Sunday, October 26, 2014

Manhattan in adjacent Long Island

Tonight the will to cook-in had diminished.  We ordered take out from Mykonos, a Greek seafood restaurant near by.  It is always good and they know us well.  I drove down to await the stuffed(with real crab meat) flounder santorini and the grilled salmon, both with salad, yogurt dressing, rice, and some seasoned green beans. Early and waiting outside, I watched the two adjacent restaurants at the end of the little downtown here as they cleaned off their sidewalks at 5:15pm, brushing all leaves off into the next places or the gutter, with Villa Milano even hosing down its sidewalk.  These are definitely Manhattan bred displacements, doing well in the suburbs. 

Saturday, October 25, 2014

Rewarding corporate shareholders and employees, the right way?

This comment looks at how public corporations reward shareholders and employees, and which choices may be more effective and which have some potential flaws.  Why?  It's a long held interest based on work experience  These choices include buybacks, dividends, market share and revenue growth, and EPS growth for shareholders, and for employees there are dividends, stock options, stock grants, salaries, and cash bonuses.  This may take some time.

For shareholders, the more than obvious best way for a corporation to reward shareholders is by growing revenues, being efficient, building market share with quality products, paying attention to customers, and increasing earnings per share.  The stock price should follow good performance in those areas over time.  Dividends are also important for many shareholders, as even though they are taxed, they are cash distributed to be used by shareholders for their own needs or for investments in whatever way they see fit.  The fact that they are taxed could be viewed as unfair, since corporations have already paid corporate tax rates on their earnings, so why they are also taxed when distributed to their owners seems a little like double taxation.  The government is not inclined to see it that way.

Then there is the widely accepted but not so clear cut issue of stock buybacks.  It's just simple math that reducing the number of shares outstanding will increase earnings per share, all things being equal.  It's not that simple.  Buying back stock is unequivocally in management's best interest, not necessarily shareholders, if stock options are a major form of compensation.  Share buybacks, under any general historic analysis, are unfortunately more often done when the stock is at a high price and is no bargain.  That is due to the fact that the idea of buybacks being wonderful usually arises when a company has excess cash, that excess cash being due to good financial results that are probably already reflected in the stock price.  Buybacks can divert cash from R&D, employee compensation, and new investments for growth, as well as from rainy day needs if they unpredictably come.  On the surface one could ask, "if there is no good investment alternative internally, how can a company grow?"  Buybacks done carefully and conservatively can be constructive, but at times they are not.

At the moment Carl Icahn is hysterically lobbying Apple, and the market, for Apple to significantly raise its buyback plans.  Carl Icahn has never done anything to benefit the long term prospects of a company, its shareholders, or its employees.  If he would get his desired level of buyback from Apple, he would more than likely be out of the stock within a year.  Carl Icahn only does things to benefit Carl Icahn.  The market and media seem to treating Icahn with more respect these days, presumably due to his age and staying power and money making prowess.  From this perspective he deserves no respect.

Good straightforward corporate performance and demonstrated growth trumps all financial engineering as way to build shareholder value.  IBM has, without question, reconfirmed that in a negative way.  CEO Ginny Rometty seems clueless when she tries to reassure shareholders about the dilemma the company is now in, now out of tricks.

Looking at employees, they can benefit from an array of compensation plans, and the further these go down into the ranks the greater the potential for better morale if done right.  Stock options offer the potential for a bonanza for upper level employees that receive large allocations.  Referred to by some as "corporate lottery tickets", it is unclear how these restricted benefits directly affect motivation or morale.  If the overall market and the company are doing well three years or so after a grant, and on for another 10 years generally, the big paydays will come, but those paydays can seem somewhat random except for the top tier of the firm, which gets bundles of options year end year out.  Someday they will they have a great chance to win the lottery.  For middle management that potential exists as well, but they don't have control of the buyback plans in order to influence the outcome. Guess who does.  When companies with declining stock prices are stressed and trying to keep employees on board they have a tendency to materially increase the number of stock options awarded, and then risk considerable dilution in the future.  It's worth the risk for the big shots, but it is not necessarily positive for those in the middle.

Stock grants are often seen as a much better near term motivator.  They will generally be restricted as well for around three years, but they represent value in hand when they vest, and any dividends come with the package.  Long term employees tend to be long term holders of this stock, whether it is wise or not.  Cash bonuses are welcome by all even if taxation eats away at the amounts.  Hey, it's immediate cash.  Some firms offer plans to defer that cash into long term annuities that are attractively structured, a great deal if an employee does not have an immediate need for the cash.  These cash bonuses are also welcome and in fact absolutely necessary as the days of automatic salary increases are over.  That was the case before this near zero interest rate environment and is more set in stone now.  To get any notable salary increase requires a meaningful promotion in most companies.

The rewards for shareholders and employees to benefit from a well run company are clear cut, but without question do depend on overall economic outcomes and financial market health.  The one group of people who are both shareholders and employees that seem guaranteed to do well are those at the top echelons of a company if they don't screw up royally, and even then they often end up in amazingly good shape.  Much has been written about this phenomenon, but putting the genie back in the bottle does not seem to be on corporate America's mind, and that is almost certainly not a good thing longer term.  Independent directors and shareholders eventually need to step up to this crucial issue for corporate oversight.

Getting this right will be politically and culturally important over time, or is now.  Change on this issue will be corporate driven or eventually forced by the government at some future time.  Taking on the issue at the corporate level is the much preferred outcome.

It's not too late.


Friday, October 24, 2014

Cleaning closets

At some point in the next few years we will either need to or want to move from this house to a more manageable building and location.  Whether one year from now or three years,or something in between, that day is coming.  We cannot begin to prepare too soon.  With that thought in mind, just recently we have been on a periodic effort to deal with the "too much stuff" syndrome.

Today, with the help of our once a week housekeeper, we tackled the two large front hall closets that had not been thoroughly vetted for at least 12 years, maybe longer.  They were crammed with windbreakers, raincoats, bulky down jackets, vests to wear under jackets, ski jackets, hooded light jackets with golf course insignias, all ranging in size from a few that would fit a four year old and going up to sizes that would have fit us thirty years ago to those that fit us now.  Hats and gloves of all types and sizes were on the top shelves and the bottom of the closets were filled with winter shoes, flip flops, sneakers, tennis rackets, lacrosse sticks, a box of sun lotions and more.  This was a big job that led to keepers, throw aways, and those things that could go to a thrift store or Goodwill.  We finished one closet and made a decent start on the second, to be continued next week.

Some things were far overdue for the trash basket.  Several hats that brought back memories but had no other purpose given their condition had to be parted with.  The big box of at least 20 tubes and bottles of sun lotions was useless, as that stuff deteriorates over time.  Several vests from Eastern Mountain Sports were so nappy that they just did not look right, although they went into the thrift store bag because with a wash they might be fine.  We just had too many of the things.  Obviously the jackets for young children could be destined for Goodwill despite the memories carried with them, and worn out sneakers could go in the trash.

Then, there were the "finds".  Those are discoveries that we, or I, had forgotten were there.  That included an almost new London Fog windbreaker of the type that I wore from 11 years old on, getting new identical ones whenever they wore out for my entire life, and there was a new one.  There was a London Fog raincoat, a little bit short but in perfect condition; a lined Paul Stuart raincoat that had been bought at a sample sale for next to nothing and never worn; a colorful Obermeyer ski jacket in perfect condition; and those do not include whatever else that K discovered of her past.

While this is not necessarily interesting to most readers here, it may be to those in similar situations who can "enjoy" doing the same thing, and we did actually enjoy going through everything, especially with the benefit of our housekeeper to help with lifting and organization. The result is a closet that can be used, one where things now can be found and not mangled if put in.  If we would have waited until that time in the future when we "needed" to do this, the effort would have not been too much fun.  Getting it done now has led to a closet that we or guests can effortlessly use, as well as some garments that can give us more choice whether we choose to wear them or not.

Speaking of someone maturing in the last post, the thought comes to mind that we are too.  It's about time.

The maturing of Mark Zuckerberg

Mark Zuckerberg caught the media's attention this week when, during a business and promotional trip to Beijing, he spoke to students at Tsinghua University.  It was not what he said there but how he said it that attracted attention.  He spoke in Chinese, apparently not at all perfect, but a television clip showed that the audience not only understood him, but also laughed and clapped repeatedly at whatever he was expressing.  He explained that he began learning the language in 2010 to be able to speak to his fiancee's, now wife's, parents and relatives.

After surviving the less than positive profile in the film "The Social Network" and the constant attacks of the Winklevoss twins who, while never satisfied with their vilification of or reward from Zuckerberg, seem to have finally moved on after profiting enormously for basically having an idea and doing no work, just rowing, Zuckerberg now seems to be coming into his own.  His earlier image of being an insular and work obsessed upstart has slowly been replaced by a more leveled and aware individual, as he stays open to tweaks of the Facebook platform to satisfy privacy concerns that are often raised.  He began being noticed for philanthropy after a $100 million donation to the Newark, N.J. school system and high profile presentations with then Mayor Cory Booker.  What was seen by cynics then as a one-off effort to improve his image, is now being put into context as an ongoing commitment to charitable giving by him and his wife, Dr. Priscilla Chan.  Zuckerberg's former role of hooded insularity has now shifted into one which broadly reaches out to those in his industry and beyond to create bonds and opportunities.  He seems to be shy no more, but one must know that he remains a businessman with an intense competitive drive.

So when looked at now, a comparison to a young Bill Gates, another Harvard dropout, is not unheard of, although Zuckerberg now 30, has been growing up much faster, as is required these days.  He joined the advisory council of Tsinghua, apparently referred to as the MIT of China, this week and his talk there was clearly aimed at raising his profile in China.  The New York Times has an article on all of this today, and one anecdote highlights Zuckerberg's growing confidence, as well as an ability to be self deprecating.  He speaks of his efforts to speak better Chinese and to understand it better as well.  Speaking of his wife, he said "One time I asked her, why is my listening comprehension so bad? She said, Your listening comprehension in English is also bad."

I liked that.

Thursday, October 23, 2014

U.S. equity market may revive today, up at first and then sideways is a guess

Yesterday's event in Canada and continued oil price declines in the afternoon were exogenous events that obviously impacted the equity market yesterday.  They were digested negatively, but it's an open playing field today.  The European PMI report grew this month, modestly but ruling out a slide into recession near term.  Dire unemployment in Spain dropped somewhat, and U.S. corporate earnings continued positively apace, even as those companies that manage to disappoint investors get seriously pummeled, see IBM and Coca Cola.  That is the case in Europe as well, see Unilever and Michelin.

Anything related to oil anywhere is subject to downward pressure, even as consumers continue to have the latent benefit of lower energy and gasoline costs.  Banks and financial service companies have been under pressure in general as exposure to European bonds presents both credit and interest rate risk near term.  Emerging markets are being led lower by China, as equity markets decline there amidst the usual array of excuses by government controlled spokesmen.  Is it right to say that the prime reason for equity market weakness is a glut of IPO's?  Certainly not in any scenario that is not extremely short term.  China has other real issues. 

We await today's market with the thought that U.S. corporate earnings will, with some exceptions, continue to buoy equity prices, at least maintaining the current level and working up from there.  Prognostications like this are surely unreliable, but that's a rational market view at this very moment.

Wednesday, October 22, 2014

Early morning

In recent months, wake-up time here has been between 5am and 6am, as I reach a point where it is clear that no more sleep will come even if fatigue still lingers.  It's either stay in bed awake and deal with anxieties that need not be considered, or get up.  I get up.

The morning ritual then means putting on my sweats and coming downstairs to await the newspaper, and finding whatever ongoing book is being read to pass the time.  I make coffee, sit in a comfortable chair in the front of the living room, pull back the curtains on the large front window, and like the Dutch have no problem with the fact that those outside in the dark can see in.  The room is somewhat elevated and 20 feet away from the street, and seeing the morning light as it begins coming in directly from the east is something that brings out energy here.

The newspaper deliverer drives by on our narrow street at about 35 miles an hour and tosses the paper somewhere on the driveway or yard.  The driveway is much preferred as the lawn slopes down and is uneven.  It takes great care to pick it up there, as I would hate to tumble over in such a open area.  That is not impossible these days.  Whatever my problems with the Times are from time to time, I relish reading the paper in those early hours.

At around 8am breakfast is made for K and myself.  As eggs and butter have been somewhat rehabilitated by the non-vegan food vigilantes, a good morning meal is less difficult to make.  Then there is cereal, a mix of Uncle Sam, Post Great Grains, and the wonderful sugar laden traditional Kellogg's Corn Flakes, topped with walnuts and low fat milk.

All of the above is the launch of the day.  Why I am compelled to share this, I don't know.  It felt like a good idea when starting the post at 7:30am, but it seems to have fizzled, after a break, as it was completed at midday.  Now it's out of my mind and whatever thoughts of greater interest that occur here are free to be released.

Tuesday, October 21, 2014

"When The Garden Was Eden"

This film, first presented on ESPN tonight, should be a special one for anyone who has ever been a New York Knicks fan, attended events at Madison Square Garden, loved basketball, been a real New Yorker, or just likes history in general.  All of those describe this writer.

The film tells the story of the Knicks in the late 1960's and early 1970's when they were making NBA basketball a major sport and won NBA championships in 1970 and 1973.  With a lineup of talented characters who became consummate team players, they were in the spotlight on and off the court in a way that had never been seen before in professional basketball.  Willis Reed, Bill Bradley, Walt Frazier, Earl Monroe, Dave DeBusschere, Phil Jackson, Dick Barnett, Cassie Russell, a little known Dean Meminger, and the transferred Jerry Lucas all played for the Knicks during this period.  Coached by another character, Red Holzman, they played tough defense and seemed to let the offense take care of itself.

The interviews with some of the players today, the clips of some the games, and the commentary on the social upheaval in New York City at that time all made for an entertaining and informative film, an exciting film about what can happen when a team and a town come together.  There were many notable quotes from the former players, and my favorite one was Walt Frazier talking about playing defense against Earl the Pearl Monroe when Monroe was still with the Baltimore Bullets.  He said, "It was impossible to guard Monroe.  I had no idea what he was going to do and he didn't either." I was lucky to spot this show tonight, and am sure that it will be repeated numerous times in the coming weeks and months for those who missed it.    

"The Zone of Interest", a novel by Martin Amis

It has been over 20 years since the attention getting "Time's Arrow" was read here, Martin Amis's first novel about the Holocaust.  His intellectual fascination with this almost inexplicably horrific event has apparently not waned since.  "The Zone of Interest" is an impressionistic look at the second rate bunglers and the protected connected ones who were assigned to run the death camps.  It does not offer answers, only a depiction of this random yet highly coordinated tragedy of that time.

To this reader it was obvious at the outset that this was a book that needed to be read in big gulps.  Snippets here and there would never pull one back into it.  There is plenty that is not pleasant to digest, even as there is wit, compassion, and obvious cruelty in this horrible setting.  Amis's writing is sharp and edgy, more alive that it has been in some of his more recent books.  It pulls one forward if one sticks with it and has the inclination to proceed.  Here it was enjoyed even if the perplexing question of "why write this" lingered.

In a closing series of short chapters entitled "Aftermath", one of the main characters cites January 1933, when Hitler assumed power, as "the beginning of the German compromise with sanity".  He later asks "how did a sleepy country of poets and dreamers, and the most highly educated nation the earth has ever seen, how did it yield to such wild, such fantastic disgrace?  What made its people, men and women, consent to having their souls raped--- and raped by such a eunuch...Where did it come from, the need for such a methodical, such a pedantic, and such a literal explosion of the bestial?"

The novel does not answer that question, and essentially concludes in the words of Primo Levi "there is no why here."  As Hitler turns his hatred onto the German people and continues a war that many saw as hopeless as early 1943, ratcheting up the effort to exterminate the Jews and putting the entire German population at the eventual mercy of  Western air power and barbaric Russian ground troops, no armistice is possible, only total defeat.  Hitler is almost inexplicably warped, and still many follow.

For those not enchanted by this topic, it can be suggested that you go to the local library or bookstore and just read the final section mentioned above, "Aftermath", and the Acknowledgement and Afterword:  "That Which Happened" to get a sense of the book and its impact.  That may be a heretical suggestion to fellow novel readers, but these last parts are not trivial.  One would miss some great writing, but still get some benefit from the effort of Amis.    

Monday, October 20, 2014

U.S. equity market depth and transparency is a double edged sword

It was suggested here last week that, given the market turmoil, investors would gravitate toward the U.S. equity market with its relatively reasonable valuations, transparency, and an appreciating currency.  In even the somewhat short and medium term that is absolutely believed to be a true statement, but in the immediate short term it apparently was not.  The liquidity that the U.S. market represents put it into the position of being a source of funds, leading to broad selling.

For example, as investment management institutions in Edinburgh, London, and Amsterdam, the three biggest European countries of buyers of U.S. equities, saw redemptions of their funds from both individual and institutional investors last week, they obviously looked to raise cash.  Looking at their European holdings they would have seen unpredictably declining prices, especially for any lots of size, and looking beyond at emerging markets positions would have been worse.  The one place to logically sell with the least unpredictable downside was the U.S. equity market, where they had holdings.  Selling there was not a research based decision, but one based on the cheapest access to liquidity at a time when it was needed.

The net effect was that U.S. stocks not only declined due to pressures based on the perception of slowing global growth but also due to pressures elsewhere that could be mitigated by the liquidity of the U.S. market.  Perhaps that's a positive marker for this week.

Sunday, October 19, 2014

The approach to successfully confronting ISIS is unclear

The New York Times today had no stories on the advance of ISIS, and its positions in Kobani, Anbar Province, Northern Iraq, and near Baghdad's main airport.  Other news is crowding out ISIS unless there is compelling current news, and one could think that the Obama administration welcomes the break.  The fact is that there is no viable strategy in place to derail, or "destroy and degrade", ISIS.

After so much talk, at the moment there is no Syrian Free Army being trained in Saudi Arabia.  Members have yet to be recruited.  The "retraining" of Iraq's army is a slow work in progress, and new recruits still wait for basic training, just "basic".  U.S. cash subsidized Iraqi army leaders talk of the eager dedication of just recruited troops who have seen what ISIS has done in other parts of the country and want to get their vindication.  A news film of these training troops showed a mix of paunchy middle aged men and very young men in their late teens or early twenties.  That the troops already in the field can be seriously motivated by American advisers after their Iraqi leaders completely failed them several months ago is questionable.

The one credible Iraqi fighting force is the Kurdish pesh murga and, as has been whined about here multiple times, the Obama administration continues to be overly cautious in giving them the most powerful weapons due to the fear that it would aid the Kurds ability to separate themselves completely from the Baghdad government.  Islamic State already has the most powerful U.S. ground weapons available, handed over to them on a silver platter by the Iraqi army in flight in May.

The many air attacks by the U.S. and its allies are having some impact, but they cannot replace some trained ground forces.  That is especially the case since Islamic State seems to have fighters with a blood lust that motivates them in an especially horrible way.  They apparently accept the fact that they will incur losses, and that they have replacements with jihadist fervor to replace them.

It is sad to say, but the only viable option seen here to stop ISIS is to allow Iran to send in their highly trained Revolutionary Guard troops to take on ISIS directly.  While almost certainly seen as politically impossible by the U.S., the Saudis, and by Iraqi Sunnis, if it is the only answer the thought must be contemplated.  Once unleashed could the Iranian forces be restrained and allow Baghdad to function as an independent capital.   Would such an action turn the region into a chaotic powder keg?

At the moment there is no good answer to all of this.  ISIS will persist.  If, or when, the airport is compromised, the country of Iraq could begin to come apart.  Kurdistan could survive without question if given proper weapons and predominantly Shiite southern Iraq could exist as a stable area.  The all-out war would be in Anbar, Baghdad, and central parts of the country.  Who would be a victor there is uncertain.

The realities discussed here have simply not been addressed by a hopeful and overly patient Obama administration.  Let's face it.  The new prime minister of Iraq, Haider al-Abadi, is a well educated and experienced bureaucrat chosen with U.S. influence.  He is without charisma, intensity, or a loyal constituency.  Displaced prime minister Al-Maliki is still making trouble around the edges.  Could this situation be more in flux, more uncertain.  Yes, it could, and may be soon.

Saturday, October 18, 2014

"Growth management isn't the Fed's forte"

This is the title of an op-ed piece by David Malpass in the Thursday, 10/16, Wall Street Journal.  Much of it echoed thoughts that have been expressed here, which is a bit surprising since Malpass is a veteran of the Reagan and Bush the first administrations and is a contributor to conservative "think tanks".  While there is a glaring absence of commentary on fiscal policy in Malpass's article, he takes on monetary policy in aggressive fashion, some examples of which will follow.

He writes of the recovery, "this time, median incomes fell as financial markets rose.  The Fed has imposed near-zero interest rates on small savers, channeling trillions of dollars in low cost credit to Fed-selected beneficiaries, especially governments and large-scale corporate borrowers".  How many times has that obvious fact been pointed out here.  Malpass continues, "The result has been helpful for the rich but has been toxic to small businesses and median incomes because underpriced credit goes to well-established bond issuers--- not known for job creation---at the expense of savers and business loans".  What more can be said.

Malpass notes the power over the mortgage industry held by the Fed, and Congress and the Justice Department are added to his comment here.  After being disastrously managed going into the Great Recession, the giants Fannie Mae and Freddie Mac have been made even more powerful.  With the threat of regulatory penalty hanging over all aspects of the securitization industry and the absence of a competitive appetite from what's left of the private mortgage industry, mortgage originators are in a quandary.  Almost the only way to clear mortgage assets off of the banks' books is through Freddie and Fannie, and they are wary when doing so due to all of the assets that have been put back to the banks with penalties due to "impairment".  Malpass does not make these points, I do, but he implies them.  These government sponsored institutions take no responsibility for what they underwrite even though their executives and traders are paid like investment bankers.  The oversight by Congress is still either non-existent or disruptive.  Banks remain exceedingly cautious about what they originate due to this state of play.  The zero interest rate policy offers no relief to this situation.  Marginally higher interest rates would not be an issue if the specter of questionable "put backs" was not always looming and banks could confidently distribute their originations.

Malpass looks at financial regulation with a similar cautionary view.  To quote again, he writes, "Companies are running into a Catch-22 as they appeal harmful regulatory actions.  Many of the regulations from the incomprehensible 2010 Dodd-Frank financial law have yet to be written and therefore can't be challenged".  That comment is not completely understood here as what is "harmful" from Malpass's point of view is not clear,  but his point about the "clarity" of Dodd-Frank is on the mark.  The bill was far too long and full of minor rules that have potentially major unforeseen consequences.

Malpass closes as follows:  "The Fed has fostered the illusion that it can create growth.  The zero-rate problem is obvious to almost everyone outside the Beltway.  Credit markets don't function with prices set at zero, and the economic results have been disastrous, with median incomes severely depressed fives years into the expansion."  Malpass goes on the express his opinion that the Fed's policy has stifled "investment and hiring that is needed to create faster growth."

Malpass makes it all seem simple and one could wish that were the case.  He makes points that would not be expected from someone with his political background, although calling to task a Democratic administration fits the bill.  His prescription for economic growth other than what not to do is unstated, but to his credit he does not get into the balance the budget type of gibberish common to tea party types.  He seems to take the high road, and makes some points worth considering.

They have been considered here for several years, and reading them in the WSJ from anyone was welcome.  That there might be a middle ground point of view is encouraging, how unique that thought is these days.  

Friday, October 17, 2014

What about the bond market?

As stocks rally this morning, one's attention could turn to the bond market.  The New York Times business section today has an attention getting article on the high yield bond market, and the concentrated positions of some major asset managers.  Here equities are followed closely, and presumed to be understood based on career experience and years of investing.  Bonds are understood, but individual bonds are not followed or bought.  That's not an area of expertise or experience.  Low cost mutual funds are the primary avenue of bond exposure here.

That's the reason, no doubt, that today's mentioned article was so enlightening, or maybe alarming, when read this morning.  The high yield debt positions that are dominated by one or more firms could, in a market crisis, lead to a liquidity squeeze that would destabilize the credit markets in a way that would be reminiscent of the 1998 LTCM crisis, and as one who was on the front lines then it is an understatement to say be that one was a real nail biter.

What is being talked about here?  Examples in the article include the apparent facts that:  Pimco owns close to 50% of a number of foreign bonds;  Pimco owns over 40% of the debt issued by the Bank of China and just under 40% of State Bank of India debt;  Pimco owns 37% of Ally Financial(the old GMAC) debt;  Franklin Templeton owns 25% of First Data debt and 24% of Tenet Healthcare debt; Franklin Templeton also has a "big bet" on bonds from Ireland and Ukraine.  Other firms like Fidelity Investments, Dodge and Cox, and Blackrock have "significant though smaller" positions in selected high yield debt securities.

The following sentence lifted from the article is important.  "Traders calculate that less than 1% of corporate bonds trade more than $5 million a day."  While some of the very large issues mentioned above would presumably trade more than that, the message is that any analogy between the liquidity of the stock market and the bond market may be incorrect.  In a crisis in the equity markets volumes generally increase while in a crisis in the credit markets they freeze and individual securities can become illiquid for an indefinite period of time.  If there were ever a situation where unanticipated and abruptly rising rates would lead to a rush to the exits by fund holders of major bond funds, it would lead to a period of significantly distressed selling, fund holder losses, and inevitable losses for affected bond fund manager, either through accommodations to their clients, mismatched trades in a chaotic market, or to subsequent litigation.

More importantly any liquidity driven credit events cast a shadow over the entire fixed income market, and activity tends to drastically decline or get put on hold.  That casts a pall over business activity in general, and if global the ramifications are multi-faceted.

At the moment there is enough to think about when looking at the equity market.  On the horizon, today's article was a reminder that bonds cannot be ignored.  High yield bonds in particular represent a hybrid risk, that one could view as part fixed income and part equity.  Concentrations are rarely wise, and those by certain firms require investor attention, one could hope.  The good news is that there is no such crisis in sight at the moment, so this is now just a cautionary note.

Thursday, October 16, 2014

U.S. relative economic strength provides little solace near term

The U.S. economy is on pace to have GDP growth of around 2.5% in 2014, the jobless claims numbers reported this morning are the lowest in 14 years, energy price declines are putting more money in consumer's pockets, and while wage gains are low, the unemployment rate is at its lowest since 2008.  Walmart lowered its sales forecast yesterday, but that change may be as much due to stiffer competition online than a projected decline in economic activity.  It must be remembered that the holiday season is sacrosanct to many Americans, and ways will be found to make the necessary spending.

Earlier this week we were out at several stores doing some shopping for the winter season.  There was reasonable activity everywhere, and any comparison to the palpable gloomy mood in stores in 2008 and 2009 was non-existent.  The great majority of American consumers are not invested in any substantial direct way in what happens in the stock or bond markets.  As long as people have jobs, any type of job as long as it is reliable, they will spend money in December and earlier as they plan.

Any suggestion that the stock market went into this market decline being substantially overvalued is generally viewed as incorrect.  Any new cracks in the foundation of credit in this country are not visible, as both companies and consumers have deleveraged in recent years.  Getting a mortgage is not easy and credit for small businesses has not been any kind of hand out.

All of the above suggests that the U.S. economy is in substantially better shape than that of Europe   which could actually be flirting with deflation in certain regions.  Growth is stalled there, and with China's economic growth decelerating at a faster pace than previously expected and Japan once again on the ropes of no growth despite Abe's earlier more progressive efforts, the global economy is not expanding.  Emerging markets, once seen as the essential long term growth element of any portfolio, are not playing that role.

The U.S. cannot for a minute isolate itself from a global economic slowdown.  It is looked at as the one country that can pull the world out of this market slide, but the U.S. would do well just to pull itself out of this in the coming days.  One could think that it will, as money seeking safety and return from around the world should gravitate toward the U.S. market with its relatively greater transparency, reasonable valuations, and an appreciating currency.  For now though, the U.S. may need to hit that 10% correction threshold before the selling subsides, and values become too compelling.

With variables such the ISIS advance in the Middle East, the continuing friction with Russia and its bordering countries, notably of course Ukraine, the turmoil in Hong Kong, and with all eyes on the ebola threat, there are issues that make a pure financial analysis of this downturn incomplete.  The coming days and weeks will obviously provide a clearer picture.

From this perspective, the near term should provide some relief to the U.S. market.

Wednesday, October 15, 2014

An undeniable but intangible cloud over the financial markets

The perceived slowdown in global growth and the consequent potential decline in financial activity is uppermost in investor's minds today.  On top of that major concern, ebola lurks just outside of the analyzable consciousness as a cloud that cannot be ignored at the moment.  The disease with no cure may be contained successfully in Western countries and become no more than a blip on screen in the coming weeks, or it may persist as a factor, particularly if the disease in Africa spirals out of control into a regional pandemic.  That does not appear to be a far fetched possibility.

Based on what President Obama has repeatedly been saying, while some nations like the U.S., France, Germany, and England are stepping up to the challenge in Africa, many others are doing so more cautiously or barely at all.  This is, one could think, partially due to the pervasive fear of ebola rightfully held be many aid and medical workers, and by the long track record in Africa of both foreign government and NGO financial contributions being misused by governments there.  When a country just says they need money, one could think "to spend on what" if they do not have enough doctors and nurses, medical workers of all types, in the country itself.  These countries need external help one could think, not more direct monetary contributions to inefficient and historically, at times, corrupt governments.  That's a biased way of thinking, but that is a blunt assessment of how many people and governments actually think.

That way of thinking must be overcome, and if in fact it must just be accepted that even if all money contributed does not get to an appropriate project or activity,  that toll is worth the cost of getting more money to the right place to halt the exponential growth of this disease.  To the extent this disease continues to expand in west Africa, it will inevitably expand, however modestly, in this globalized world economy.

Investors can't put this into a model but they are susceptible to concerns about ebola and both facts and rumors about its spread.  We can't underestimate this intangible at the moment.  After all, investors are actually human.    

Tuesday, October 14, 2014

High speed trading programs set off yesterday's sell-off

Something as dramatic as yesterday's U.S. equity market sell-off in the last half hour of trading had to be related to high frequency trading.  It makes sense and apparently that was the in fact the case.  When it became clear at some point after 3pm that the S&P 500 index would close below its 200 day trading average for the first time since November 2012, automated programs began selling stock across the board.  To the extent that there was any sector bias is unclear, and the impact of individual stock selection was almost certainly minimal, but as always it was there on the margin.

What this type of move means for investors, big and small, is not trivial.  When this type of automated group think move hits, one can only get out of the way.  Referring back to a September 2 post here, how does individual stock selection and research fit into this pattern of macro trading moves.  It certainly negates, in most cases, the benefit of paying any appreciable amount to have assets managed.  It's either do it yourself or use index funds, or both.  As the California state pension board pointed out two weeks ago, using hedge funds broadly as a means to beat the market is a fool's errand.  Some funds will of course excel, but for the most part those fund's ultra high fees eat up any market beating returns.

We'll see any impact of individual stock analysis today and in the coming weeks as corporate earnings reports roll in.  Rarely should such reports be analyzed more scrupulously as we sit on the cusp of a potential major market correction.

Monday, October 13, 2014

Market close wipes out constructive day

The U.S. equity market day was one of ups and downs, always seeming to be moving toward the center, forming a base for more positive trading as this week of earnings reports develops.  Then came the last half hour.  The bottom fell out and all major averages headed straight down.  Why?

There really seems to be no good reason unless one chooses to listen to the chart followers, as I said no good reason other than a general market fear that this decline will continue.  There was no strikingly bad news today, none at all unless one case of Ebola can be extrapolated into thousands of stocks falling simultaneously from 3:30pm to 4:00pm.  What also was not there was any new good news, some news that would be additive to the market's attempt to build that base.  Transportation stocks were particularly hard hit, airlines, cruise lines, and hotel chains, based on an obvious panic of the day.

For those who have been waiting for the opportunity to "buy a dip", how do you feel now.  It appears that the inclination to buy the dip has not yet set in.  What we perhaps saw this afternoon was a type of capitulation, a "to hell with it" style of selling that had investors not waiting any longer, not one day longer, to sell what was on their mind to sell.  Still, it does not seem like the selling is over yet.  Earning reports may be or will certainly be the answer to the question about the longevity of this selling.

Tomorrow JPMorgan, Johnson and Johnson, Wells Fargo, and Citigroup are among those firms reporting.  Wednesday comes Bank of America and Netflix among many others.  Thursday provides Blackstone, Goldman Sachs, Marriott, and Schlumberger and many more.  These earnings will definitely provide facts to trade on rather than vague fears, and one could hope not fears at all.

Let's wait for more information and digest today later. 

Sunday, October 12, 2014

Islamic State on the attack on multiple fronts

The Islamic State jihadist radicals are on the attack across Iraq and in Syria.  The one area mentioned today in most news reports was the siege of Kobani, the strategically located Syrian town on the Turkish border that is populated by Kurds.  Most of the town's 150,000 residents have fled, and the town seems lost despite U.S. airstrikes to support the local Kurdish fighters.  Other areas of intense activity are Sinjar in the north with the Kurdish pesh murga attacking IS positions, Anbar province where some apparently functioning parts of the Iraqi army are battling IS for control of Fallujah and Ramadi, and, what was not mentioned in the New York Times or elsewhere today, the IS advance on Baghdad, which is most interesting here.

While it should be impossible for IS to overwhelm the substantial Iraqi positions in and around Baghdad, they could wreak havoc in the area.  They are apparently in control of the infamous town of Abu Gharib, not too many miles from Baghdad's major airport.  One could surmise that the new Prime Minister Hashir al -Abadi did not envision his capital being under potential attack so soon after he succeeded the completely divisive al-Maliki.  

What makes all of this possible is the immense amount of weapons that IS captured from the panicked and fleeing Iraqi army.  These are of course state of the art weapons and machinery left by the U.S. for the Iraqis to use as they established a unified state.  IS has captured all of the weapons of four divisions of the Iraqi army.  There are 12 divisions in all, but since some are located in more placid areas of country, one can reach the broad conclusion that IS captured one third to more likely one half of all weapons of the supposed 200,000 strong Iraqi army.

These include shoulder held anti-aircraft missiles, tanks, helicopters, fighter planes, rocket launchers, and multiple types of military vehicles.  In one commentary it was said that IS now has as many as 15000 armored and weaponized Hummers that cost $220,000 each and 100's of mobile rocket launchers that cost approximately $500,000 each. Some of these are being used around Kobani now.  With these kinds of weapons, the best available, and the apparent zealotry of the IS fighters, the battles being fought must by definition be tough ones.

It is unclear whether Obama has finally relented and given the Kurdish pesh murga comparable weapons, or he is still partially holding back for fear of fracturing his "dream" of a unified Iraq forever.  For now, one can wonder whether the IS potential to make inroads into Baghdad will be underestimated, with the powers there assuming that U.S. soldiers will come to their rescue if necessary. It is unlikely that Obama has the flexibility to do that, thank goodness.

Saturday, October 11, 2014

A morning read about health insurance

This week the book "Medicare & You" arrived in our mailbox.  Since anything will be read here, early this morning seemed to be the time.  This 150 page plus booklet is well bound and appropriately has reasonable large print.  Unfortunately the title of the book should be "Everything about Medicare except what you really want to know."  The words "You must..." appear regularly, making sure You know that it's only your fault if you miss some deadline or don't file some document.  What documents?  There are none in this package.  This is not a book that tells a person how to take action.  It is a book that suggests that you should.

There are some strange lapses.  The word "deductible" comes up frequently, but the amount of any deductible is never defined, even for "Original Medicare" which is sort of the "Classic Coke" of this book.  The descriptions of Medicare start out simply and in a very clear way, but as the book evolves the story, or plot, become more opaque.  The one thing that you finally can know for sure is that if you have all of the Medicare coverage that you would really want, you don't want it.  That's because if you did you would have ALS, aka Lou Gehrig's disease, or ESRD, that is end stage renal disease.

The book really hits its stride on page 93, which has a spectacularly meaningless chart.  Only a government bureaucracy could produce such a piece of work.  The chart apparently gives the coverage limits of 10 types of Supplemental Insurance Coverage, none of which are named.  The message is, to paraphrase, "go find them yourself."  Then the real gusher of information begins on page 148 and what follows is 15 pages of charts detailing over 35 New York City area Medicare Health Plans and their user ratings.  It is difficult to imagine making a choice among all of this in isolation.  Nowhere does the book say how to make a choice if you wanted to, although all of the deadlines are there.  There is no "call this number or fill out his form" or whatever.  Maybe it will come in mail that follows.

All of that may be moot here, as supplemental coverage here comes from a retirement plan with my last employer.  That worked perfectly, and smoothly, as Classic Coke was in place and the cost of the supplemental was simply deducted from a retirement payment and voila, there was drug coverage, dental, and supplemental insurance provided by previous employer.  Easy as pie.  Of course, everything in the prior sentence was in the past tense.  Now that previous employer has announced a new "more flexible" plan called "Screw the Retiree", but all of the details have not been sent yet, due to arrive in another handsome book, no doubt, any day.  Essentially the flexibility is that now, as with Medicare, all of the burden of choosing a plan falls on the insured.  There will be flexibility also as there will be the opportunity to pay multiple providers depending for services that you choose.  There will also be the flexibility to receive payments from previous employer in an HRA, Health Reimbursement Arrangement, documentation of which will increase the much enjoyed paperwork that can fill your idle hours with thrifty activity.

I get ahead of myself, and must await a more lengthy book to determine the real impact of this plan.  Surely the previous employer will at least send some information on how to enroll, and not just that you should.

Always more to look forward to?     

Friday, October 10, 2014

U.S. equities don't respond in the afternoon

From this morning's post here, it was obvious that a bad start was expected but followed by some kind of rebound in the afternoon.  That did not happen.  The small cap demolition continued.  Energy weakness continued.  There was surprising vulnerability in bigger tech(see QCOM and TXN).  And one can assume that there was some necessary margin selling as well as decisions made to harvest recent gains(see FB and TWTR).

It will be interesting to see how the market digests all of this over the weekend and to see how earnings show up next week.  Barron's will probably sell out early tomorrow.  Wall Street Journal Weekend will last longer only because they publish more newspapers.

What happened today is not subject to rigorous financial analysis.  It is the dynamics of the market and of the human mind.  Patience is required.  It's a perfect night for baseball.

The excitement of another market crisis

Here we are again.  It's one of those times of palpable anxiety, when the routine is upset and expectations seem completely unclear.  It's one of those times when emotions can rule, facts be damned.  Can there be no limit to what could happen?

That may be, or is, completely overstating what is going on now.  After all of the significant market gains that have been experienced by investors who have stayed in the market through good times and bad, we have room to give back without getting into the territory of significantly hurting portfolios. U.S. corporate performance will be anywhere from good to excellent in the earnings season just beginning.  That the wheels are coming off in Europe is an exaggeration.  They're still moving but at an extremely languid pace.

What follows today will be interesting to watch.  The U.S. will certainly be down in the morning, but what happens in the afternoon when U.S. markets are on their own will be telling.  

Thursday, October 09, 2014

Russia and Ukraine conflict worrisomely quiet?

Have Ebola and Isis pushed the Ukraine and Russia conflict off of the front pages or is there in fact a decline in the conflict. While, despite a supposed cease fire, the conflict over Eastern Ukraine remains active.  What is different now is that Putin has been quiet on this issue in the last few weeks.  His bellicose comments that make news have been few, and movements of his troops in the area have been unremarkable.

Eastern Ukraine remains a war zone between separatists and the Ukraine army, but it seems to be more a guerrilla war of terror and hooliganism than a politically motivated effort.  In the NYT today one observer was quoted as saying that separatists were terrorizing the population while another said "there is a total breakdown of order."  All observers say that both sides are at times are indiscriminately bombing population centers.

Putin is obviously focused now on the sanctions from the West, but from his own personal perspective of retaliation and protecting, or compensating, the elites rather any concern about the general population.  That is the concern.  If the general population does begin to feel the pinch, will he choose to take actions that continue the rise of or maintenance of nationalistic fervor, giving the masses pride of country rather than any economic relief.

Will he go back to further intimidating Ukraine and irritating the Baltic states?  Would he really do something aggressive in those areas?  He would certainly talk big and his completely controlled media would do their job.

For now though, the situation in Ukraine is out of the spotlight.  Is that a reason for worry as Nato and the U.S. put all of their attention on the middle east.  Will Putin get jealous?

Wednesday, October 08, 2014

Market art

It was a thing of beauty.  Tuesday's U.S. equity market performance was a negative 1.62%.  Today's performance was a positive 1.63%.  On both days well known major investors with positive long term performance ignored the huge swings, while CNBC's analysts and preferred pundits were atwitter.  It was a masterpiece of market advice for those who hadn't noticed it before, or the many who need to be reminded of this fact.  One day rarely means anything.

Monday, October 06, 2014

A couple of baseball games

Yesterday the first baseball games of the season were watched here, playoff games with Detroit and Baltimore and one between the Angels and Kansas City.  It was surprising how enjoyable that they were.  Playoff intensity made every inning seem important, the players intense and performing at their best.  I can get into this. 

Or can I?  There are two games tonight but they are on Foxsports 1 and the MLB network, but it is not clear that our cable channel network carries these channels.  Maybe there is some conflict because the NFL has rights to Monday night football.  There will be some searching for these channels after dinner, but could it be that there thoughts of footing my feet up and zoning out in front of baseball will not be possible.

Oh for Hogan's Heroes and the Rockford Files.