Friday, September 23, 2016

Can an equity investor hold their nose and buy Wells Fargo now

Wells Fargo closed today flat at $45.74 after closing yesterday at $45.72.  On September 1st the stock was at $51 and had been as high as $55 in the last year.  It now has a dividend yield of 3.3% and a trailing twelve months p/e of 11.3x, well below the S&P median.  The penalty that it just received from the regulators was limited by what they were allowed to charge, and it is peanuts compared to WFC's earnings.  There is no comparison to the many giant charges related to mortgage securities that have impacted the large financial services companies in general.

With all of the attention on their fiasco and fraud related to opening phony accounts without customer knowledge, it can safely be assumed that their incentive systems will be overhauled as soon as possible.  It is also clear that they have no choice in the near term other than to make management changes.  They do have a succession plan in place and the likely person rising has had no role in the retail banking imbroglio.  It can also be assumed that a major customer outreach program is underway.

With the fines for their fraud not substantial, it now can be recognized that a huge amount of Well Fargo's business is annuity-like.  Their gargantuan mortgage business will keep seeing a flow of servicing fees and interest.  It is unlikely that a significant amount of customers will go out and refinance their mortgages with another firm.  There are costs to doing that, and the risk that Wells will scam them is reduced with government scrutiny.  The same can be said for the average banking customer.  Making changes to banking arrangements is something that most retail customers would like to avoid as it is a time consuming process that can always lead to errors in transfers to a new financial institution and requires establishing new relationships.  WFC's risk profile in the corporate and institutional market has always been low relative to investment banks, of course, and to JPM, in particular, and BAC as well.

The bad news will keep coming as Congressional hearings and Labor department investigations go on.  This is prime time for attention seeking politicians to get their mugs on the screen, indignant and probing , as if they had been seriously examining the industry in the past, or in the previous month. The bad news is presumably reflected in the new lower stock price.  It could decline somewhat more, but one could guess that the worst has mostly happened from a stock price point of view.

It's an investment to think about.  It is not an endorsement of the firm's behavior, but a chance to buy a substantial firm that has many positive attributes and leading market positions at what could be a reasonable price, with a good yield, and meaningful upside if the Fed ever has the guts to raise rates.

Postscript:   Wells Fargo has been as a well known bank with a history of good management.  There has never been a hint of arrogance from this firm, from its middle management seen from day to day into the 80's and beyond.  Culture sustains itself, and this aberration will be overcome.

Clinton estate tax proposal

Sometimes it's not that hard to wonder if Hillary Clinton is trying to lose this election.  She announced her proposed estate tax policy as detailed in the WSJ article today, "Clinton Seeks Big Jump in Estate Taxes".  Her plan would dramatically impact a relatively small number of extremely wealthy families, but it would also hit families with small businesses and any family inheriting stocks and other assets with capital gains.  Also, the complexity of her suggested capital gains reporting, for all taxpayers inheriting such assets, will be a boon to tax accountants and an affront to individual taxpayers who think that they should be able to do their taxes without paying for help.

From an election point of view, why would she go into such detail on a proposal that would need to be negotiated with Congress, the outcome of which is completely unclear.  The estate tax issue is up in the stratosphere for most voters and is not a key to how they would cast their ballot.  To those voters who see her proposal as a significant confiscation of wealth, it will antagonize them and no doubt increase their election activity and contributions in the coming weeks, despite the cloud of Trump.

Relative to the actual budget deficit and tax receipts, her overall plan is more cosmetic than it is a major additive to funding her proposals.  It helps, but it is done for the purpose of fairness and wealth redistribution.  That's fine.  There is one proposal, however, that cuts right into the upper middle class, those not rich but doing well.  That's eliminating the step-up in capital gains taxes upon the death of someone leaving an estate.  As it has been, when a person dies their assets are repriced as of the date of their death.  If they have gains, they are eliminated as being taxable.  If they have losses, they can no longer be used to offset tax.  For those who save, those who buy and hold stocks and other assets with the goal of building wealth over time, this would be a significant change for many families and small businesses.  It's a potentially huge hit on the upper middle class, those whose children would benefit from their thrift and work.

While the overall number of families and businesses significantly affected by these proposals still may seem limited, Americans are almost naturally aspirational.  For example, a small business run by a thirty year old may be very small now, but if successful could grow into something that Clinton's proposals could impact years ahead.  Her net may be catching the attention of a population segment much broader than she realizes.

There was no good reason to promote this now.  Clinton seems to go out of her way to show how smart she is, how fair she is, and what a swell candidate she is.  With Trump as the alternative, she should win the election.  What she does after that and can get through Congress is after the election of course.  Why provoke voters that absolutely should be in her camp, not in Trump's or with Gary Johnson or Jill Stein.  Her potential victory is not a done deal.

Postscript:  Today's early statement that she would go to Charlotte tomorrow was really not smart. Trump soon followed saying he would go there as well.  Thankfully the Charlotte mayor said to both "stay away"'.  They have their hands full.  What was Hillary thinking in saying that she would go there, as if she is some sort of savior.  She must win, but she is not helping us.

Thursday, September 22, 2016

Opportunists for Trump

There is a category of Trump supporter that goes beyond the routine.  They stand out in a way that is completely transparent.  They clearly don't mind the attention that they receive or the incredulity with which their statements are met.  They see a chance for something much bigger.

This comment is not focused on the campaign manager from nowhere, Corey Lewandowski, who has now been replaced.  With no experience, he did well by doing nothing.  It could be focused on Paul Manafort, but his aspiration may have been to do what he was doing, and he had achieved it just as he did in Ukraine.  He, too, is gone.  It is also not focused on Boris Epshteyn or Kellyanne Conway, two Trump publicists in the spotlight now who make little sense at all as blindly steadfast Trump supporters and apologists. They are making good money and getting tremendous exposure, but that is their accomplishment.

The "Opportunists for Trump" group has much bigger things in mind.  They are beginning to come out of the woodwork.  The prime one seen here is Steven Mnuchin, Trump's chief fundraiser.  With Yale, Skull and Bones, Goldman Sachs, and success as a Hollywood producer in his background, he startled most who knew him or even knew of him by signing on with Trump.  There is only one answer to this puzzle.  He sees an opportunity to be Secretary of the Treasury and he does not see Trump's quest for the Presidency as a lost cause.

A second example of this showed up today as Andrew Stein wrote an opinion piece in the Wall Street Journal today endorsing Trump.  Remember Andrew Stein?  He from a wealthy and connected family in New York that played a leading role in state and city Democratic politics.  He was a constant attention seeker.  He went from job to job, serving in various New York elective offices from 1969 to 1994.  He once was Manhattan borough President, but he never made it to the top rungs of the ladder that were his obvious aspiration.

With his career in politics seemingly over, and his Democratic network diminished, he now sees an opportunity.  Supporting Trump could lead to something, could lead to attention from the media again, and might put him in the second tier of the cabinet, assistant secretary of whatever, of anything, please.

Then we have Rudy Giuliani.  How he would like to be back in the news.  His supportive comments about Trump have been beyond the fringe.  He is embarrassing himself with his obsequiousness.  We must not forget the ultimate champion of this style, Chris Christie.  Christie does not seem to realize that he will get nothing for his fawning, while Giuliani possibly could in the event of the unexpected.

Waiting for the next blatant opportunist could be a parlor game.  Who could make the best guess for the next one in line.

Tuesday, September 20, 2016

"The Pigeon Tunnel", life stories from John Le Carré

As a reader, from time to time of espionage fiction based on real historical settings, I had at one time read a few novels by Le Carré.  From this perspective they were interesting but a bit too involved in the inner workings of the spy services, meaning a bit tedious.  That statement must seem like heresy to some Anglophiles who view Le Carré's work with adoration, but so be it.

Most new books of this genre of fiction inevitably have reviews that state something like, "belongs in the realm of John LeCarré and Alan Furst."  The assessment of the former has just been stated and Furst is a second class spy writer, well grounded in history and the locales of Paris, and with a claim to fame of being in the literary community of Manhattan's upper west side.  If two favorites were chosen here they would be, first, Charles McCarry and second John Lawton.  Their work is, more broadly, historical fiction at its best.

Regardless of this opinion, "The Pigeon Tunnel" is an interesting collection of memories from LeCarré.  Some of the stories are fascinating as he gives accounts of his travels around the world. Some that focus on the rationale or background for particular books of his are less so, as I have not read the books in question.  His two chapters on visits to Russia in 1987 and 1993 were particularly interesting.  Overall, these stories are a mixed bag, but finding the ones that sparkle are worth the slog through some that are factually of note but not as entertaining.  The longest chapter, "Son of the Author's Father", is one of the gems.

David Cornwell, the real name of the LeCarré writer, had a fine career and it continues.  To those who love his work this book is no doubt cherished.  Here it was enjoyed.

Monday, September 19, 2016

Slipping into darkness

This time of year can be somewhat less than upbeat.  The length of the day becomes shorter in a way that is not always fully anticipated.  The weather is beginning to get a little cooler and more cloudy on some days.  The wind picks up and is beginning to shake a few leaves off of the trees.

In fact, the weather is still pleasant but, directionally speaking, a sense of foreboding can come to those who like summer, lots of light, and warm weather.  We know what's coming.  Soon there will be less people out in the evening.  Those early fall storms could be on the horizon.  Summer in fact and on the calendar is almost over.

An attitude adjustment needs to be made to shake off any anticipatory fatigue.  It's been done before many times and must be done again.


Saturday, September 17, 2016

Apple's revived stock price, Deutsche's pending disaster

After media skeptics continually raised doubts about the iphone 7 and had begun comparing Apple's stock to that of a sluggish Microsoft in the mid-2000's, the stock was up 11% in the past week more than 25% above the recent June 27th low of $91.50.  The new iphone is now almost sold out and a new Apple watch seems to be attracting more interest than the first edition.  At the new price as of Friday's close, Apple is still trading at a trailing twelve months p/e of 13.5, below the S&P 500 average, and it has a dividend yield of 2% that will certainly grow over time.  When the numbers work and the embedded core Apple users act, listening to most securities analysts and pundits is not worthwhile.

Meanwhile, back at the bank ranch, Deutsche Bank is the latest victim of U.S. regulators wrath about mortgage securities business seven years ago.  Will this ever end?  The fine proposed by these regulators is a preposterous $14 billion.  The only fine larger was the $16 billion paid by Bank of America, including its untimely acquisition of the massively flawed Countrywide, indigenous operations that were significantly larger than Deutsche.  Securities analysts had been projecting that the fine would be $4 billion to $5 billion, because that was what the company was telling them and what the company expected, or hoped for.

Is this payback for the EU's $14 billion tax bill for Apple, which the Irish government itself is not seeking? There is often no way to figure out the rationale for such charges, and many large U.S. banks like Goldman Sachs and J.P. Morgan have often paid up whatever very large fines as soon as possible to get bad publicity behind them, even if executives viewed them as extortion.  Most of these fines do not go to holders of such tainted securities, but simply to government coffers as punitive assessments. Deutsche insists that this is still a negotiation, but the stock market wonders and the more that 8% decline in the stock yesterday suggests that any fine, even if reduced, will be much larger than had been expected.  To many, it looks as if Deutsche will need to raise capital to meet its capital standards and this will temporarily put a further damper on its stock.  To repeat, will this ever end?  The fines do relate to some level of misconduct, but why could this not have been concluded earlier?

Friday, September 16, 2016

II Delivering Alpha Conference big shots go market negative

Some of the most active, successful, and influential investors at this week's conference were prone making exceptionally negative comments.  It was surprising and, as it is impossible to know if they somehow were talking their own books, a bit confusing.

Carl Icahn is definitely an aggressive equity investor at all times.  He intimidates companies that he invests in, and with his reputation can often incent management behavior in a way that he almost dictates.  While it is clear that he is still investing, he called these times "exceptionally dangerous".  His words were that whether it's one week or months away, there will be a noticeable correction.  Paul Singer sees a "huge bubble" in the bond market.  He thinks a significant repricing is inevitable and suggests that it could be calamitous for some.  He sees gold as a good investment.  Ray Dalio was highly cautious as well, seeing issues in the bond market, equity market, and commodity markets.  Dalio's view is understandable as when one part of the securities markets to some extent collapses, liquidity is affected broadly and impacts all markets.

The equity market is still performing reasonably well, but with much more volatility than in August. Things are heating up even as summer ends.  It's easy to suggest that the bond market is vulnerable. Staying the course is the main option, being wary of anything but short to medium term bonds and strongly capitalized stocks.  The coming months will be a time to look at any over allocations.

A few campaign comments

The opinion here is that Hillary Clinton should not have rushed back to campaigning so soon.  She would have collapsed on Sunday had Secret Service agents not been around her.  For gosh sake, she was diagnosed with pneumonia.  That is not trivial.  It is assumed that much more rest is generally required for people so afflicted, even often a few days in the hospital.  She must think that getting back on the campaign trail as quickly as possible was a necessity.  Once again that is an exaggeration of how influential her campaigning style has been.  Now she has set herself up for a big problem.  If there is one more health scare, one more instance of dehydration, or a big stumble caught on camera, her campaign will be damaged.  Significant plane travel is taxing on the body. Trump and his media minions will make sure that any problematic physical event will now receive plenty of attention.

The good news is that the few days off seemed to give her a chance to reset her campaign.  She now says that she will focus on her major planned initiatives and not as much as on Trump's obvious falsehoods. They are so transparently not true and the majority of voters should see that.  Committed Trump supporters will not be budged by any logic or any facts.

There is an editorial in the September 10th "Economist" magazine with the title "The Art of the Lie".
It is worth reading, and it points out two important thoughts related to this.  Quoting, "Feelings, not facts, are what matter in this sort of campaigning.  Their opponents' disbelief validates the us-versus-them mindset that outsider candidates thrive on.  And if your opponents focus on trying to show your facts are wrong, they have to fight on the ground you have chosen."

Quoting again, "Well-intentioned journalistic practices bear blame too.  The pursuit of "fairness" in reporting often creates a phoney balance at the expense of the truth."  This is why Trump seems to get a pass on many of his outrageous statements while Clinton has to fight tooth and nail about her e-mails, not about her more important policy initiatives. By the way, Matt Lauer was a joke.

"The Economist" refers to a "post-truth" era of politics.  How to hold a candidate with the bombast of Trump to some degree of accountability is difficult.

As a related aside, it would be nice to think that Clinton's "deplorables" comment at Streisand's LGBT event was due to growing fatigue and not just playing to an audience for applause.  That comment was almost as bad as Mitt Romney's 47% comment in 2012.  At least Romney did not know that he was being recorded.

Sunday, September 11, 2016

15 years ago

This 9/11 seems to have a little more resonance.  The loss of friends is no less meaningful, but for some reason that long ago walk up the hill to our house after a day of hiding was full of memories. The vulnerable structures remain, and building a tower on that site was a defiance by private enterprise that shows the best of this country.  If we could live with that intensity as we face the bigger problems in our society of tech and finance dominating our work lives and compensation, we could just maybe create solutions.  Whether there are any potential leaders can bring that to the table is not clear

In memory of many, but more specifically to my close friend David Berry, KBW head of research.

Friday, September 09, 2016

Wells Fargo's account opening debacle

The fiasco around Wells Fargo's disclosure that it has been fined for setting up bank accounts and credit card accounts without the knowledge of customers will not be a significant financial event for the firm.  Wells can easily digest the fines, as they pall in comparison to all of the fines over recent years related to mortgage securities and mortgage originations in the industry.  In addition, the cost to the bank of reimbursing customers for actual overcharges or late payments is modest.  That said, the reputation risk for Wells is huge.

Investors closely follow account growth, and the success of the overly vaunted concept of "cross selling".  In forecasting future earnings growth, they consider the potential benefit from new accounts.  Their forecasts are now tainted.  Customers, too, will certainly be aghast now that they know that this has been surreptitious practice of some Wells' bankers.  Most importantly, however, is the complete waste of time and the aggravation that this fraud has caused existing customers that have been affected.  Can a reader fully appreciate how much time it takes and aggravation it causes to deal with a problem that one has with a bank account.  People in general are understandably highly sensitive about irregularities in their financial life, and losing sleep over it is normal.

Wells says that it has fired 5,300 employees that have been involved in the scam.  Bizarrely that has been over a five year period.  They have long known that they had a problem.  The incentive system at the bank, closely linked to "cross selling", has somehow incented this behavior and yet has apparently not been modified during this time frame.  Selling commodity products is possible only with strong relationships.  Broad online banking opportunities from multiple sources have dented those relationships.  That's the dilemma for retail bankers, especially those who are just beginning at a firm and need to build a portfolio of clients.

There are questions that arise from this.  First and foremost is whether this is an industry problem and not solely related to Wells?  Second is whether, with all of the mergers that have created our major banks, is this behavior primarily related to one or two regional areas tied to acquisitions by Wells or is it widespread?  Third, what changes will Wells make to avoid a repetition of this, as firing of those involved over the years does not seem to have been effective?

The banking industry certainly did not need another reason for the politicians to pounce on it, but this will surely be campaign fodder.

Wednesday, September 07, 2016

The global rise of Trumpism

Whether it is just a sign of the times everywhere, or a reflection of what is going on in this country, an anti-immigrant, nationalistic, style of right wing politics with unusually harsh rhetoric has become widespread.  Donald Trump's uninhibited crowd crazing politics of the negative is not just happening in this country.

In England, Nigel Farage led a party that favored Brexit and won, surprising an establishment that found it difficult to take him seriously. With success, Farage bowed out of politics, at least for the moment, when the task of aiding the transition would have required work, rather than excess, vitriol, and bombast.  In France, Nicolas Sarkozy has risen from the ashes to become a faux centrist right wing agitator full of absurd comments to try to take the mantle of the right from the even more extreme Marine Le Pen.  In Austria, election disputes will be decided in October and it is possible that the anti-immigrant almost Hitleresque Freedom Party could win.  In Germany, Chancellor Angela Merkel's party was defeated in her home district as a far right party won 21% of the vote and allowed the Socialists to win.  In Italy, polls suggest that 65% of the voting population has moved to the right due to immigration fears.

The unprecedented language and hostility of the Philippines new President Rodrigo Duterte as he spoke about President Obama is further evidence of a deterioration in any sort of decorum in some areas of world politics.  They are a long term ally that depends mightily upon U.S. aid and defense still now, long after they became independent after WWII.

The willingness of Trump to lavish praise on the dictatorship/kleptocracy of Russia and Putin while saying that if he doesn't become President it will only be because the election is rigged is perhaps more blasphemous than all of the above.  And yet here we are.  The media is playing the "try to be fair" game and bending over backwards to accept Trump as a normal candidate.  Clinton has her problems, but she also has her principles.  They are being tested as Trump is given a pass.

Where is the good news here?

Sunday, September 04, 2016

"Hillbilly Elegy"

This first book by J.D. Vance was read here a few weeks ago, immediately after it was published. Usually that means something will be posted soon after.  This book was different.  There were many aspects to it that did not fit into an easy description, at least that was the case here.  By now it has been widely reviewed and has attracted significant attention.

In what ways was this book attractive and identified with here?  First, while never seeing myself as growing up in a hillbilly culture, growing up at 500 feet above sea level on the fall line in Virginia and far from the mountains where "hillbillies" lived, based on what was read here I certainly must been growing up in a "hillbilly" town.  At one point it is mentioned that in Middletown, Ohio, where much of the book takes place, more than 20% of those entering high school as a freshman would never graduate. That number was over 40% in our hometown when I was growing up.  It was a highly divided mill town.

Second is Middletown itself, which is in a part of Ohio that I covered as a corporate banker in the mid-80's, where a major client was Armco Steel.  The deprivation described about Middletown now is not something that was obvious then.  Armco, where some of the Appalachian transplants described in the book worked, seemed to be the ultimate patriarchal company.  They maintained an expansive recreation area with two immaculately maintained first class golf courses for all employees and much more. During my coverage time, Armco was working, we bankers were working, to help it avoid bankruptcy.  Almost three months of meetings with all banks and lawyers in downtown New York*, plus multiple trips to Middletown, made what was read here in this book of great interest.

Third, the book led to reflections about my great grandfather in Lebanon, Virginia, someone I never knew, who was the son of an Irish immigrant and by the early 1900's was a lawyer for some of the largest coal companies in Virginia and Kentucky.  My grandmother told me about him taking her to stay at the Waldorf Astoria when she was 12, as he needed to be there on a business trip.

Fourth, the many drives through Appalachia that were made during the time that I lived in Louisville and going to the hometown in Virginia, were always opportunities to see Appalachia, stop to get gas or a barely edible sandwich, and talk with whomever.  Few people took the opportunity.

Fifth is the fact that this book is all about a mostly dysfunctional culture, and a very resilient one, rather than governance or politics, although that is not avoided.

This has obviously not been a review of this book in any form.  It is random reactions to an interesting book.  It caused some personal reflection on my part,  related to some things that I know and like to ignore.  With what little a reader can gain from what has been written here, it is suggested that this book be read now, not because it tells any type of full story but because it does a great job of telling a piece of one, that is if one reads it as a reflection on what is happening in this unusual election season.  I did.  J.D. Vance tells his family story in what seems to an honest and straightforward way, and it has much broader implications.  At 31, he is already a highly accomplished and experienced individual, war veteran, writer, and practicing attorney.  What's next?

*I remember many things about those intense all day and late night meetings as seven banks and Armco struggled to agree on anything that would lead to a solution.  One winter night a major blizzard arrived, and I was wondering how could make it back to my midtown studio.  Would there be any cabs, would I need to walk, or would the subways be working if the effort was made to walk to one and from one.  With that on my mind, three J.P. Morgan bankers, with a short walk to their bank and car services ahead, were talking about whether their lanes in Connecticut would be blocked. They were my age or younger.

U.S. Open tennis on television

Yesterday, we watched a few hours of the U.S. Open on television.  It was entertaining for the most part, completely engaging at times.

For many years I had disdained television in favor of seeing the event in person, or not at all.  Sure, on occasion for special semi-final or final matches we had tuned in, but for middle of the tournament matches almost never.  Since we live 20 minutes on the Long Island Railroad from the Tennis Center, we, meaning K, me, or at least one of the daughters, would go to some of the early rounds every year. When I lived in Manhattan, the 7 train was an easy ride there from mid-town.  At other times I was able to entertain clients there at corporate expense in some of the best seats in the stadium, and with available hospitality tents.

The entire scene each year was worthwhile.  The crowd, with so many from around the world in a good mood, the food venues, and even the shops were a diversion whenever one was needed   Even though I played tennis for many years, actively and somewhat competitively until my mid-fifties, just sitting and watching for hours, in person and certainly on television, was not my deal.

It was a pleasure to watch yesterday.  What was remembered as commercials at every changeover or any break in the action seems to no longer be the case.  ESPN stayed with the action most of the time, moving from one match to another.  When there was an infrequent commercial break, relative to the past, it was a bit longer but allowed time for any break needed, or a resupply of chips.

We will watch more as the tournament progresses.  It would still be better to be there, but that will not happen this year.

Saturday, September 03, 2016

A break to reconsider the market

This three day weekend will be a time for many to relax and maybe, while doing so, have a few unfettered thoughts about the stock market.  Will there be a post Labor Day ramp up of activity?  It surely could not slow down more.  Will major institutional investors and pension fund managers begin to take more risk and do more trading to assure, or try to assure, that their year will be better than it looks now.

Very recent results have seen a resurgence in long dormant small caps, mid-caps outperforming large caps, and emerging markets showing some life.  There is no reason to bet that these trends will continue, but if the large cap dividend trade becomes even more crowded the near term, opportunity may still be in be those areas.

There is a thought here that the ongoing election pyrotechnics have investors standing back aghast, simply not able to fathom what will happen as the next two months unfold.  There appears to be no way to trade this, and uncertainty is part of the market activity stall.  It would not be surprising if this uncertainty leads to a near term drop in equity prices, a drop based not only on any flight from equities but also a repricing of equities based on boredom, ambivalence, and the inability of investors to analyze the impact of political events.

Given the lack of alternatives, most investors will stay the course but it is not especially satisfying.

Tuesday, August 23, 2016

This placid market

If this equity market of late was a lake, there would hardly be a ripple in it.  There is almost no activity of any consequence in recent weeks.  It is almost unnerving.  For many years, various pundits and some legitimate analysts would talk about the summer swoon, especially in August, but more often than not, that truism did not turn out to be true.  With ubiquitous communication capabilities, the market did not stop for the beach.  If there were events of consequence, investors could jump in from anywhere.  That's an old story.  Now, this month seems to be reviving the old adage.

July was a particularly good month for equities, one that was unexpected.  That may be a reason for the mostly flat line in August.  Under the surface there appears to more going on than in the major averages as extended market indexes have shown some new strength for small cap and mid cap stocks relative to earlier in the year. Still, it is a bit of a concern to sit around waiting to see where the market is going, what sectors will break out or breakdown.  Any indications of what lies ahead are not clear at the moment, at a time when the political world in the U.S. feels as if it is edging into chaos.

Investors are staying calm at the moment.  That's good news.  There is no consensus as to what lies ahead.  There is a concern that the need for yield is stretching the price of stocks with decent dividends beyond what expected valuations would suggest.  There is a concern that the Fed is behind the curve on whatever may lie ahead, in other words that it has by default become complacent.  We are cautious but still behaving like normal investors, trade here and there, and staying the course.

Postscript 9/2 --- It continues.

Monday, August 22, 2016

"Chaos Monkeys", a mixed opinion

This informative yet strange book is subtitled "Obscene Fortune And Random Failure In Silicon Valley" and the writer is Antonio Garcia Martinez, a former product manager at Facebook and the co-founder of a venture capital start-up that was sold to Twitter.

The book is an at times insightful look at various aspects of Silicon Valley business.  It looks at the challenge of creating and managing a start-up.  It details the demands of a growing internet business that is basically constant seat of the pants change, lots of new competing ideas, and plenty of driven personalities, some attractive and some not.  It focuses on the huge challenge of monetizing businesses that have been designed with the primary purpose, sometimes sole purpose, of attracting users.  All of this is detailed well, and was educational from a technology point of view.  From a finance point of view it at times seems at bit plodding but that may depend on one's background.

So what is wrong with this book?  It is absolutely filled with sophomoric attempts at humor.  Michael Lewis is someone Martinez is not, ditto not Robin Williams or Jay Mcinerney.  Much of the humor attempted belongs in the bathroom, the bedroom, or the back seat of a car, and it almost uniformly feels forced.  Once the writer gets in this mode he must feel required to get on an obscenity laced rant.  It's all too glib and cute.  It is beyond annoying and it is almost constant.

On top of that, this is one of the most self adulatory books that has ever been read here.  Martinez creates himself as a Silicon Valley free spirit, living on a boat in the bay, riding his bike, drinking til dawn, fathering children that he rarely sees, and having sex in a closet at a company party.  Why do we need to know all of this.  Why do we care about this man?

All of that said, the book was finished here, because the morsels of interesting information were worth wading through the muck.  It was, however, a relief to finish with the book and the writer.

Wall Street Journal delivery

We have forever had home delivery of the New York Times here, but as of today the Wall Street Journal will come as well.  It is clearly an attempt to create as big a mess as possible around my reading chairs.

Rather than just pick up the Journal at the drug store or the grocery store when seeing that the articles look interesting, this will be a reliable way to see it every day.  This is a result of an offer received in the mail, for new subscribers, to get 6 months of WSJ delivery at a cost of $99.  As Donald Trump might say, "What have I got to lose?"  Of course there will be an automatic renewal at a higher rate, but that's six months from now, which is forever based on what's happening here, and it can be canceled.

The Journal is good complement to the Times.  For example, today had an article about the company Kimberly Clark, which over the past four years has been a significant and highly productive investment here.  I now know much more about why this has been the case and it's not been solely because Huggies, Depends, and Kleenex are necessities for many and are category leaders.  The article "Stimulus Efforts Get Weirder" is a look at how central banks of many countries are doing more creative or misguided initiatives to get any type growth out of their economies.  Another piece, "Silicon Valley Gives Trump Cold Shoulder", is just what it says.

Of course, with the Journal one must be willing to put up with or ignore some of what they print, like an op-ed today by John Bolton lauding Donald Trump's foreign policy.  That's based solely on one teleprompter speech read last week, and ignores everything that Trump has said, and seems to believe, over at least the last nine months.  Those articles can be ignored here, or read for entertainment.

While the WSJ can now be seen fully online as well, reading a newspaper in a chair is much preferred here to sitting and looking at a screen.  Old habits die hard.  The recycling bag will get bigger.

Sunday, August 21, 2016

Late to the theater...

This weekend two very different films set in the Islamic middle east were watched here.  For the most part they have been in and done at the theaters, so they were available on Netflix.  The first was "Whiskey Tango Foxtrot", which was loosely based on the memoirs of a woman journalist covering the war in Afghanistan.  Starring Tina Fey and with Margot Robbie, it is meant to be both a somewhat humorous but informative look at an obviously a serious situation.

For those hoping that they would see film footage of Afghanistan, and one could at first assume that they were, but it was filmed in New Mexico.  At least that was well done.  While not quite ever getting accustomed to seeing Tina Fey playing anything serious, the film was mostly entertaining and did show the travails of and dangers faced by journalists covering the war, especially female journalists.  It also showed the close knit community of journalists in "Kabubble" as they sought relief from the stress through aggressive partying.

"A Hologram for the King", a film based on the book of the same name by Dave Eggers, is the story of a troubled and aging salesman sent by a large U.S. construction and technology company to bid on a major project in Saudi Arabia.  Tom Hanks plays the main character.  The film has its slow parts and its engaging parts, but rarely has any edge of the seat action.  The salesman needs to wade through a range of cultural barriers and understand how the society works, especially as expected norms for the majority of the country's citizens do not apply to the wealthy who live there or to the expats and diplomats who are there as well.

Regardless of where this film is located, the crux of the film is the life of the salesman, divorced, past his prime in his career, absolutely needing some success, missing his early '20's daughter, and anxious about midlife health scares.  In this unusual country he finally becomes grounded and unexpectedly finds his place.

Of the two films, "Whiskey Tango Foxtrot" did more to entertain but "A Hologram for the King" gave more insight into the country that it was situated in.  Reflecting further on the films, it seems clear that the Tom Hanks character will have much more of a lasting impact on most viewers than the Tina Fey character.  For those who might wonder, Margot Robbie kept her clothes on and Sarita Choudhury did not.

With the inclusion of that last sentence, it is acknowledged that neither of these films is worth a trip to the theater for most people, but they helped pass part of two evening's decompression.

Friday, August 19, 2016

The U.S. housing market and credit risk

The August 20th issue of "The Economist"has a cover with the title "Nightmare on Main Street". That lead editorial and the following first article in the issue, "Comradely capitalism", discuss the risks that remain in the U.S. housing market.  While noting that the capital of the banks is much stronger, that risky and funky derivative risk has been reined in compared to 2008 and 2009, and multiple new regulations exist to avoid a repeat of that period's crisis, there is still an issue with this massive market.  A chart titled "A state business" shows that the government is now the explicit funding source for anywhere from 75% to over 80% of all mortgages since 2008, as compared to less than 10% be before 2008.

What was meant as a way to staunch a crisis has become permanent.  While this insulates private investors and corporations from much of the direct risk, the risk does not go away.  It now belongs to the U.S. taxpayer.  With both campaigns now pointing to the decline in the U.S. home ownership rates since 2008 as a big problem, their suggestion of a solution implies that the U.S. taxpayer in general will be a participant in rebuilding greater risk, even if intended to be well managed.  "With a fifth of all mortgage loans granted since 2012 having loan to value ratios of 95%", less than reassuring lending still goes on.

While there does not appear to be any crisis on the horizon, the candidates' lofty thoughts  about infrastructure spending will come to naught if by chance there is a financial or political or global risk event that triggers a decline in the home mortgage market.  The supposed value of houses in this area, based on selling prices in the first half of 2016, is approaching record levels.  After what we have just been through, it makes one think...

That means thinking about maintaining the liquidity necessary for any unexpected downturn, selling one's house now, or maybe even buying a house now before interest rates rise as well as prices. Personal situations vary.

Wednesday, August 17, 2016

Trump adds to his campaign staff

It had seemed like Paul Manafort was the perfect choice for a Donald Trump campaign manager.  He lives in Trump Tower, albeit quite a few floors below Trump, he played some role in the Republican campaigns of Ford, Reagan, and the senior Bush, and more recently had spent more than five years as political adviser to the oligarch, Putin ally, and looter of Ukraine Victor Yanukovych until his ouster. Manafort was well known and without scruples.  To add to that, his career included periods advising the rapacious dictators Ferdinand Marcos of the Phillipines and Mobutu Sese Seko of the Congo.  He also looked and sounded like a respectable man.  What more could Trump ask for?

He wanted more firepower for his strange campaign.  Roger Ailes, fresh off his firing at Fox, is now advising him on the coming debates, Stephen Bannon, executive chairman, or some such title, of Breitbart News joins the team with a reputation as a pit bull of anti-establishment political opinions and conspiracy theories, and Kellyanne Conway, a pollster and publicist who has a close working relationship with Robert Mercer, the hedge fund billionare who was primary financier of the Ted Cruz campaign and whose political beliefs move into the bizarre side of the extreme right wing.  How will this work?

It seems that Trump has decided to double down on his erratic behavior and his attacks on anyone who is not on board his runaway train.  Is this campaign going to just get more ugly, and become more of an attack on the U.S. political system, that is democracy?  In this unusual and unpredictable political year, nothing seems certain.

"The whole world is watching?"

Tuesday, August 16, 2016

Stocks drop today, as would be expected

After a Fed member's comments about the possibility of an interest rate rise in September, the U.S. stock market declined in a predictable and controlled manner.  Interesting bright spots in the market even after the recent rise to new highs, not inflation adjusted, still remain.  They are emerging markets stocks which after three recent dull years, at best, have begun to move up in the last month and a half.  Also small cap and medium cap stocks, aka extended market stocks, have been moving up modestly, now noticeably, since February after lagging the large caps in recent years.  Looking at these two areas may present opportunities, although here skepticism will always remain about the ability to choose emerging market stocks or indexes, while a mild resurgence in the extended market is seen as an opportunity.

Now is not too early for large institutional firms to begin looking at harvesting gains for the year to establish a base for strong performance.  For example, Johnson and Johnson has had a substantial run-up over the past two years and remains attractive.  But the run-up may mean that the stock is out of line with its intended allocation.  A fund manager may sell some part of that position to lock in gains, and simultaneously buy another strongly capitalized stock with decent earnings growth and dividends, like 3M or Merck or many other names.  Waiting for the fourth quarter to make changes is not the easiest time to do so in some years.  Declines in strong stocks may happen for portfolio management reasons.

One of the hardest things for some investors to do, raising my hand, is to sell parts of positions in stocks that are performing well and have large gains for the tax man to pursue.  It is a chore that is unfortunately necessary at times.

Monday, August 15, 2016

"The Sympathizer", a novel about the detritus of the war in Vietnam

This book by Viet Thanh Nguyen won the Pulitzer prize for fiction this year.  It also received other awards and was on many top 10 lists in the print media.  It seemed as if it needed to be read, but it was not immediately easy for this reader.  Twice it was started and after a few chapters in it was put down due to other interests.  Recently it was once again picked up again and with some effort it was completed.

What was difficult about the book was that it described situations that ranged from humorous to dreadful.  The main character is a half Vietnamese/half Caucasian man who came of age during the war.  Born and raised in Vietnam, he went to college in the Los Angeles area but went back and forth to Vietnam.  His loyalties were mixed both in Vietnam and the United States, as his ethnic background and his geographic locations led to a constant cognitive dissonance in his life.

The observations of this character about life in the U.S. as a perceived Asian are insightful and at times entertaining.  His situation related to the war is more complicated, gripping at times and at other times harrowing.

The unique nature of this book makes it a novel that stands out and is compelling in the way that it is written.  It is not surprising that the book was considered as a major book of the year.  Much of the story is loosely based on actual events.  What could be disconcerting to this reader was the less than cohesive way the narrative developed.  At times there is humor that seems forced, or not so much humor as evidence of despair.  The serious nature of the book is encompassed by this passage near its end, "Our commandant was a man who didn't get the joke, and people who do not get the joke are dangerous people indeed.  They are the ones who say nothing with great piousness, who ask everyone else to die for nothing, who revere nothing.  Such a man could not tolerate someone who laughed at nothing."


Sunday, August 14, 2016

Celebrities for Trump

The Yahoo home page, and its list of stories that are routinely odd, today had one article with the title, "35 Celebrities Who Support Donald Trump".  I had to take a look.  The article was unwieldy as each celebrity needed to be brought up one at a time, surrounded by advertisements.   After viewing just 11 of the supposed 35, the website sent me to another website about female celebrities unrelated to politics.  That was odd, but not at all unexpected for this type of Yahoo suggested news.  I had had enough anyway.  Among the 11 that were seen were Hulk Hogan, Mike Tyson, Tom Brady, Owen Wilson, Ann Coulter, Charlie Sheen, Hershel Walker, and Mark Cuban.  Fyi article writer, Cuban is now fully behind Hillary Clinton.

Quote from a book not yet finished

There is a book being read here that will not be mentioned today.  It needs to be completed and then some sort of overall comment will be written.  Here are two sentences from the book that appealed to me, one as completely timely and one as completely timeless.

"Americans on the average do not trust intellectuals, but they are cowed by power and stunned by celebrity.  Not only did Dr. Hedd have a measure of both, he also possessed an English accent, which affected Americans the way a dog whistle stimulated canines."

Tuesday, August 09, 2016

U.S. equity market absolutely flat

If there were ever a flat day in the U.S. equity market, this was it.  Some individual stocks moved a bit, but it is hard to find any that did so meaningfully, at least in portfolios here.  Volume was only slightly above half of the 90 day average and more than 20% below the ten day average.

The market averages are mostly at highs, but it does not feel like that.  Looking at the huge ETF SPY, the short interest is 28%, not reassuring at the moment, and the dividend yield is 2%, not bad relative to other market yields.  We are standing at the crossroads.  If the market has a reason to rise, that short interest will need to cover and it could mean a big move up.  If the market gets bad news, there is little to prevent a precipitous decline.

Equity p/e's trade on the cost of money and the outlook for the future.  If something clouds the outlook, even in a relatively stable financial market, that could unnerve investors.  There is no collapse on the horizon but a burst up of consequence and a 10% pullback are both possible.

Monday, August 08, 2016

"One Summer, America 1927"

This historical account by Bill Bryson is entertaining and informative.  It's a view of America in and around 1927 that is full of interesting facts and well told stories, and gives the perspective of the American people at that time.  What really was of interest to them and what news did they obsessively follow?

This was the year of Charles Lindberg's crossing of the Atlantic and the year of Babe Ruth's 60 home runs.  Jack Dempsey and Gene Tunney fought before 150,000 fans at Soldier Field as America listened on the newly ubiquitous radio.  President Calvin Coolidge did little and said less as the economy prospered.  Al Capone was at the height of his criminal powers that year, so much so that he was more or less a part of the Chicago establishment.  Prohibition was in force but in big cities but it was only tacitly enforced.  Saloons grew exponentially as untaxed and unregulated beer and booze was highly profitable.  Films were never more popular and were shown in extravagant movie palaces in New York, Chicago, and Los Angeles among other big cities.  The theory of eugenics was developing a mainstream following that tied into the racism that was a reaction to immigration and what was happening in Germany.  Ownership of automobiles was growing rapidly as these future huge businesses developed.  Newspapers had readership like never before, or after.

"One Summer" captures all of this and more as it follows popular culture at that time.  What it only touches on but does not delve into deeply are the forces that were setting the stage for the Great Depression.  That no doubt reflects what was of interest, or not of interest, to people at that time.

The book did not end with any grand conclusions or major insights.  It was simply an in depth look at a period in time.  The reader was left on his own at the end, having been treated to a deluge of commentary on that year in America, 1927.  It's a fine bit of story telling.

Postscript:  Reading this book,  I could not help but think about how this was absorbed by my parents.  My father would have been nine years old at that time and my mother seven.  I know that my mother loved movies, and she even played the piano(she was gifted) in the flat floored theater with folding chairs in her small town before the age of ten, but I don't know how much before.  My father was never much of a sports fan(until golf that he began to play in his forties), but he did choose to become trained as an Army Air Force pilot even before the U.S. entered WWII(Lindbergh related?) for some reason.  He was eventually shot down over China as part of the Flying Tigers, the successor of the OSS.  He survived and would never talk about it, and here I am.

Sunday, August 07, 2016

This week's Bloomberg Businessweek

This magazine has a "special double issue" at the moment, one called "The Interview Issue".  It is an interesting and diverting edition of the magazine.

The relatively brief interviews are with forty different people, most well known in business, some in politics, and a few in creative pursuits.  While there is nothing earthshaking here, the interviews seem to give a fair representation of the main strengths and interests of the person being interviewed and, depending on one's previous knowledge, can be enlightening.

The best article in the issue, viewed from this perspective of course, is titled "Is Banking Better in Bed" and concerns the move to negative interest rates in certain regions and the almost lack of interest return broadly, unless one is inclined to try out bonds from Greece, Russia, Pakistan, or Venezuela among other distressed issues.  The safest way to seek yield is from dividend stocks, but many view that as a very crowded trade at the moment.  The U.S. high yield bond market does offer opportunities but buying them in a mutual fund is a bet that is highly dependent on the often opaque skill of the fund manager, more so than in most stock funds by far.

Preservation of capital is more important now than growth for most investors, at least that is a crucial starting point.  It does not make for an especially scintillating or entertaining investing experience at the moment.  Is boring the right word?

Saturday, August 06, 2016

U.S. equities jump on positive jobs report

U.S. equities rose almost 1% broadly on Friday after a jobs report that was more positive than most analysts had predicted.  Financials in general and banks in particular rose sharply, as the prospect of even a minor increase in interest rates would make trading and lending more profitable, or once again profitable after simply being a weight on earnings for the past year.  The stock price rise yesterday, though, was also widespread, covering major tech firms and well capitalized consumer product companies.

The unemployment rate stayed at 4.9%, but more importantly some cumulative wage growth was thought by the market to be evident.  That and continued low oil prices could lead to a gain in consumer spending in the back to school months and then, think the optimists, continue in to the holiday season.  In fact, it is too early to make any such projections but investors are grasping at straws.

Included in job totals are many people who are underemployed or working more than one job. Earnings growth in the aggregate is still modest, and what there is often depends on the financial engineering of stock buybacks.  Capital spending is not growing in any pronounced way, as a conservatism by both businesses and consumers is a lingering effect of the slow recovery.

Retail investors can take solace in the fact that this rise in the market is being led by institutional investors, the presumed professional investors and traders.  They must believe that there is an potential upside from these market highs.  Corporate and insurance company pension funds are particularly hard pressed to bet on this, as their generally actuary projected 7% return is questionable for the year.

For the most part we will simply sit back and watch, looking for ways to improve portfolios but not grow them.  The market may not recognize that it is August, but we do.  Still it seems that nap time has been missed today and the challenge to come up with dinner will be upon us.  It's time then for Tazo zen tea, the zen not to be achieved but some relaxation is possible.

Thursday, August 04, 2016

Books and books of photographs

During our early time together and during the years of our children growing up, we compiled many books of photographs.  There are at least 20 of them, probably more.  Many of them document a period of the children's lives, birthdays, holiday events, visits to and from friends and relatives, block parties, and the like, and for the most part those photos were of great interest at the time that they were developed, but, with notable exceptions, seem somewhat repetitive now.  The books that are of really great interest still are those from major trips.

Those before children to France, Istanbul, Greece, Portugal, and Italy are fascinating now.  We were so young and we were so pleased to be traveling, away from what at the time were rather monotonous mid level jobs in New York.  That would change, but we were both in the patiently or not so patiently "paying the dues" portion of our careers.  Still the jobs paid enough for exceptional if not luxurious travel.  That statement should be corrected.  In the early 1980's, the dollar in Greece, Turkey, and Portugal was strong.  I fully remember, after the first day in Crete, saying to K that we can go to any restaurant or hotel we want and order anything we want, even any bottle of wine.  That was a new feeling.

The travel trips with the children also have photos of events that otherwise almost had been forgotten, multiple trips to Europe, and three trips to Maui.  At one point, the older daughter complained that she had been to Paris more times than she had been to Disneyland.  Some of the best more recent, not so recent for sure, pictures come from a trip to Forte dei Marmi on the Tuscany coast in 2001.  Venice and Siena were also part of that journey.  After that trip and one to Paris and Cannes in 2002, the full family trips ended.  The teenage children were pulled in other directions and sometimes opportunities were missed or other responsibilities needed to be tended to.  A 2009 trip was taken to Paris with the younger one as she wanted to see the city with the eyes of one who would remember it. She had also turned into a photographer, and still is on her many travels as a young adult.

Will I look at one today, if I get the time?

Monday, August 01, 2016

The surprising strength of equities

In July, stocks advanced slowly but meaningfully during the month.  From the mid-February lows, they are up almost 20%.  Today was a mixed day, not unusual.  The S&P and Dow were down modestly but the Nasdaq rose by a higher percentage rate.  All in all, one could say it was a flat day to start August.

Other than the lack of investment alternatives, there is no significant reason for this performance. From the beginning of 2016, across the indexes, aggregate stocks are up somewhat more than 6%, not including dividends. Here in stock picker's land, the returns in four somewhat equity weighted portfolios have been fine, and modestly stronger.  Given the risk involved in some of the choices, the portfolio is vulnerable to a negative change in sentiment, but what's new.  It has evolved into a more large cap, strong balance sheet, dividend paying portfolio in the last two years.  The number of stocks held now that are small and mid cap stocks that could be characterized as swing for the fences bets are fewer than in year's past.  The ideas have not been forthcoming.

Right now, just standing still, although it feels like a time to think about taking some gains selectively.