Saturday, January 31, 2015

Volatility in the equity market, yes, but is it something else?

Most of the market talk in January was about the increased volatility of stock prices.  That is a fact. Volatility has markedly increased following the mostly placid melt by the market in 2014.  Now it looks less like increased volatility and more like a market correction that is underway.  Exceptional results by some companies are being recognized by the market, but anything less than that is met by languishing demand and liquidity building.

There are a competing series of events.  Current U.S. consumer confidence measures are strong, economic growth slowed in the fourth quarter, consumer spending picked up, while aggregate wage growth is not keeping up with inflation.  Bond prices, as they rise and rates fall, are surely telling investors something but it is difficult for the stock market to decipher as it develops.  Are they saying that the economy and the market outlook is much weaker than stock market analysis suggests?  One could think so, and conclude that the stock and bond markets are at odds, and the first to give in will be the one that is displaying less caution, that could be stocks.

That dichotomy may be due partly to the looming challenges of global politics.  The Ukraine situation is getting worse, not better as had been assumed a few months ago, and the resilience of Islamic State, or ISIS or ISIL, is becoming newly alarming.  Groups claiming to have ties to the group have recently surfaced in Afghanistan, the Sinai of Egypt, Tunisia, Libya, and even East Asia, and Al Qaeda links are claimed in Nigeria and Mali.  The ISIS unexpected disruptive and deadly strike yesterday in oil rich Kirkuk, in Kurdish, Iraq, is alarming.  Stopping most civilian traffic at Baghdad's international airport on Thursday was not reassuring.  All of this, and much more in the international scene, cannot go unnoticed by the financial markets.  It will manifest itself in caution and not in any specific market research.

The currency wars that are beginning is not helping the outlook, and Putin's decision to lower Russian interest rates Friday to further weaken the ruble's value was a sign that his priority is in fighting the West in any way possible, be damned the Russian people and their flexibility in purchasing power. The dramatic, truly dramatic, collapse in the price of oil over the last six months has investors struggling to find a way to value the phenomenon.  When there is uncertainty, investors always back off.

Some investors are backing away from the equity market now.  This may be a short term correction, and it may be both necessary and ultimately constructive, but corrections are never reassuring until they are over.  What has been underway in January does not seem to be over.  The improving attributes of the U.S. economy will eventually overcome this slide, but it will take patience to see this through. Unfortunately that word has been used too much in recent comments here.  It still works, assuming no seismic events are on the horizon.

Staying the course here, while not being naive about maintaining adequate liquidity, I hope!

Friday, January 30, 2015

"The Hundred-Foot Journey"

Yes, this is what one would call a feel-good movie, one that was watched here tonight.  Yes, we liked it.  What's not to like about a film that combines French cooking with the cooking of India.  My mind was filled with recent and long ago memories of meals at both types of restaurants.

This 2014 film did well enough in the theaters to have its head above water, even though it was not known here except through Netflix.  Helen Mirren is the big name star, but she shares the acting honors with others who are not as well known, at least in the U.S.  Among the producers were Steven Spielberg and Oprah Winfrey.  This film was destined to be made, and it did not try too hard to be something special.  It did not need that.

Whoever gets the chance and is in a relaxed mood should see it.  Filmed mostly in the south of France, it is a remembrance of that region.  Looked at as a troubled clash of cultures that evolves into a combination of cultures is not the norm in our world today, but we can hope.  Why not enjoy a film that makes it work.  Acting, photography, and the social dynamic of this film were all strong, even as the film became somewhat predictable. We did not care.

"Bloomberg Businessweek", feature articles stand out

This bi-weekly business magazine, "Bloomberg Businessweek", has broken from the traditional troika of such magazines and now is in a class of its own.  Its predecessor, "Business Week", was staid and boring in comparison.  The feature articles week in week out are well written and tend to be half business and half human interest stories in their totality.  The business aspect is covered in reasonable detail and the coverage of the individuals involved is usually interesting, sometimes fascinating.  Fortune and Forbes are now far behind.

The January 25th issue is a good example.  Among the features is one about the now struggling retailer Abercrombie and Fitch, its history and its leadership.  It details the 22 year career as CEO of Michael Jeffries who recently left the company.  His hands on strict rule based management finally ran out of steam, his style choices became stagnant.  Younger daughter, among her many jobs(she likes jobs), worked there part of one summer and found the job completely frustrating.  Rules were that a salesperson was required to stay in their one designated spot in the store and if a customer wanted to look at an item not in that area she could not continue to help them.  These stores are generally not that large, and she was threatened with being fired a few times as she thought sticking with a customer was the best way to do things.  She quit before she was fired.

A second feature looks at Greg Wyler, a serial entrepreneur that was not known here.  The 45 year old has already made a couple of fortunes, and now runs "OneWeb", a company whose goal is to bring high speed internet connections to everyone on earth, no minor ambition.  He is planning to use "an elaborate array of low-orbit satellilites", and the effort is already underway in parts of Africa and in islands throughout the Pacific.  Who knew?  Many are aware, of course, if they are in this business but he and his company are far from household names.  He refers to his plan as creating "the second internet".

A third feature looks at Viktor Orban, the prime minister of Hungary.  While Hungary is part of the European Union, Orban has been leading the country away from the free market and toward what could be called "antidemocratic" rule.  His "reforms" have not been universally embraced and if fair elections are held it is likely that his party will lose their "supermajority" status.  How this plays out is unknown, but certainly it is important in that area of the world.

What it all boils down to is that "Bloomberg Businessweek" is a magazine that attracts attention here with each issue and, like "The New Yorker", does not sit around piling up and waiting to be read. Those piles include "New York Magazine", "Consumer Reports", often "Vanity Fair", and any travel magazines that cost almost nothing.  At least for the moment I gave up on "The Economist".  I like it but it was in piles as well. I was not keeping up with its content stuffed issues of conservative economics and it was far from inexpensive.  The library subscribes but access is not perfect.  I did like the extensive feature articles so will revisit the cancellation at some point.  For now, less piles.

Thursday, January 29, 2015

The equity market today... what a relief...

While by no means providing any reassurance that the drop is done, today was a relief from the recent declines.  Owning Qualcomm and Yahoo(aka 85% BABA which had a very bad day) did not help the day here, but otherwise it was positive to see the big diverse banks partially recover from their losses yesterday, plus Goldman and Morgan Stanley completely doing so.  Boeing continues to take off, steel stays strong, Fiat Chrysler is beginning to move faster, and McDonalds got a big Mcbounce from bouncing their CEO.  Twitter just seems to be slowly melting, but the guess here is that it will eventually just provide another new good entry point.  The brand seems too ubiquitous to not find the creative people and the engineers to make money off of their franchise.  Facebook faces an uncertain open, but the bet here is that it goes up despite its Amazon-like approach to expenses.

Tomorrow will be interesting, and important to see if today's performance carries over or just stabilizes.  That's the short term view while the long term is the much more important big picture that needs to be understood, or underpinned by a point of view.  Are my young millenial daughters intuitively right in maintaining 50% or more of their financial assets in banks and low yielding short term bond funds?  That's an important question, as the adage of only having the inverse of your age in equities is surely not followed here.  Should it be?  Should aspiration slow down and settle for what's already been achieved?  And then there becomes the question of how much in capital gains taxes one wants to pay.  These will be substantial for the 2014 tax books here.

So much to think about, but lucky to be able to think about it.

Wednesday, January 28, 2015

A diverse equity market day

Today's U.S. equity market, looked at here at 3:25pm, a needed fact given rampant market volatility, is a combination of strong performance by Apple, in particular, plus Boeing, Yahoo, and certain steel companies, combined with pressure on major bank names, and a search for liquidity that is negatively impacting strong performing mid-caps. That all translates into to a flat or declining market, after a reasonably robust start to the day.

The most interesting downturn here is in the big banks, and all banks in general.  The yield curve keeps getting flatter and net interest margins will continue to be crimped.  Of note, JPMorgan, Citicorp, and Bank of America are all down by more that 2%.  One could reasonably guess that the uncertainty about private banking clients in Russia, Greece, and other stressed areas is a cause for concern.  Losses in private banking flow through well after trading results and corporate issues.  Greece was always a large private banking market for the wealthy there, and the Russian oligarchs have widespread banking relationships.  That's not to forget the Swiss or those with ties to that country or its banks, and any repercussions from its currency actions.  Goldman and Morgan Stanley are both down more than 1%, perhaps reflecting this concern, but they don't have the double whammy of net interest margin concerns.

The end of day market decline was foreshadowed by the search for liquidity during the day in mid-cap stocks that are trading vehicles for some investors and have built up considerable gains.  Gold is declining as well, as cash is becoming preferable to commodities.  What is not new is that energy related stocks continue to be in free fall.  A small stab here a few days ago at bottom picking energy was not a good short term idea.

Equities continue to be going through a vulnerable period.  That bonds continue to outperform expectations is mind boggling to many, but it is a fact.  We will watch, hold, make small investments, and sell when necessary for diversity purposes or take an exit in a name that can no longer be justified.  That happens, even here where there is the double edged sword of a reticence to give up, a character trait.     

Tuesday, January 27, 2015

The Winter Blizzard that Wasn't

All of the media hype here about a winter storm with 65 mile an hour wind gusts and three feet of snow was just that, hype.  We had maybe a foot of snow and it was mostly done by 7am.  There were no high winds whatsoever.

We had at least eight storms like this last winter, and this is first of the season.  It is not a knockout punch, except for the fact that since everyone in business and government seemed to believe the forecast and acted on it.  Most stores were not open, and if they were they only opened in the early afternoon.  The snowplows took a break at about 3am and did not start again until late morning.  So in a sort of self fulfilling prophecy manner, most of the day was wasted.

It was not actually wasted.  There is always work to do here.  It was just that options were needlessly limited.   Don't get this wrong.  We were glad that a terrible storm did not come.  We do wonder how the forecaster and government could have gotten it so wrong.  The poor de-Blasio stumbles once again.

The Perils of Facebook

A friend of mine recently signed up my Facebook page for a group e-mail entitled "You Know You're From Danville When...".  Some group of signed up patrons of the site can post pictures, comments, memories, and the folklore of hometown Danville, Virginia for others to comment on.  To the best of my knowledge there is no ability to post here, but there is the ability to "Like" or to post a comment. How my friend signed my Facebook site up for this is a mystery here as he does not know my password, and that is a mystery that I will soon understand, hopefully.  I will ask him to sign me off.

In fact, I have enjoyed seeing the photos that people post about Danville, many of them taken of the way things were in my childhood, or even earlier, and totally different from now.  Today I made the mistake of making a comment, as one post asked "Before the chain grocery stores came to town, where did your parents shop?"  In what I guess was the initiating comment, there was to my mind a minor mistake which will not been explained here, so it was decided here to tactfully suggest that there was somewhat of an error.  Perhaps it was a matter of being politically correct, which led to a cautious statement that I still felt necessary.

Facebook of course then copies one who comments on all of the following comments.  It seems that I was among the first to comment and at this point there have been over 150 e-mails that have come in here, and I continue to count.  Something of concern is that I have tried to conceal my e-mail address on Facebook to only friends, but obviously that was not successful.  Now, the few e-mails that I want to see, and some that I need to see, are buried amid this mass of mail almost totally from people that are unknown to me.  What a complete nuisance.  I have learned a lesson, which is never, never comment on one of these sites.  Being removed from the site completely is necessary, so I am not tempted to make the same mistake again.  Finding out how to not make my e-mail address widespread is a necessity.

"You Know You Are From Danville When..." you are obsessed with the past.

Sunday, January 25, 2015

Putin's Ukraine plan is now transparent

Vladimir Putin's clumsily managed Russian aggression against Ukraine now has a transparent goal. He is working to make Ukraine a de facto landlocked country.  There are, or were, three major ports in Ukraine, Odessa and Sevastopol on the Black Sea and Mariupol on the Sea of Azov.  Sevastopol, as part of Crimea, is already firmly in Russia's control.  Currently in Eastern Ukraine, the separatists with their Russian armaments, advisers, and by almost all accounts the men in green suits, aka Russian soldiers, are firing rockets into civilian areas of Mariupol.  They have achieved to some extent Putin's goal of demolishing the significant economic infrastructure of the Donetsk region, and the separatists and Ukrainian army continue to fight for control of that area.  Now these same separatists, supported by all elements of Russian aid, seem to be focused on Mariupol, which had not been involved in the fighting and has had no significant separatist activity to date.  This was seen as a possibility here, and now it is underway.

Despite being in the south of Ukraine and a long distance from the eastern region, Odessa had a spate of separatist violence in May that was unexpected in that multi-cultural liberal city, and it seems to have been instigated and guided by Russian related intelligence forces.  The separatists were repelled by the local nationalist militia and many were trapped as they retreated into a burning building, leading to 47 fatalities.  With those "martyrs" under their belt and part of their propaganda, it is fairly obvious that this is not the last of Russian efforts in Odessa.  Because of the fighting, the tourist business of Odessa, usually robust in the summer, was down by more than 50% in 2014 and the local economy is stressed.  Russia will find, from this perspective, a way to disrupt the city once again if they get control of Mariupol, or maybe regardless of their degree of success in Mariupol.

There are two other smaller ports on the Sea of Azov(consulting the most recent National Geographic atlas now), Tayanrog and Berdyansk, but they are not significant enough to provide enough needed infrastructure for much of Ukraine's industrial shipping. Tayanrog is a short distance from the Russian border and Berdyansk is not too far south of Mariupol.  The point is that both are vulnerable to Russian managed assaults.

With control of the major ports, if successful in achieving that, Putin would have significant control over the Ukraine economy.  That's a guess as to his goal, a good guess.  Whether that is achievable is not clear.  Whether he has the economic fortitude in Russia to achieve this goal could be questioned, but the great majority of Russian people, other than the now hemmed in oligarchs, seem to be willing to sacrifice for the nationalist agenda of Putin.

Will the West just watch this happen, or will it draw the line at some point and be serious about it?
This is a dangerous situation that could ultimately have no winners.  It looks like a slow moving train wreck waiting to happen.  I hope that statement is wrong.

Saturday, January 24, 2015

Winston Churchill, with an aside about a nemesis from Danville

Today is the 50th anniversary of Winston Churchill's death.  He remains the most transcendent hero of recent British history and this anniversary is being commemorated on new stamps and a new 5 pound coin. There will be some type of celebration on the River Thames this coming week.

Earlier this week we watched the 2002 HBO movie "The Gathering Storm" with Albert Finney and Vanessa Redgrave.  For interesting history well done with solid acting, it was worth the time and was good entertainment.  The film is based on the book of the same name written by Churchill, a book that was the first of his six book series "The Second World War".  This set of books is viewed as the primary catalyst for his receiving the Nobel Prize for Literature in 1953.

"The Gathering Storm" covers Churchill during the 1930's when, while still in Parliament, he was out of any position of real power.  His many prominent stints in government previously had been marred by a series of mistakes, most notably his plan as head of the Admiralty to assault Gallipoli in WWI, which was a catastrophe.  In his role in the House of Commons in the 1930's he was viewed much of the time as an annoying windbag, as he constantly raised the issue of Nazi Germany and its rearmament as compared to England's diminished level of military spending and constant negotiations in hopes of avoiding another war, with most of Parliament being in full support of that approach. By 1938, with Churchill's constant research of Nazi activities and his emphasis on the Nazi's as a cult believing in Aryan supremacy, some in Parliament began to listen and when war was declared in 1940 he was once again made head of the Admiralty, and eight months later was Prime Minister.

In a completely odd twist for this comment, it brings to mind his famous feud with Lady Astor, the first seated female member of Parliament and a native of hometown Danville, Virginia who was known there as Nancy Langhorne.  During a stay in England after a divorce from a poor first marriage, she met and married Waldorf Astor, an American born aristocrat whose family moved back to their ancestral home in England when he was 12.  By ancestry he became a member of the House of Lords when his father died. Nancy Astor ran for his local House of Commons seat in 1919 and surprisingly won.

Her hostile relationship with Winston Churchill was well known and, if there were a Page Six(New York Post) of that era, their interactions would have been regularly featured.  The most famous and well known was the comment by Lady Astor to Churchill that "If I were your wife I would poison your coffee", to which he replied, "And if I were your husband, I would drink it."  In another often told interaction Churchill asked, "What disguise should I wear so that no one can recognize me at the Astor family's stupid masquerade ball?" to which she replied, "Why don't you come sober, Prime Minister."  On another encounter Lady Astor said to him at a party, "You are disgustingly drunk", to which he replied, "My dear you are ugly, disgustingly ugly, but tomorrow I will be sober and you will still be disgustingly ugly."  She was in fact quite attractive, and her sister was the original Gibson Girl, a celebrity in her own right.

Enough of that, but it was Lady Astor's unpredictable wit, charm, and style that kept her in the headlines for many years, as her accomplishments in government were meager.  Her most notable accomplishment was to get a bill passed in Parliament that raised the drinking age in pubs from 14 to 18, and in England that was indeed notable.  Reflecting possibly her Danville background from that era, she was anti-Semitic, anti-Catholic, anti-Communist, and racist, not vociferously so but for the most part but those were her biases.  In fact, as is typical for her upbringing, she was generally gracious to all and among friends she made exceptions. There is a curious trove of correspondence between Astor and the Catholic U.S. Ambassador Joseph Kennedy in which they, with little restraint, shared their anti-Semitic views.  At the same time she uncharacteristically became close friends with Margaret McMillan, a well known and staunch English socialist and education reformer who established an organization to promote and finance nursery schools for children's early education that Lady Astor supported with her work and her money.

Her behavior became somewhat more unpredictable and unproductive in Parliament over time, and in 1945 she was persuaded to resign, ironically at the same time that Churchill lost his bid for another term as Prime Minister despite his masterful WWII role.  Reading Astor's Wikipedia biography is an interesting few minutes for those with further interest.

As often happens when writing ends, preparations for dinner need to be made on this snowy afternoon. Fortunately we are well stocked with food, films, newspapers, and books.

A comment from Rudi Dornbusch

Rudi Dornbusch was a professor of economics at MIT from 1975 until his untimely death in 2002.  A native of Germany, he spent the majority of his adult life in U.S. academia.  He was a renowned teacher at MIT who focused on international economics and macroeconomic theory.  He was by all accounts an amusing and provocative public speaker who was the highlight of any conference or consulting role that he participated in.  This comment from him was stumbled upon recently, and its truth has been seen repeatedly.

"In economics, things take longer to happen than you think they will, and then happen faster than you think they could."

Think of the 2008 market collapse in the U.S.  Concerns about the state of the U.S. mortgage and credit markets were not uncommon well before the crisis. Here on ENS there were comments beginning in 2006, continuing through 2007 and early 2008 that raised question about various credit practices and the levels of mortgage finance.  It took longer than anticipated for regulators or market participants in general to heed any concerns broadly.  Then when the crisis hit in the second half of 2008, it was for the most part not one that could not be rationally traded.  Everything was happening too fast.  Any attempt to look for value in a crippled stock was just doomed for more losses. Bargains were only possible in the first quarter of 2009 when most market participants were completely scared, exhausted, crippled by margin calls, or lacking liquidity.

In individual stocks the best example of that thought in recent times from a positive point of view is Microsoft.  After its spectacular run in the '90's, from the early 2000's to 2013 the stock languished in the low to mid-20's. The company had great patents, a near monopoly in its personal computer software, a pristine balance sheet, solid earnings, and yet it went nowhere as it was too big to have the high rates of growth that investors wanted.  I gave up at some point except in younger daughter's portfolio as she had the longest time horizon in terms of both life and in terms of not being aware of what I was doing and being able to criticize me.  In mid-2013, with a change in management from the befuddled CEO Ballmer, the stock began to move up steadily and is now at $47.  This was a no risk and obvious situation that was missed for the most part here because it took so long, and when the move began, slow but steady, there were almost no dips that could be traded.

GE would seem to be in the same situation now.  It's a great company but it is not happening.  Before the great recession in 2007 it was trading in the low $40's and back in the bubble it was trading at much higher levels.  It has not recovered and has been stuck in the mid-$20's for five years while at the same time dismantling much of its vulnerable finance division and bolstering its focus on environmental protection and cost efficient technology.  There is no giving up on this one.

On the immediate downside is IBM.  As recently as mid 2013 it was trading at $214.  Under the stewardship of CEO Ginni Rometty, the company has disappointed investors quarter after quarter over the last three years, with its restructuring process that never materializes into anything positive in its financial results.  Now the bottom has dropped out and it trades at $155.  What looks like a bargain may have more downside than upside at the moment, until she is replaced.

On the macroeconomic front, the U.S. financial market is not ringing any alarm bells, no recession in sight and modest economic progress continuing.  The U.S. of course is not an island, and the global economy is a cause for great concern that could shake the U.S. markets substantially if currency wars, deflation, political disruptions, and regional recessions proliferate.  We can see the potential for this but don't expect it now.  Is it possible that one day global economic problems will be upon us in a way that overwhelms the U.S. market's resilience and current role as a safe haven.  If so, how fast would that happen?

Preferring to be optimistic, Dornbusch's quote, which certainly resonates here, is one that leads to stepping back to ponder what's next.  Good alternatives do not come to mind other than keeping reasonable liquidity, taking some long term capital gains in outsized positions, and staying calm. Relatively speaking, the U.S. economic outlook is favorable and there is the potential for ongoing growth.  One could think Europe can only improve from this low point, but China will inevitably stumble at some point.  There is much to think about.  Stay calm I say to myself.

Thursday, January 22, 2015

"Without You, There Is No Us", Suki Kim writes about six months in North Korea

"Without You, There Is No Us", a book of non-fiction by Suki Kim, is sub-titled "My Time with the Sons of North Korea's Elite".  It is a chronicle of her unique experience in 2011 of teaching English at Pyongyang  University of Science and Technology(PUST), a walled compound with 270 students, and in fact the only college students in the Democratic People's Republic of Korea(DPRK) that year as all other institutions of higher "learning" were shut down so students could work in agriculture or construction, for what purpose it is unclear.  Unclear decisions in the DPRK seem to be normal as the book develops.

Suki Kim first became known here through her first book, "The Interpreter", read about 10 years ago. That book was a novel, and the protagonist Suzy Park, had emigrated to the United States with her parents and sister at the age of five.  The book is in no small part a story of their adjustment but also is built around a murder mystery.  Her parents were itinerant greengrocers in parts of metropolitan New York and when Suzy was in her late teens they were both murdered in their store with single gun shots to the head.  The police feigned interest and discovered nothing.  For Suzy and her sister Grace the mystery lingered and changed their lives.

That story is not the real strength of "The Interpreter".  Reading it at that time I distinctly remember thinking that the book read more like non-fiction when it involved the lives Suzy, Grace, and their parents(rereading parts in the last week the thought remained).  It just seemed to be too realistic to not be partially or largely based on truth, slightly altered, and that was the opinion here, right or wrong. The murders, at least of her mother, were fiction and the intrigue around that story had to be fiction as well.  Nevertheless, truth seemed to be all over this fiction.  The book received positive critical attention when it was published in 2003 and won several literary awards.

Since that time Suki Kim has not written another novel despite the success of her first.  Her work has all been focused on journalism, much of it focused on Korea, especially North Korea where she has been traveling to on assignment since 2002.  She has received a Fulbright Research Grant and a Guggenheim Fellowship, and her work has been published in Harper's, The New York Review of Books, and the New York Times, among other publications.  As background, she emigrated to New York at the age of 13 with her sister and parents.

In one interview about "Without You, There Is No Us" she noted that she has changed the names of students and teachers that she worked with, changed the schedules of places they went, and liberally paraphrased some of what was said in discussions, all with the purpose of obfuscating her sources and activity from the DPRK regime once the book was published.  That sounds like a not so novel way of protecting sources.

"Without You, There Is No Us" refers to the Great Leader, whether it be the founder of the DPRK Kim Il-sung, his successor Kim Jong-il, and the current family leader Kim Jong-un.  The mythologies built around these leaders are amazing in their exaggerations, and in the case of the latter two are just ludicrous.  Kim describes a completely closed society with little information about the outside world, a completely controlled society with every activity possible scrutinized, and one that exists in stark poverty except among the elite in Pyongyang and maybe a few other cities. Power is unreliable across the country, as in electricity and heat, and food is often minimal in its diversity and the quality and quantity available.  That is of course except for the top government and military leaders and their families.

Even at PUST, the power is not reliable and Kim and her fellow teachers sleep in multiple layers of clothes in the winter.  How does PUST exist?  How weird is this?   PUST was founded and financed by a group of evangelical Christians whose ultimate goal is to covert North Korea to their rigid faith once a change in regime eventually comes, if that time ever comes.  How they adequately disguise this is unclear, but they lay low and accept all of the censorship, scrutiny, and surveillance that their presence requires, and North Korea accepts their money.  How Kim worked her way into this group is also unclear, but, as the book tells it, she just applied for a job teaching English, and with her Korean background she was eventually hired on at a moment's notice and headed off to the school from New York.

The life that she lived there sounds grim, with little communication with the outside world, few brief phone calls allowed, all mail read and censored, classes monitored, and only her evangelical fellow teachers to socialize with.  Kim is decidedly not an evangelical Christian.  What relieved her boredom and her spartan life was the relationships that she built with her cloistered students, her ongoing interest in the country, and obviously the fact that she planned from the outset to use this as a way to write about North Korea in a way that few if any have the opportunity to do.  Among the many things that had the most impact on her was that these students, sons of the wealthiest and most powerful people in the country, were also for the most part oblivious about the outside world.  To them the DPRK was one of the most powerful countries in the world and Pyongyang was one of the most beautiful cities.  If they by any chance knew otherwise, saying so would have been blasphemy so from this perspective it is impossible to know what they knew.

"Without You, There Is No Us" received good but not great reviews from what I can see here with just a few samples looked at so far.  Kim took exception to the New York Times Book review section review of December 14th and immediately wrote a Letter to the Editor of that section that was published on December 28th.  One would need to Google the book review on 12/14/14 to understand the letter fully, but here I will just quote the last paragraph of Kim's letter to the book review.

"But my book is about the exact opposite --- how evil is not arbitrary in North Korea, and how it is systematically meted out from the top down, the military dictatorship that exploits the myth of the Great Leader to its citizens imprisoned in a gulag posing as a nation."

This book was a fascinating look into North Korea, and getting a deeper understanding of the author was also intriguing.  What she writes next will be of interest, and what evolves in North Korea will be better understood.  Now we just wait for Dennis Rodman's next celebrity tour of the isolated and dangerous country.

Wednesday, January 21, 2015

Obama's State of the Union address

Watching President Obama's State of the Union address last night, the first impression was that from a public speaking point of view this harkened back to his 2008 and 2009 speeches.  He was relaxed, confident, and articulate in the way that he delivered his mostly scripted words.  Not be be irreverent but is seemed as if he was "free at last".  Free from his own party's thin skinned politicos who hemmed him in with their concerns about how his words would affect them and free, in his mind, from the need to cede ground to the Republicans and thus tactically keep them corralled as the "no" party.

Whether highlights or lowlights, key takeaways that come to mind here this morning are as follows.

---The expected references to taxes on the wealthy and more taxes on the banks were not specific but clearly indicative of proposals for more tax.  There seemed to be no distinction between taxes on wealth and taxes on productive investment.  He specifically used the phrase "pay taxes on accumulated wealth" which here seemed to be a new and a somewhat radical statement since he didn't reference estate taxes or reported earnings in tandem with that.  An increase in capital gains taxes that he proposes would not be popular to some but 28% is not unlike the Reagan and Clinton years so it could be digested over time.  As for the tax on large banks with assets above certain levels, one could ask why only banks if he is going to make such a proposal.  Are banks inherently more evil that other large global corporations or are they just easier to pick on?  Of course the Republican Congress will approve little of this and even that would be possible only if a major revision of the tax code could be negotiated, something both parties always say they favor but never happens.  I wonder why. Actually I don't.

---The President made an oblique reference to increasing home ownership without referencing the Democratic initiative that is being implemented by his administration, one that is also favored by some Republicans, to allow certain mortgage loans with just a 3% down payment.  After what we have just been through that idea seems to be borderline insane.

---As for foreign policy the President's emphasis on combining strong diplomacy with a potential for force was listened to a little wistfully here even if those were surely the right words to say.  There are so many difficult situations in the world today and Syria, for one, is no shining example of the effectiveness of that approach as executed by Obama.  He mentioned his support of a moderate opposition force in Syria, but that was mentioned four months ago as something that was being orchestrated on Saudi Arabian soil and nothing has come of it yet.  Now that is forgotten it seems and there is some kind of new initiative that will take many months to reach any critical mass.  It is not clear that any President could have handled this difficult situation well, as it is sort of a lose lose mess of options, but Obama's words of hope were not too hopeful here.

His comments on Afghanistan and the "successful" completion of the U.S. mission there beyond ten thousand remaining advisory troops was nice to say considering all of the sacrifice of our soldiers, but everyone with a pulse knows that Afghanistan is far from a done deal.  Will we still regularly send planeloads of cash as we had been doing with Karzai, literally, to the new government to payoff everyone in this corrupt group of elitists, tribal leaders, and terrorists to get them to cooperate in some way?  One other open issue is the terrorist threat globally. His reassuring words felt good and he's right that much has been done to combat it.  The truth though seems to be that the terrorist threat is spawning into something more insidious that makes it also "far from a done deal", very far.  Any President and any Congress has much more vigilance required ahead.  

---The focus on the middle class was foreshadowed by administration officials and expected, and that focus is needed.  To suggest that it is so simple as to be solved by more tax breaks is simply naive and Obama is smart enough to know that.  Yes, it is terrific that unemployment is down significantly over the last few years but as everyone knows wages have been stagnant.  That may be beginning to change and would be a positive for our economy if that hoped for thrust is not derailed by disinflation. The real problem, however, is structural.  The number of "real" middle class jobs that this economy produces are simply not what they were in the 1950's through the 1980's.  Technology and globalization have changed the equation.  Raising the minimum wage to even $12 an hour, the highest level that could be remotely politically possible, leads to a salary of $25,000.  That's not completely poor but it is could not be considered at even the bottom rung of middle class except in the poorest areas of the country.

---The President's refrain that we, or he as says "I", far too much, have "laid a new foundation" is a little premature.  That's not to discount what the Federal Reserve and the Obama administration have accomplished by staying the course on initiatives to improve the economy.  There's more to be done, but Obama is right to suggest that we have come a long way economically since 2008, and it is a big deal, a really big deal given all of the constant naysayers in Congress and in parts of the media.  What is overlooked here by many is that this progress was initially the result of the of the greatest bipartisan effort of this still new century.  That was the hand off from the Bush to the Obama administration of the policy thrusts to deal with the terrible recessionary crisis at that time.  Bush made some hard choices and Obama continued to make more, choices that were absolutely necessary in hindsight.  Who could imagine what this country would be like if Bush and Obama had let the auto industry collapse.  Who can imagine what would have happened if both administrations had not injected huge amounts of liquidity into the system at that time.

Maybe bipartisanship only happens under extreme duress, but why wait for that eventuality.

---There was much more that could be commented on.  That the Republicans could not manage even a smattering of applause on any mention of the challenge of climate change and environmental issues was discouraging.  It's an issue.  My younger daughter spent the first half of 2014 in China and her photos of and experience of the pollution there at times are mind boggling.  How can this issue simply be ignored by the leaders that now control Congress.  It won't go away if they simply look away, but almost everyone knows this but them.  This should not be a political issue.  The same can be said for infrastructure spending in the U.S.  This is an issue that is essential to address for long term economic growth, not to mention just plain old safety, and this is so obvious that it too should not be a political issue.

One can only hope that in these next two years some progress can be made on the above issues and many others.  Immigration comes to mind as extremely urgent as well, but now I must have lunch and know that readers, if they have made it this far, are flagging as well.

Monday, January 19, 2015

Robert Albertson, one of the last standing outspoken bank analysts, speaks out

On today there is an article, "Large U.S. Banks Are Too Small:  Robert Albertson", that is interesting here.  Robert was one of my friends in business for many years.  While his demeanor is a bit off putting or intimidating to some(not me at all), he is one of the last really intelligent and outspoken bank analysts still standing who is not afraid to be interesting and not looking for a one off attention builder.  Most people in the business already know him or know of him.

He worked for Goldman Sachs for many years, then ran a small hedge fund that specialized in bank stocks, and after the 9/11 attacks he joined Sandler O'Neill(a modest sized financial services research, trading, and advisory house) which was decimated (building 2, a floor in the eighties), to participate in their rebuilding process.  Robert no longer follows individual financial services stocks and his role is Chief Strategist.

I enjoy hearing someone who has real opinions and happen to agree completely with some of what he says, understand sympathetically most of what he says, but disagree with his wholesale condemnation of the flawed Dodd Frank bill.  Dodd Frank is damaging in many ways just because of its complexity(community banks and small regional banks are especially burdened by legal and accounting expenses) and because of its overreach, as an example one could look at its draconian regulations on individuals doing business as expats, something that big corporations can expensively afford to maneuver but are incredibly burdensome to entrepreneurs and small businesses.  That said, directionally speaking, better consumer protection regulation and limitations on unhedged speculative trading by FDIC insured banks are rational and needed pursuits, even if there is some overreach there as well.

What Albertson says overall will be viewed negatively by many in the political arena, especially as the Democratic left and the tea party Republicans meld on some financial services issues, in their perhaps well meaning lack of knowledge, their intransigence, and self dealing.  That's of course an opinion here, and others would see Robert's remarks and perhaps what is said here as heresy.  There are intelligent differing opinions of course, but they are hard to find in Congress.

I hope that any reader who wants to do so can find this article today, as an automatic link wouldn't work here and the link coding was miles long.  A link did work on my Facebook page but that page is not widely known, on purpose.  A search for Robert Albertson on the Bloomberg page brings this up even if is not on the home page.

Sunday, January 18, 2015

"Foreign Correspondent", a 1940 Hitchcock film

Last night we were fortunate to find "Foreign Correspondent" on TCM, the advertisement free channel of historic films, even recent historical ones at times.  This film was the second film Alfred Hitchcock made after arriving in Hollywood from the UK in 1939.  It was completed in July of 1940 and released to theaters shortly before the Nazi bombing attacks on London began in late 1940.  These dates are important because, while it seems like old news now, at the time the U.S. was far from being universally committed to defending England or Europe from Hitler, and did not enter the war until late 1941.  The U.S. Ambassador to the UK at that time was the anti-semitic Joseph Kennedy, the famous family patriarch, who was firmly for appeasement and business as usual negotiation with the Nazis, and not even supportive of any aid to England.

With that background, this film is profoundly interesting as Hitchcock pulls no punches describing what was happening in Europe and predicting exactly what would happen.  This is an espionage and crime film with an American reporter getting involved in tracking American spies for Germany posing as leaders of an organization advocating peace at all costs.  Set in New York, London, Amsterdam, and the Dutch countryside it is atmospherically entertaining and the "thriller" aspect of the film is just that. It is classic Hitchcock at its best says this writer who enjoys films but does not have any claim to being a film buff.  A student of history would be more apt, and that works for making an informed comment here about the film.

As a film watcher, seeing things that are familiar is always an attraction, and two hotels central to the film were often stayed in during my business life.  The Savoy in London plays a central role but with only one outside shot the scenes could have been shot on a set in Hollywood.  That is not the case with Hotel Europe in Amsterdam where I often stayed when calling on investors there.  There is one great scene when Joel McCrae, who plays the protagonist, is escaping from danger by crawling along the roof and parapets of that hotel and, in holding on for his life, he touches the Hotel Europe lighted rooftop sign and shorts out the letters e and l in hotel.  It took a few minutes for me to get it as the chase was so engrossing, but the sign then said Hot Europe.  Message clear.

This short note does not do justice to this film.  Ever want to see a film that details the inner workings of a windmill as a scene for espionage, then this is for you.  It's so much more than that.  It was nominated for Best Picture at the Academy Awards in 1941, as was Hitchcock's first Hollywood film "Rebecca" which I know nothing about at this moment.  "Rebecca" won the Oscar beating out "Foreign Correspondent", with Hitchcock obviously starting out strong being based in the U.S.

Saturday, January 17, 2015

Further thoughts on financial markets after yesterday's dislocation

While each of these speculative thoughts are ultimately related, they are random in that they will not tie together into a neat commentary.  They are separately discussed:

---For several years most commentators on the stock market, from professional pundits to serious economists to top ranked securities analysts, have always mentioned the huge amount of "money on the sidelines".  The supposition has been that when more of this money begins to come back into the equity market there will be an eventual resurgence in values.  By most accounts the money on the sidelines remained huge throughout the 2014 melt up.  Looking at that sideline money (a large portion of which is apparently settling for almost zero return and the rest seeking out high risk alternatives) has been reassuring here as well and has been mentioned many times.

Now the thought arises that the "money on the sidelines" will stay there indefinitely.  It is not coming back.  The retail investor did venture back into the market marginally more in 2014 and institutions that are compelled to stay mostly in equities may have increased their exposure somewhat, but there is no information here that it was any kind of seismic move.  The urge to protect assets that are already in place and keep a large portion of money off the table may be long term, even if it means lower returns.  Prices are not set by volumes in the long term, but valuation can lag reality for a long time.

---The decline in oil prices has been almost unprecedented in such a short time frame.  Most commentators seem to putting their hands up in the air in befuddlement at the negative impact this is having on the stock market.  The oil price declines should be, must be, a boon for consumers.  Hey, I just filled up my car for $40 when not too many months ago it was $55.  The problem is that the rapid oil price decline could be viewed by some of the lead steers as a precursor to deflation, and a commodity price turn downward that is getting out of control.

When looking at the challenges in Libya, Iraq, Nigeria, Venezuela, and other oil producing nations one can see an almost inevitable decline in production, despite Saudi Arabia's intransigence.  The Saudi's may need to change their tune as well, as budget challenges could emerge if this decline is magnified.

While there is much effort, investment, and research into non-fossil fuel substitutes for oil and coal, that is a long term effort.  Solar is expensive and with a long term payback, wind is not pervasive at all except in a few wealthy European countries, and other promising technologies are exciting, but how many Tesla's are there on the road.  Ever seen one?

One could think that this oil price decline is reaching bottom, I do, but markets have a habit of over correcting in either direction.

---Speaking of deflation, along with their misguided surprise elimination of their currency peg against the Euro, the Swiss National Bank reduced deposit rates to minus 0.75% from an already penalizing minus 0.25%. You pay me to hold your money.  It seems that their view was that this would mute the reaction to removal of their support for the Swiss Franc.  Ooops.  I don't think that the Japanese have ever done anything this drastic.  It is not reassuring, and it obviously had zero impact,maybe even a negative impact, on foreign exchange market reaction.

---Finally, to get to an easy target, on CNBC yesterday Jim Kramer called large bank earnings this season "horrendous" in the emphatic way that only he seems to have license to do.  Bank earnings in general were not strong, but from what was seen here most banks missed securities analyst's estimates by just a few pennies, one major one by just one penny.  The biggest culprit was fixed income trading.  Traditionally, when banks have strong fixed income trading they are discounted or almost ignored by bank analysts and some investors because they are called "unrepeatable, or not core, or too volatile".  As usual though, when banks have weak fixed income trading it is treated as a major setback by those same analysts.

To professional investors who follow markets more closely than is possible here, the lack of good volumes in fixed income markets, and thus revenues for the banks, was absolutely no surprise.  The lower revenues were not the result of bad trades, just less opportunity.  The other more modestly weaker area at the banks was in the credit card and mortgage businesses as that activity slowed in the market in general.  Does Kramer want banks to act like they did from 2003 to 2007 and be out chasing business at any cost, any risk.  It seems that banks should not be trying to take more business than a rational market has to give, as was the case this past quarter even if it meant slightly lower revenues from those areas.

True, the bank stocks have been performing poorly in the last two weeks and whether it is due to ingrained but flawed perceptions, or that deflation worry, or systemic financial system concerns, or the realization that regulatory assaults and huge penalties on the banks are never ending under the reign of Obama, it is unclear. What is clear is that the minute to minute all-knowing Kramer's comment on bank earnings was an overstatement in fact and in his delivery.  What's new?

I must eat dinner, and remain observant and reserved.

Friday, January 16, 2015

Financial markets in turmoil, or are they

It's been easy to stay quiet about the financial markets recently.  Everything was happening too fast, with volatility rarely seen so widespread, one way or the other, in equities, bonds, and commodities. Sitting on one's hands instead of trading or writing was from this perspective the right thing to do, although as far as trading goes there was a tad of activity here that there is hope for, the risk/reward looked exceptionally good but the trades may turn out to be ill-timed.  Of the few small trades made only one is barking, and of the others two are up and three are down, all modestly.

The removal of the peg on the Swiss franc is the big news. Anything that disruptive and unexpected will take days if not weeks to unravel, find the big losers and any winners if they can be found outside of owners of tangible Swiss assets, and that is even a suspect comment.  With volatile markets fully in stride for 2015, the timing of this action by the Swiss Central Bank is not helpful, an understatement certainly.

The U.S. equity market finally had a positive day to close the week.  Some may say that the U.S. consumer sentiment numbers from Univ.of Michigan being at an 11 year high was a big positive and spurred the one day rally.  There are those who keep saying, rightly so, that the market is trading as if we are heading into a recession, and there is no indication of that at all.  But one could also say that when in uncharted territory, the operative word is "uncharted", meaning who knows what's next? Looking back at the LTCM crisis in 1998, dire at the time, it did not happen when the world had any fear of moving into a recession.  Still, it was a near credit market freeze-up caused by completely unexpected events that threatened to create defaults across the system.

That kind of situation is not expected here, but Central Banks have gotten themselves into a fix, in different ways, in Europe, Japan, and the U.S.  Their quivers are almost empty.  As has been preached here over and over again, there is no rationale for U.S. interest rates to be almost zero, but now that they are there how do they get raised.  This needs to be addressed even if it causes temporary pain.  Stitches are no fun but most would say having the ability to stop the bleeding, if necessary, is important.  Anyway enough of this rant.

Does the U.S. equity market run-up today mean there's more to come next week, that the table is finally turning.  Absolutely not. We don't know!  Today was in all likelihood a short covering rally of some magnitude as we face a three day market weekend.  Global financial markets will be open on Monday and more news will be coming out of the woodwork.  We can only wait, watch, and be patient for now.

Sunday, January 11, 2015

Busy but still much to accomplish

Who would have imagined that our life would be so busy at this point.  From the almost irrelevant "Golden Globes" tonight(humor is a great tonic, go Amy) to the completely irrelevant NBA, NHL, and NFL football games(watched partially), and the relevant to some extent college ones(first college game seen this year was half of Louisville and North Carolina yesterday), time is spent here avoiding some bigger issues for us that we should spend more time on, and by any relative measure already are, and those focusing on the evolving issues related to the extreme Islamists who embrace brutality for their cause and almost unbelievable hostility toward women. They are wretched people.  The "2015" comment here indicated that they would be the devil in our outlook, and that has come true too soon, and is not over.

 For us that lack of focus is not completely true, as finances and security are under control.  Near term we watch the games, eat good food, and wait.  WE ARE CONCERNED.

Monday, January 05, 2015

WFM, now or never?

Here the equity Whole Foods Markets(WFM) has been watched closely forever it seems.  It was owned several years ago but sold when it went nowhere and seemed to have more downside than upside.  It is now in its mid-range for 2014, after recently rising due to some undocumented takeover rumors.

I want any excuse to buy this darn stock that always seems fully priced, meaning not a good buy. Why?  This holiday season, Thanksgiving, Christmas, and New Year's, our local store was exceptional, almost a life saver.  They added a huge number of employees, many obviously experienced, and their holiday deli case, salad bar, and fish counter were full of new seasonal offerings.  Even the coffee area and the salad area had new items, seasonal items that were seriously good to have for the holidays when the wallet tends to be wide open.

This is not just a personal thumbs up.  This type of service and no doubt expense by Whole Foods totally differentiates them from other stores, at least here.  It must have an impact on their long term appeal to customers, and now it is easy to think that they would open another store somewhere else in the immediate area.  They could simply not have more have additional customers here, even as well as they managed the lines for check out.  They did an laudable job of this, what could have been a nightmare without more staff, more experienced staff.

In the last post here on an outlook for 2015,  retrenchment in the stock market was suggested.  Hey, not this fast... this is a big down day that reflects the sentiment here for the moment and was propelled by more issues in Europe and another significant decline in oil prices.  This will take time to settle out, but if there is a time to buy a long wanted stock in the next few days, this may be it.
WFM, still thinking.

New York Times front page picture today

Rarely is there a front page picture in the NYT as stunning as the one today.  It is of Pei Xia Chen, the young wife of Wenjian Liu, one of the two police officers randomly murdered in New York two weeks ago.  Her distraught look and sadness reverberates here.  How could it not.

Saturday, January 03, 2015


Projecting what will happen in 2015 is an exercise in fantasy.  Fantasy is not out of bounds here. Maybe it is a skill.

We start 2015 with a global set of difficult situations, in fact dire situations, that are too numerous to detail or project anything about.  Our world, in looking at it completely, has many areas that are out of any control.  That is particularly due to the radical proponents of Islam, fake or real, who are vicious predators. Dealing with them is not simple and not solely the responsibility of the U.S.  These extreme Islamists provide a backdrop to 2015 that is wary.  We also cannot dismiss the unpredictable or all too predictable Russian nationalist Putin who, in his self-enforced isolation, is entirely capable of doing something really stupid

There are many other "powder kegs" in the world that could be on the tip of the tongue of any informed person.  Some of those are detailed in a article today.  Not all.

For a 2015 OUTLOOK that does not include a complete unhinging of these concerns, we look at financial markets that could be stable overall, but volatile in the near term.  Retrenchment will probably come in the next few months as informed players give way to the less informed and let them have their way.  Those who have stayed in the game will do so and take the opportunity to buy and sell, reset their portfolios, while those who were "once burned" will once again lose out.  In the major market of China, there are few upper middle class "once burned", and that will be a big test of that equity market's stability when a decline does  eventually come.

Here in the grand semi-old U.S. for now(cannot say old since we sold a building built in 1778 here in 2012), any market recoil will result in more cash and the question of what to do with it.  Buy more groceries, buy more cheap gas, invest in more properties with their overhead costs, buy gold or commodities, there is no simple answer.  The fact is that with zero interest rates, or even marginally higher rates, in any declining stock market there will need to be some outlet for cash.  It could in fact buoy the economy in the short term, but it is no long term solution to the type of growth that this country needs, or that the developed economies of the world need.

With that perspective and that progression, the market will move up again during 2015 as where else can the money go?  There can always be a fundamental reset of values, but that is not seen as coming near term.  Getting back to early 2000's market levels as we have on a non-inflation adjusted basis is no heroic feat.  Our financial markets, especially equities, have room to sort things out and go higher, led by specific companies with strong balance sheets and reliable growth.  That's big caps, and for small caps there is a dice game going on that can lead to big gains or some amount of losses.  What's new?  The bias here is that the equity markets in the aggregate will go up marginally in a volatile way and that the bond market will finally begin to give up some gains in a modest way.  On the bond market that's a wimpy statement, as any deflation that no one wants to even talk about or even think about could turn that projection around.  2015 will be a pivotal year.

On perhaps a more important front there may be, with big hope that this is right, a creative resurgence in the U.S. and parts of the world that is already underway.  Some of the new writing, fiction and non-fiction, is riveting and mind bending.  It's both from a new generation that is coming into its own and the boomer generation that is producing its culminating great works.  Whether writing or film or music, the good new stuff needs to break through the mass of corporate pablum.  It will begin to do that in 2015 more than any other recent year.  Creativity is on the rise, and why would that need to be another comment of some questionable credibility.  It just is.  That is by far the most positive possible attribute of the just beginning 2015.

To all of those working to manage, produce, contribute to, and creatively think about an honest and credible 2015, it must be said that there is room for improvement in most quarters.  Or most, it should be said, since saints still exist.  I know some, and three of them passed away recent months, Janet, Mu Chin, and Dolichos.  We are just getting accustomed to this.

Our life here, as said in  a recent comment, will be one of acceptance and inevitable but unpredictable change.  At its core, I do not like change but it will come. That's not any type of Sam Cooke monumental statement, just a simple fact from folks deciding on a next step.