks: Big vs Small”

Author: Kenn Lamson

Comments: 0

As the big bank vs. small bank battle lines sway, the NY Times today published a great graphic showing the distribution of deposits across the nation.  Like the other phenomena (the housing bubble and population density for instance) the large bank deposits are clustered on the East and West coast.

hat tip: Ritholtz.com

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