Tuesday, August 23, 2016

This placid market

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

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

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

Postscript 9/2 --- It continues.

Monday, August 22, 2016

"Chaos Monkeys", a mixed opinion

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

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

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

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

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

Wall Street Journal delivery

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

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

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

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

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

Sunday, August 21, 2016

Late to the theater...

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

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

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

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

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

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

Friday, August 19, 2016

The U.S. housing market and credit risk

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

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

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

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

Wednesday, August 17, 2016

Trump adds to his campaign staff

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

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

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

"The whole world is watching?"

Tuesday, August 16, 2016

Stocks drop today, as would be expected

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

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

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

Monday, August 15, 2016

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

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

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

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

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


Sunday, August 14, 2016

Celebrities for Trump

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

Quote from a book not yet finished

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

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

Tuesday, August 09, 2016

U.S. equity market absolutely flat

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

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

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

Monday, August 08, 2016

"One Summer, America 1927"

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

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

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

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

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

Sunday, August 07, 2016

This week's Bloomberg Businessweek

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

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

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

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

Saturday, August 06, 2016

U.S. equities jump on positive jobs report

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

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

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

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

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

Thursday, August 04, 2016

Books and books of photographs

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

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

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

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

Monday, August 01, 2016

The surprising strength of equities

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

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

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