Thursday, September 25, 2014

Baseball stories, my experience with Derek Jeter and more

As Derek Jeter enters his final days as a player, after 20 years of mostly great play and always exemplary behavior, it seems that a little story should be told.  In 1996, at the sixth game of the World Series, the company that I worked for at the time gave me 10 tickets to the game to host with investor clients.  This was at the height of my influence at the firm but not at the height of my earnings power, a strange thing that was only understood fully in hindsight.

Anyway, I invited guests from Morgan Stanley, Fidelity, Alliance, Bernstein(well before their combination), Lazard, and other buy side firms.  We had five seats on the front row just behind and to the left of the Yankee dugout, and five seats behind that.  Perfect seats.  Every batting warm up in the old Yankee stadium was right before us, inches away.  The rookie Derek Jeter the was most accommodating.  With the game early in the balance, he stood next to us, chatted amiably, signed baseballs, and took his swings.

The game was awesome, especially from that front row perspective.  While those investors may or my not remember yours truly, they will always remember that game.  The Yankees won for Joe Torre's first World Series title.  My favorite star crossed player in the final days of his career, Darryl Strawberry,  made an unlikely diving left field catch with his lanky body in the final innings to save several possible runs by Atlanta. You could only imagine the immensity of that catch unless on ground level.

As to Strawberry, I first met him in 1985 when as a corporate banker covering southern Ohio from my perch in New York.  From Columbus to Dayton to Cincinnati, big companies were there and as a corporate sponsor of the Mets, I arranged a lunch presentation for clients with Davey Johnson, the Mets manager, before an early evening game.  We sipped the afternoon away before heading to the then awful Riverfront Stadium.  The game was boring, but all seemed to enjoy it, and then a hearty few of us headed to a bar just outside of the city that was rumored to be the "players" bar.

It was.  Most of the major Mets players showed.  When Gary Carter with his golden locks showed up with his entourage everyone shouted.  I headed to the bathroom after that, and ended up standing next to a silent Darryl at the urinals.  His now famous line there was, "This water is too damn cold".  We later sat at the bar together.  He was a seeming loner in the midst of the many young and attractive girls and his ribald teammates that together would win the 1986 World Series.

Happy trails Derek Jeter, who will prosper, with a hope that you are well Darryl Strawberry.                  

Wednesday, September 24, 2014

Kurdistan today, from Dexter Filkins in "The New Yorker"

Here at ENS, there were at least five posts in August about Kurdistan.  They focused on the, at the time, limited support from the U.S. and the unique qualities of the Kurds, most emphatically the fact that they were long term supporters of the U.S. in the region.  That is definitely unique.  The Kurds have been followed here since the advent of Bush's war in 2003.

In this week's "The New Yorker", Dexter Filkins gives an update on the status of Kurdistan, the resolve of its President, and the region's desire to eventually be an independent country.  As a reporter who always manages to find his way to the front lines, Filkins writes with characteristic authenticity.  It is an update that every follower of the Middle East conflict now should read.  He does not romanticize the Kurds, and he does not criticize them.  He sees them as a force in the fight against ISIS, one that is the only potent force in the fight given the impotence of the Iraqi army that he details.  The Iraqi army was composed of  just guys wanting jobs, needing jobs after Bush and Cheney dismantled the entire Iraq economy after 2003 and never reassembled it.  They were just senior officers of the Iraqi army wanting loot, especially after American oversight ended in 2011.

What startles me is what Filkins left out.  That is that the U.S. is still not fully supporting Kurdistan, as it is not supplying them with tanks, major vehicles, and advanced weapons that could assault ISIS from a distance.  Obama is supplying the Kurds with rifles, assault weapons, and ammo that they can use in brutal combat, but not anything compared with what ISIS has captured from the hopeless Iraqi army.  Why?

The United States administration is still stuck on its unified Iraq strategy and does not want Iraqi Kurdistan to become too strong.  They absolutely want the Kurd's pesh murga forces to confront ISIS, but they don't want it to be able to defy Baghdad.  This is a useless Kissinger chessboard style of thinking.  Giving the Kurds their opportunity and more weapons would greatly heighten their efficiency as the most effective fighting force in the region, one that would not give up their weapons, would support the U.S., and that unequivocally sees ISIS as a huge threat to their ecumenical way of life and hope for Kurdish independence.

The unity of Iraq is a pipe dream.  The threat of ISIS is immediate and one that should not be tempered by long term diplomatic theory.

That Filkins did not express an opinion on this issue just raises questions here.  What does he see and know while on the ground that cannot be known here?  The views here are clearly stated, but the information network is not robust.  That Kurdistan needs even more U.S. support in materials to continue their military ascendancy is beyond debate.  Obama has made a huge step by striking within Syria.  Upgrading support to the Kurds would is not such a big step, and really is essential.  Obama's reluctance is something that he will come to regret.

Tuesday, September 23, 2014

Time to buy Yahoo?

From $44 on September 15th, the price of Yahoo stock has fallen to $39 today after a modest rebound from recent declines.  The company's role as a surrogate for investment in Alibaba is now over.  What is the value of Yahoo now, and what is the potential of both its investments and its core franchise?

Having established a position here at $15.50 in May 2012, the incentive to add more at this level is not strong, but that is not the right way to think.  If there is more value, perhaps adding a few shares would be wise.  Yahoo still owns 16% of Alibaba's stock outstanding and 35% of Yahoo Japan, the company's most successful effort at organic growth during its life span.  These two investments easily support a Yahoo stock price in excess of $30, some would say $35.  What is the ongoing company worth?

It seems that Yahoo today is more of a technology management platform than a technology innovator.  That talent has long moved on.  The challenge now is to turn Yahoo into a successful mobile platform and into a creative and compelling content provider.  Marissa Mayer has acquired Tumblr(why?) and made multiple small acquisitions during her two year plus tenure at the firm, looking to acquire talent and new ideas.  When these acquisitions jell into something that tangibly drives revenue growth rather than primarily adding expenses is not yet known.  There are many that are pinning their hopes on Mayer, but her vision is not yet broadly clear.  If, a big If, her efforts reinvigorate the main Yahoo franchise with its still substantial eyeball reach, the value of the company could easily rise to $50..  If the core franchise is valued at zero, there is an investment entity that can be valued in the $30 to $35 range.

The bet here is that Mayer will eventually confound her many critics, both inside and outside of the company, and see some benefit from her actions.  Legacy expenses are a big issue, as Yahoo's expense base is out of line.  Dealing with this will not win Mayer a popularity contest, but it must be done.  Revenue growth is the long term goal, but it must be built off of an efficient foundation. If she does not do it, somebody else will.  Yahoo will stay in the spotlight now, and a CEO's continuity of employment will require results, not drama.

It is incredibly reassuring here to see that as of June 30 Will Danoff, sole manager of Fidelity's 100 billion Contrafund, remains Yahoo's largest fund shareholder.  He is not necessarily always right of course, but he is more often than not and his insight has served him and Fidelity well.  As a low key analyst and skilled observer of people, he would understand completely what was written in the prior paragraph.  And he's still there.



 


Monday, September 22, 2014

Rough day for equities

Was today primarily an effect of Alibaba share digestion, and the resulting liquidity pressures on the rest of the market.  Was it also a result of the Iphone 6 introduction being completed.  What more is there to look forward to?  That thought could most explicitly be seen in Yahoo shares, falling almost 8% in the last two market days as its role as an Alibaba surrogate ends.

Certainly the significant downturn in small caps suggests a liquidity squeeze broadly impacting the market.  Today's current news included disappointing weak data from the U.S. housing market and a rejection by China of the need for any economic stimulus for their economy.  Fears of a growth slowdown there are either overblown or ignored by the government that controls released data.

The question in the first paragraph here, "what more is there to look forward to", is the key to the broad market lethargy today.  The stagnation in Europe's economy at the moment, with Italy moving back into recession, France flagging, and leader Germany barely keeping up with diminished growth expectations, weighs on the market.  So does Japan's seeming retreat from improvement with Abe facing a crucial test of his economic policy in the coming weeks.  Emerging markets offer no relief and remain the weakest link in the global economy, with Brazil on the ropes, Latin America in general showing declining growth, India having already priced in any improved prospects from Modi's ascendance, and emerging markets across the board being viewed by investors as vulnerable to any U.S. rate hikes.  Whether one agrees or not, the market is nervous.

If the above is correct, in a few days the market downturn will become muted.  We can only wait.

Sunday, September 21, 2014

"All The Light We Cannot See"

This novel by Anthony Doerr is a pleasure to read.  That is not to say that the book isn't a challenge.  The richly imagined story of two young people in the time of World War II, one a French girl who is blind and one a German boy who is an orphan, and how their lives become briefly intertwined, requires attention.  The novel begs to be understood and made consequential, and the effort can be rewarded.

"All The Light We Cannot See", amazingly, has been on the New York Times bestseller list for the last 18 weeks.  That a real literary novel achieves that in 2014 is rare.  The other Doerr book read here was "Memory Wall", a stunningly written group of short stories that were interlinked by the theme of memory.  Comments on that book were written here on August 22, 2010 and August 19th 2010.

That theme of memory is carried on in this latest book, as characters make their indelible imprint on others that is carried on throughout the story, and by implication beyond.  Doerr's descriptions of pre-occupation Paris, the walled Breton citadel of Saint Malo to which the Parisian characters flee, an orphanage in a German mining town, and the Nazi youth military academy that becomes a brutal alternative to lead to a more fulfilling future, all bring to life the story as if it could be non-fiction instead of fiction.

It will only take a few pages for a reader to understand whether this is a novel for them.  The writing is such an attraction that the beautiful unfolding of the multi-faceted story is just a bonus.  Doerr's talent is undeniable.      

Saturday, September 20, 2014

"Levels of Life"

This short book by Julian Barnes is a study of grief, his grief over his wife's untimely death, and a study of life and its uncertainty.  This does not sound like an easy topic, but in this unusual book it is at times lighter than air.

The first chapter is an apparent true story of balloonists in 1860's, eccentric explorers and risk takers who wanted to see and photograph the world from a different perspective.  These aeronauts were encouraged by the intelligentsia like Jules Verne and Victor Hugo, George Sand and Alexandre Dumas, and joined by the peripatetic actress Sarah Bernhardt.  The second chapter is an account of a love affair between Bernhardt and an English soldier and trekker of the world that ends in disappointment for the well meaning and dashing Brit.

These two chapters set a somewhat unlikely stage for the final chapter, "The Loss of Depth", which describes the process of mourning and grief that Barnes' experiences.  It begins with this paragraph, "You put together two people who have not been put together before.  Sometimes it is like that first attempt to harness a hydrogen balloon to a fire balloon:  do you prefer crash and burn, or burn and crash?  But sometimes it works, and something new is made, and the world is changed.  Then, at some point, sooner or later, for this reason or that, one of them is taken away.  And what is taken away is greater than the sum of what was there.  This may not be mathematically possible; but it is emotionally possible."

What follows in this third chapter is an array of thoughts that developed over four years or more, despairing and persevering.  As time lets "the universe do its stuff', grief shifts.  "We did not make the clouds come in the first place, and have no power to disperse them.  All that has happened is that from somewhere---or nowhere---an unexpected breeze has sprung up, and we are in movement again."

This is a valuable, thoughtful, and on the surface a simple book of reflection.  It is cause for reflection here even now.

Friday, September 19, 2014

Bad progressions

As of September 14, there were approximately 5400 cases of Ebola in West Africa and there have been 2600 deaths since the epidemic started.  These numbers are from reports on Google searches.  They could be just baseline numbers as it is unclear how well these cases and deaths are accounted for without any central control of the issue.  Country by country, statistics are kept and totaled, with what degree of accuracy is unknown.

At this point, there are projections of how these totals could evolve by year-end if current patterns are not disrupted.  The range of projections is wide, from 77,000 total cases by year-end to 277,000.  That would suggest a huge increase in the death totals as well.  Disruption cannot come too soon.

In May administration officials suggested that there were 10,000 Islamic State fighters in Iraq and Syria, with only 3,000 being part of the initial Iraq invasion force that routed portions of the supposed 200,000 strong Iraqi army with all of its new and powerful U.S. equipment.  Last week, President Obama said that there were 20,000 Islamic State fighters in Iraq and Syria, and his tone of voice suggested that there were "only" that many, meaning not so formidable.  Today the CIA said that there were 31,500 Islamic State fighters in Iraq and Syria.  Given Iraq's long border with Saudi Arabia, a Sharia law state for all but the elite, having a majority of the population being trained from birth in the most fundamentalist style of Islamist religion, an immense supply of potentially new fighters is nearby.

Many would prefer to focus on the positive progression of Alibaba's stock price today, and one can understand that.  The financial markets will eventually need to or be forced to take into account these "bad progressions" as well, which eventually must be faced up to in dollars and cents calculations as well as political, humanitarian, and emotional ones.

Thursday, September 18, 2014

The Scottish vote --- a personal view

Today's vote, yea or nay, on Scotland's independence is viewed with great interest here.  Yes could mean, will mean, a rocky road ahead short term, but perhaps not close to the worst case scenario projected by some.  A No vote could be positive in ways exponentially unknown, as this scare to the British "empire" will lead to considerably more autonomy for the area while still under the U.K. fiscal umbrella, a noun used purposely given its necessarily ubiquitous use in London.

A personal view holds Scotland dear.  It is the ancestral land of my late mother's family.  I visited there on business on average twice a year from the late 80's to the early 2000's, calling on investors primarily in the financial center of the country which is Edinburgh, and tangentially in the historically commercial center of the country Glasgow.

The Scottish people in the banking world that I encountered were almost uniformly charming, great and highly opinionated talkers, who on the golf course could seem like hometown friends even if one was meeting them for the first time.  In business meetings, the charm was still on but the attitude was decidedly different.

Because Scotland was somewhat off of the beaten path, meaning a layover in Heathrow before a connecting flight to Edinburgh or Glasgow, plus it was not a high profile shopping or sophisticate location, most senior executives were pleased to delegate the region to yours truly, unless either a Gulfstream, golf, or both were involved.  Autonomy was always fine here, in fact preferred.  My trips there were arranged through long term personal contacts and investor lunches  of size were arranged by a London consultant.

Those investor luncheons were classic.  The investors attending knew that, while my firm was treating them to a nice lunch in a fine hotel, my role was not something that deserved significant deference.  I was there to provide information.  After a period of informality while attendees arrived and had cocktails, spicy tomato juice, or sparking water, we would sit down for lunch.  Once we got down to entrees, I was fair game.  There would basically be an hour or more of castigation.  Well thought out rhetorical explanations of financial history and why the U.S. was doomed were listened to politely, careful credit analysis of why my firm would soon collapse were acknowledged, questions about how I could represent the company on my own were taken mostly with aplomb, all because it was enjoyed here.  When I would finally get a chance to give the pitch of my company, they would listen with arms folded and looks on their faces as if this was the last place that they wanted to be.  Could one call this arrogance, or just being in the cocoon of the British empire.

As investors in U.S. banks, the Scottish securities gurus were almost uniformly wrong.  They would sell or not buy when the stock that I represented and was pleading, in the limited way that the law allowed,  for them to buy had a risk/reward that was compelling, and they would buy quietly, never mentioning it to me, when our firm was valued at the top.  Among those Scottish investment firms, many legendary, only Standard Life seemed to get it right.

This was all enjoyed immensely at the time.  The relevant thought for today's election is that the Scottish investors behaved as they did because they were part of the U.K., and their outspoken behavior was part of their role as being a counterweight to their London counterparts.  We are different, and not so easy is what they were saying.  That is part of what the country is saying now, in varying spheres of influence.  Without that adversarial role, what will an independent Scotland evolve into, and how will it change.  Without a chip on their shoulder, what will drive them.

In the long term they will be fine.  As independent they will be a minor country going through negotiations of cooperation on multiple fronts with their former country.  With the world's greatest whiskey and many fabled golf courses, they will be the beneficiaries of Japanese and Chinese investment across the board that, knowing them, many will abhor.  They will get by, but one could ask whether the tension of their relationship with England is best in both the short term and long term. 

Today's result is a cliffhanger it seems, and watched here with fascination.

BABA

As the market awaits the IPO of Alibaba tomorrow, it was interesting here to see that the stock symbol for the company on the NYSE will be BABA.  In spoken Chinese language known here, the sound "baba" can be a childhood endearment for "father".  With no power here to be part of this IPO, unless our broker can allocate a nuisance amount, one can only hope that it has the experience of Facebook and Twitter, meaning that after an initial surge the stock drops back into "bargain" territory after the IPO.

Wednesday, September 17, 2014

Watermelon time in the northeast?

Good watermelon is hard to beat.  This summer, June, July, August, the watermelon here in metro New York has been routinely disappointing.  At our two main stores, Whole Foods and North Shore Farms, the fruit was either too hard, not sweet, or tasteless.  Now, in September, it is perfect.  What gives?

Ever the conspiracy theorist here, could it be that those southern states who grow most of the melons were using all of the prime produce for those great summer traditions at home.  That's picnics, summer camp desserts, rewards for sack races and wheelbarrow races, baseball games, church gatherings, family outings, just about everything goes with watermelon in the humidity drenched heat in that region.  Would they then send the old or the unripened fruit "up north", where some might think nobody knows the difference anyway.

Certainly there was no shortage of watermelon on shelves this summer.  It just was not good.  Could it now be that with all of those southern summer traditions satisfied, the good stuff is finally arriving here.  Whatever the reason, it's wonderful to finally have some of what was my late father's favorite breakfast treat arriving here in perfect shape, great taste, refreshingly familiar, and energizing.    

Monday, September 15, 2014

The ever recurring anxiety plague of equity market pundits

After an unexpectedly stellar August in the U.S. equity market, market pundits and traders are once again grinding their teeth, obsessing over what a modest rise in interest rates might mean as a sluggish market this month is underway.  What it will mean, when it happens, is a slight retreat by the equity markets in the short term after any announcement or hint by Yellen, and then back to the basics of looking at stock values.  Getting some tiny interest rate hikes behind us is the best thing that could happen.

The slowly growing economy in the U.S. outshines the rest of the developed world.  Of course it is not better than China's absolute growth rate, but China's growth rate is decelerating and the corruption and pollution there are appalling, while the infrastructure needs in less prosperous parts of the country are huge.

The worries of the pundit class are at least a reminder to do the good housekeeping of a portfolio.  Selling a few stocks, mostly small caps, that have likely gone as far as they can go, or close to it, and selling parts of positions that have grown substantially outsized since March 2009 are both happening here now.  This gives more liquidity for both comfort and for the ability to move on any new opportunities that arise.  Since capital gains are taxable at Obama's new long term rates that are moved up substantially by his health care tariff, it obviously makes sense to keep some of that liquidity for tax time.

If there is any long term worry about the stock market having substantial downside, it is negative geopolitical events that would cause it.  So far the U.S. equity market has only been affected marginally by this, and it is solely related to the sanctions on Russia and how they will boomerang back to in some companies and industries.  However, the near term potentially significant wild card remains Russia and Ukraine as Putin is a self absorbed and unchecked player whose expansionist goals remain in place.  A more aggressive move by him in Ukraine or one of the Baltic states would shake the West, and their impotence against Putin in that area would be transparent.

One might wonder about the horrific medieval forces in the Middle East, and Obama's intention to more or less go to war again there.  Where the battles are being fought are not economic forces of consequence, except for oil production.  The next round of defense department spending, off the budget, will soon be underway and will positively impact some areas of our economy.

As an aside, when will we decide on a uniform name for our enemy.  Most people in the press and in Congress had settled on ISIS.  Recently the all knowing Obama decided to revive ISIL as the name and the executive administration has followed of course.  Apparently the heinous jihadist warriors have now settled on just Islamic State.  It is positive to see some sort of coalition developing to fight them, even if a somewhat timid one.  The leadership of Saudi Arabia is truly terrified.  The group must be stopped, but has anybody paused to think whether we are reacting just as they want us to do.

What a bleak way to end this comment.

  
    

 

Saturday, September 06, 2014

Mooncakes

Today's New York Times business section has an article about mooncakes, that Chinese "delicacy" that shows up each year at Chinese New Year and other celebratory events.  Read the article if you have access.  These lard based, lotus seed paste, and egg yolk concoctions are inedible by almost any measure, especially when one considers how much exceptionally good cheap food is available in real Chinatown's, like in downtown Manhattan.  The mooncakes, however, are big business despite being that most who do not eat it, generally speaking.  The article reports that in Hong Kong alone more than 1.5 million mooncakes are thrown away each year.

The article both touches on and skirts the major issue.  Seen in New York, the mooncake is hawked by gangs, in traditional Manhattan Chinatown by the Ghost Shadows and the Flying Dragons, youth gangs who are the more or less subsidiaries of the Hip Sing and On Leong fraternal and benevolent associations.  East of traditional Chinatown, you are not out of luck.  More violent Fukinese gangs control that area and are insistent mooncake providers.  In all areas of Chinatown's, Manhattan, Brooklyn, and Flushing Queens, mooncakes are sold to solicit bribes for safety.

I have never seen anyone eat a whole mooncake, or even a quarter of one.  Having gagged when trying a bite, they are not welcome here, but someone always shares some with us.  They are just symbols to be thrown away.  If they were nailed to a front door to deter criminals, they are so sturdy that they might last for a month or two.  To suggest, as the article does, that more edible mooncakes can be made is, from this perspective, a hopeless starting point.  They have one purpose, and that is extortion.

The U.S. employment conundrum

U.S. unemployment numbers of various types were released in the last two days.  Broadly speaking, the  unemployment rate came in at 6.1%, on the surface healthy at this stage of the slowly ongoing recovery, but there are many other factors to take into consideration to determine whether the job market has any possibility of recovering to mid-2000 levels.

The good news is that more people are working in many different ways.  The variables are underemployment(working jobs below ones skill level), part time jobs(jobs that do not require full commitments from employers to worker's benefits), the choice not to work(a new issue of late which takes people out of the workforce at all age levels), and off the book's work(mainly in small businesses, home health care, cleaning services, and restaurants).

All of these variables are difficult to measure, but one can be sure that they are impacting actual unemployment.  Underemployment is a rite of passage for young people learning the rigors of full time work and the ins and outs of the company they work for.  Underemployment for mid-life professionals is new, as technology and a continued emphasis on cost cutting and efficiency at corporations creates a constant pruning process, undermining the diminished concept of long term employment at one firm.

Part time jobs are the bane of the employment conundrum.  They are necessary for many people, who patch together part time jobs to create a full time work life, without health benefits or retirement benefits.  They create the issue of whether there are more jobs being counted than more workers being counted by the survey sources.  These jobs are low pay ones generally, and create less than normal worker and employer loyalty by definition.  Long term, they are not, at current numbers, healthy for our economy.

The choice "not to work" has become a growing option for many.  Disability benefits, for some reason so easy to access, can create an alternative lifestyle based on savings and perhaps a working spouse or children.  Savings during the good years can make getting any comparable job to what one has had difficult, and unacceptable in an after taxation analysis.  The end of unemployment benefits creates an incentive to give up the facade of looking for work that was never really looked for.

Off the book's work is the lifeblood of many ethnic communities and many specialties that are needed but too expensive through a formalized corporation.  Those who work in specialties like home health care and cleaning services are often viewed as independent contractors who have their own responsibility for filing taxes. Whether they do is apparently not the responsibility of those who hire them.  Whether those employed are illegal is another issue, but if they work here they still buy goods here and help the economy.

Undesired unemployment is a miserable state.  Strong people can endure it, but it can create a downward spiral of lowered motivation that saps the strength of many.  There are ways to work around it by working with others and family members, but it is a completely debilitating way of living.  Janet Yellen is right to focus on it, but we need a more aggressive approach(see August 3rd commentary here) and better numbers, better measures of what the unemployment issues really are.

One could suggest that an independent survey of all of these variables of employment would be invaluable to economists and investors.  A school like Washington University in St. Louis, with its great reputation for research and its non bi-coastal bias, would be a candidate to do this.  With their strong psychology and sociology departments, both undergraduate and graduate, and their reputable business school, they could undertake a project to survey all of these variables and create a new employment and unemployment map of the U.S.  It would not be easy, but it could be done.  It would be a step toward making the Fed, the Congress, and whatever Executive administrators look at facts rather than political clich├ęs.  Some non-profit, non politically aligned institution should undertake this probably thankless and cantankerous task.  Why not WashU?




   

Thursday, September 04, 2014

Ritual interrupted, NYT does not arrive

This morning our New York Times did not arrive in the front yard.  It usually is delivered around 6am, sometimes earlier, and requires walking out on the downward sloping driveway and through a grassy area to wherever it is thrown from a moving car.  A small nuisance but it is worth it.

The delivery is almost always reliable, but blips are not unknown.  The ritual here is to get up earlier than would be preferred but when sleep no longer seems to be a viable option.  That generally means going downstairs, drinking cold water and making coffee well before 6, and ready for the newspaper to arrive as I read whatever book or magazine is ongoing at the moment, or spend time checking the financial news on the internet.

Of course, by necessity this morning I went to the internet and read a few NYT articles, but it is not the same.  The physical newspaper is necessary.  It an ingrained habit going back to the days when I had morning and afternoon paper routes in my hometown from the age of 12.  It was delivered and read.  I could never understand why some people only ordered the afternoon paper, which was more New York Post-like and even more right wing  than the traditional morning paper.  Years in New York now, I understand.

What goes for newspapers is true with books as well.  Trying someone's Kindle was just not the same.  Certainly if we were to go on a long trip now we would have a Kindle or an Ipad with us.  How many books can you carry, and how many worth reading can be found on a vacation.  Books, however, are pleasing to hold and, if they are not from the library, to mark up when wanted and to fold pages.  The habit  here is to make tiny folds at the bottom of pages that I may want to return to, and they are used just after a book is finished to remember the high points.  After that they are only occasionally used, or rarely.

Someday physical newspapers and books may become a part of a quaint history, but that may take longer than is generally expected.  This is not VHS to DVD to streaming movies.  These holdable reading materials cannot be duplicated.  The experience is too tactile and vivid to go away just yet.  

Wednesday, September 03, 2014

King Abdullah's unusual high profile comments

As widely publicized, King Abdullah of Saudi Arabia made public comments last week calling for the U.S. and Europe to help confront the extremists in the Middle East, and while he wasn't specific what he meant was Al Qaeda  and ISIS.  He suggested that by this month ISIS will be active in Europe and by next month in the U.S.  An obvious question is what is Saudi Arabia doing, other than purging their country of known extremists to the extent they can?

Saudi Arabia has an air force of 300 combat jets, many the most advanced made.  It has a standing army of 200,000 to 250,000 paramilitary forces, as well as significant reserve forces.  Yet they have made no moves in this quagmire of competing forces.  Somewhat like President Obama, they must be sorting through what if anything to do, as this region of opaque alliances and conflicting agendas makes taking action problematic.  Saudi Arabia supports the ouster of Assad in Syria and the moderate dissidents that fight and demonstrate against him.  They are opponents of the regime in Iran.  Taking aim at ISIS in particular would be beneficial to Assad and to Iran and its increasingly active support of Shiites in Iraq.  What to do?  To some extent one could suggest that the U.S. faces the same dilemma.

Despite its moderate Sunni approach to the world, one can't forget that Osama bin Laden was a Saudi as were 11 of the 15 9/11 perpetrators.  Meanwhile the extended royal family continues to lead lavish lifestyles around the world, squandering the country's immense wealth, one could say, and wearing arrogance on their sleeves every step of the way.  Case in point was the robbery of Prince Abdul Hziz in Paris last week, in which his entourage of 50 people with multiple cars was stopped heading to the airport and robbed of 335 thousand Euros in cash, plus documents of some import unknown.  He had just spent 45 days at the Hotel George V, and was headed to Ibiza.  So we should protect the royal family's lifestyle and listen to their call for protection, hop to it U.S.?  King Abdullah should have outlined what they were doing while asking for a coalition to be built to stop ISIS.  Accustomed to many years of U.S. obsequiousness, Abdullah has no concept of partnership, and no taste for the risk of publicly doing so with the U.S.

President Obama's "no strategic plan" commentary last week was awkward and not necessary.  His further comment was that he was waiting for the defense secretary to present a plan pushed the responsibility down.  In this tennis week here in New York, one could say he is back on his heels.  He seemed to be excited when he spoke in Milwaukee earlier in the week at a political rally where he talked about the improving U.S. economy and his support for a higher minimum wage among other initiatives.  He does not seem especially motivated or focused when he discusses the challenges of the Middle East, or the other major issue of Russia and Ukraine.  It is apparent that he did not expect to be drawn into such crises, and he has been dragged into these issues unwillingly.

With a recalcitrant and divided Congress soon back in the beltway, we wait for more of a show of leadership if that is possible.       

Tuesday, September 02, 2014

Who is analyzing and valuing individual stocks?

What percentage of individual stocks are bought and sold based on fundamental analysis?  There is no answer here, but it appears that it is only a small number.  There are three reasons for that from this perspective, and this is not a unique thought.  First, as detailed in a chart in a Barron's article this weekend, over the S&P 500's rise during the last three years, it has traded within an increasingly narrow band, suggesting a concentration of opinions.  Second, high frequency traders represent as much as half of all volume on a given day, and those traders have no interest in company specifics.  Third, investors large and small have increasingly moved to index funds or ETF's, which require sector decisions but no individual company decisions.

Quoting Martin Whitman, the octogenarian Chairman of Third Avenue Funds, "Understandably 100% of high frequency traders, as well as the vast majority of other market participants(with the exception of those engaged in risk arbitrage), have little or no interest in becoming knowledgeable about individual companies and individual securities... Most market participants just are not in a position to make determinations about intermediate to long term fundamental values."

Is this important?  One could guess that it should be.  A fundamental attribute of index fund investing is a belief that securities markets reflect price equilibrium.  At any time, the prices for securities are right, meaning efficient, and will change as the market digests new information related to a company specifically and to broader market issues as well.  If there are fewer and fewer market participants doing company analysis, how does this "efficiency" evolve?  Does it mean that a smaller and smaller pool of securities analysts at investment firms and brokerage firms wield greater influence than in the past, or does it mean that there will greater opportunities for those who actually do fundamental analysis?  Is the investor who does fundamental analysis the marginal investor that prices the stock.

Over and over again it has been demonstrated that actively managed mutual funds, after fees, on average do not perform better than index funds, and often do somewhat worse.  There will always be those fund managers who seem to differentiate themselves from the crowd in a positive way, but finding them is always based on hindsight.

One could latch onto a star like Will Danoff of Fidelity's huge Contrafund, and feel comfortable in the hands of someone who can beat the market regularly and with an expense ratio of 67 basis points.  Even Danoff could have a bad year, although he hasn't for the last 20 or more, but look at Bill Miller of Legg Mason who had a 15 year benchmark beating winning streak before being clobbered by the great recession.  Nothing lasts forever, but the indexes do whether one likes the "market" result or not.

Here doing some analysis and research is either valuable or just an enjoyed hobby.  Positive results can be a result of luck or insight, and mistakes can be made.  Eliminating mistakes quickly is a discipline, but doubling down, or more, is a risk.  Both are done here depending on the situation.  Like I said it's an enjoyable activity here, certainly not harmful and at times beneficial, but God help the person or family members who might need to unwind all of this someday.  Really it could be easy.  Just push the sell button multiple times and buy index funds with the proceeds.  My goal is to begin to simplify over time and to make a little money in the interim.



 

Monday, September 01, 2014

Strong U.S. equity market in August, year to date numbers solid

What an August for U.S. equities.  Who would have predicted that in supposedly sleepy August there would be such a rally.  Every major U.S. index average was up more than 3% for the month, with many up in the 4% to 5% range.  Even the previously lagging small caps stepped up to participate.  Optimism about the U.S. economy, in an absolute and relative sense, overcame global turmoil and a continued cautious outlook by many.  Given that long term treasuries rose as well in the month, by 4.5% and are up almost 17% year to date, one could suggest that part of the reason for U.S. financial market's strength was in fact global turmoil.

What's next?  September for some reason, statistically speaking since 1950, is the worst month of the year for stocks.  Does summer produce some lethargy that is all of a sudden replaced by more discipline in September?  There is no answer to that here, but one could suggest this year that investors have room to give some back and feel little pain, and a modest pull back could be healthy for the market.  It would allow for more investors to feel comfortable stepping in and clear out the really weak hands.  It would set the stage for an end of year rally that would continue this long bull market recovery from March of 2009.

Small caps have been the one laggard this year, but there is some inconsistency there.  The small cap 600 and the Russell 2000 are up just 1% year to date, but the Russell 1000 and notably the Russell 3000 are up over 8% each.  That must explain the fact that while reading about the woeful performance of small caps, the indexes that are owned here seem to be doing fine.  Looking at more data, the one other surprise here was that TIPS are up 4.9% year to date, well ahead of the 3.2% for the total bond market.  They are held here in non-taxable accounts like a 401K and IRA's, but somehow I missed the fact that they had been on the rise.

Most observers do not see the S&P as overbought now, but most also are wary of looking for more growth from this point.  As is usual most of the time, there are no predictions here, but once we get through always dangerous October, a year end rally could be in the cards.