Friday, April 30, 2010

Op-Ed Columnist - The Euro Trap -

Paul Krugman in the New York Times this AM with a good piece on the mess in Europe. If you're curious as to why you should care about problems across the Atlantic Ocean, this is a good read.

Here's the most relevant sector, in my opinion:

What’s the nature of the trap? During the years of easy money, wages and prices in the crisis countries rose much faster than in the rest of Europe. Now that the money is no longer rolling in, those countries need to get costs back in line.

But that’s a much harder thing to do now than it was when each European nation had its own currency. Back then, costs could be brought in line by adjusting exchange rates — e.g., Greece could cut its wages relative to German wages simply by reducing the value of the drachma in terms of Deutsche marks. Now that Greece and Germany share the same currency, however, the only way to reduce Greek relative costs is through some combination of German inflation and Greek deflation. And since Germany won’t accept inflation, deflation it is.

The problem is that deflation — falling wages and prices — is always and everywhere a deeply painful process. It invariably involves a prolonged slump with high unemployment. And it also aggravates debt problems, both public and private, because incomes fall while the debt burden doesn’t.

Op-Ed Columnist - The Euro Trap -

Thursday, April 29, 2010

Fidelity Investments: Helping Aging Parents Plan

Good summary piece from Fidelity.

Fidelity Investments:

Utility Stocks

I went to go see Dan Ford yesterday afternoon. Dan follows the Power and Utilities area for Barclays, and is a very good analyst.

For the first time in at least a couple of years, Dan is positive on the group, in particular the regulated utilities.

Many investors buy utility stocks as yield vehicles, so it makes sense to compare the group relative to corporate bonds.

At the present time, the relative yield of utilities versus Baa-rated corporate bonds is nearly 1 standard deviation outside of historic norm. Put another way, Dan figures utilities are 13% undervalued compared to a comparable yield vehicle.

Part of the reason may the possibility that the tax rate on qualified dividends may go to 40%, which was proposed by the Senate Budget committee last week. This figure caught the market by surprise - President Obama's 2011 budget had proposed dividends be taxed at 20% (compared to 15% currently). However, Dan's contacts in Washington told him earlier this week that it was unlikely this large increase would be imposed, since it would hit retirees disproportionately hard.

Even if the tax hike were approved, in my opinion, it would not necessarily mean a problem for investors who hold utility stocks in tax-deferred accounts.

Besides yield, Dan cited several other reasons to be bullish:
  • Typically utilities lag at the beginning of a market upswing as investors chase lower quality, higher beta names. The market rally over the past year has followed this pattern. Utilities were star (relative) performers during the market swoon, but have since lagged, making their comparative valuation attractive. Dan figures managers will begin to move to higher yielding utilities later this year;
  • The utility industry raised $7 billion in equity money last year, which was far beyond their actual needs but a "panic" reaction to the tight capital markets. With cap ex budgets being slashed (too much excess capacity), there will be only $3 billion in equity raised this year, reducing the supply pressure;
  • Electric demand - which had fallen off a cliff during the recession - has slowly began to recover, helping the revenue line;
  • Energy (input) prices have remained low, especially natural gas, which should help margins;
  • Rate case decisions (with the exception of FPL in Florida) have generally been favorable, as commissions seem to recognize the need for utilities to earn competitive returns.
The one part of the utility industry that Dan remains cautious on is the pure power generators (e.g. Calpine). There is still too much capacity in this sector, and it will probably be several years before reserve margins shrink enough to allow premium pricing.

Dan has made a lot of money for my clients in the past, so I think he is worth a listen.

Wednesday, April 28, 2010

Social Security Claiming Guide - Center for Retirement Research at Boston College

Very useful book from the Center for Retirement Research at BC on Social Security.

Social Security Claiming Guide - Center for Retirement Research at Boston College

Europe's insurers: No time to relax | The Economist

I continue to struggle with what stocks look attractive in the financial sector.

Financials represent almost 17% of the S&P 500, so it is difficult to avoid the sector in institutional accounts where you are measured versus the broader market indices.

But what to buy? Banks look attractive on a valuation basis. In addition, it now appears that many banks may have over-reserved against possible loan losses, which may lead to an earnings boost later in the year when the "excess" reserves are returned to earnings.

And yet...there are still plenty of areas that could still blow up. Commercial real estate remains a concern. Loan growth has been anemic. The government bailout in 2008-09 may have just masked the loan problems instead of solving them. And who knows what ticking time bombs are in the trillions of derivatives outstanding?

What about the brokers? Last year this group just minted money: illiquid markets lead to huge bid-ask spreads for the remaining brokers, and trading profits were enormous. This year the huge flood of corporate bond issuance should boost earnings as well.

Yet there remains the possible of heavy regulation, as Wall Street continues to demonstrate a tin ear when it comes to politics. It's not just the whole Goldman debacle - I don't know how the hearings will all turn out, but I suspect that any eventual repercussions will hit all of the brokers, and that Goldman will emerge as one of the dominant players once again. Still, it is very possible that Congress does something rash in an effort to please a resentful public, and the brokers get

That leaves the insurance sector: the life companies and the property/casualty companies.

On a valuation basis, the stocks look cheap. Most - with the exception of Berkshire Hathaway - are trading around book value, which historically has been a good place to buy them.

But here again there are issues.

Without going into great detail, one of the biggest issues that all the insurers face is low asset returns. On the life side, insurers have promised high returns to policy and annuity owners - often 5% or higher. However, interest rates on all but the lowest quality borrowers are now below 5%, especially on shorter maturity bonds. The longer interest rates remain low, the more this could potentially be a huge problem.

On the P/C side, low asset returns combined with unattractive pricing levels probably means poor returns. In addition, with too much capacity in the group, maintaining reasonable pricing levels in the midst of fierce competition is a challenge, to put it charitably.

The issues facing the insurance group are not confined to the United States, by the way. European insurers also are facing huge challenges, as the attached article from this week's Economist discusses.

Which leaves me scratching my head.

Europe's insurers: No time to relax | The Economist

Tuesday, April 27, 2010

Op-Ed Columnist - The Goldman Drama -

I saw this editorial mentioned on Professor Greg Mankiw's blog this morning, so I thought I would take a look.

As I have mentioned in previous posts on this blog, I am trying very hard to avoid political statements (frankly, I think both parties share plenty of blame for our current fiscal mess). However, I think that David Brooks in today's New York Times makes some very good points in his piece this morning.

Here's the most interesting section, in my opinion:

The premise of the current financial regulatory reform is that the establishment missed the last bubble and, therefore, more power should be vested in the establishment to foresee and prevent the next one.

If you take this as your premise, the Democratic bill is fine and reasonable. It would force derivative trading out into the open. It would create a structure so the government could break down failing firms in an orderly manner. But the bill doesn’t solve the basic epistemic problem, which is that members of the establishment herd are always the last to know when something unexpected happens.

Thanks for the heads-up, Prof. Mankiw!

Op-Ed Columnist - The Goldman Drama -

Quarterly Letter from Jeremy Grantham of GMO

I have always been a fan of Jeremy Grantham, who is the chief market strategist at GMO (he's the "G" in the firm's name). While he's not always right on the markets, he always seems to have a thoughtful and interesting viewpoint, grounded in a more rigorous quantitative discipline than many commentators.

I liked Jeremy's recent quarterly letter, since it discusses how he is struggling to make sense of market that continues to move higher despite only modest economic growth. Here's an excerpt from the piece, with a link to the full piece below:

So now, Bernanke begs us to speculate, and we are obedient. Despite being hammered down twice in 10 years and getting punished for speculating, we again pick ourselves up off of the canvas and get back into the good fight. Such persistence is unprecedented – 20 years for each really painful experience has been the normal recovery time – but Uncles Ben and Alan have treated us so well in these two disasters that, with hindsight, they don’t feel so bad after all. Yes, the market is still down a lot in over 10 years and on our data is likely to have a
second consecutive very poor decade, but we have had two wonderful recoveries in which the more speculative you were, the more money you made. So why not break the historical rules and try a third time? Perhaps this time it will be lucky.

JGLetter_ALL_1Q10.pdf (application/pdf Object)

Monday, April 26, 2010

Learning the "Boring Stuff"

A couple of years ago I read a book called The Power Broker: Robert Moses and The Fall of New York. Written by Robert Caro in the mid-1970's, it is an exhaustive study of how the influences of an unelected official - Robert Moses - came to play a major role in shaping modern New York City.

One of the key aspects of Robert Moses's power was his ability to understand the details of the laws that were being written. In fact, Moses was so adept at writing new laws and regulations that politicians - from the governor of the state of New York to the mayor of the City - came to totally rely on Moses.

Problem was, Moses often had his own agenda, and would often draft legislation that would make sure that his vision of what should happen would be the one adopted. Political figures would often become furious with the power that Moses had garnered, only to find that they had been out-maneuvered by Moses by legislation that he had written and they had signed (but never read).

Moses became known as the man who "got things done" in New York, and for many decades was a major figure on the political scene.

I have been reminded of Robert Moses on several occasions in the last few weeks in recent news events since it seems that those who are willing to sweat the "boring" details often come out ahead.

For example, in Michael Lewis's new book The Big Short, he talks about several major investors who made fortunes betting against the housing market through shorting various mortgage-backed securities and derivatives.

How did they know which ones to short? Simple: they read all of the boring details of the securities and the derivatives. This information was available to all, but most never bothered to actually study the securities.

Our whole investment process seems to encourage only superficial analysis. For example, when an IPO is introduced, usually investors are given hours to actually do any in-depth reading on what is being offered since they are "sophisticated" investors.

Or take the rating agencies, who seem to be guilty more of lax work requirements than any real culpability in the credit markets debacle. Relying on models, and forced to work under very tight time constraints, the agencies viewed the mortgage-backed market as a money machine, where ratings were issued under a formulas that the underwriters helped to develop. Now the agencies look silly, of course, but in the middle of the last decade very few actually did the legwork to try to understand the risks.

The SEC's recent filing against Goldman Sachs seems to me, at least, to be a protest against someone who actually bothered to do their homework. The SEC claims that Goldman should have told their clients that a hedge fund manager was betting against the very securities they were selling them. Well, maybe, but it appears that very large investors were willing to rely on the words of a Goldman salesperson rather than do any in-depth work on their own.

The recently passed health care bill was more than 2,000 pages long - how many do you think have read the whole document? I bet in years to come we will find people who have made serious money studying the new laws and acting in ways that those who voted for the bill never intended.

Then there are the proposed new financial regulations now being debated in Congress. Most likely our legislators are reacting to summaries prepared by their staff, since this too is unlikely to have been seriously studied.

I don't know why legislation has become so voluminous. The Civil Rights Act that LBJ pushed through Congress in 1965 was only 6 pages long, but clearly was an important piece of legislation. Come to think about it, the length of the Constitution is probably no more than two or three pages, yet has survived for more than 200 years.

More to follow

Saturday, April 24, 2010

Fed to Discuss Mortgage-Bond Sales -

I had a good meeting with a client the other day. This client acts as trustee for one of his good friends and, in my opinion, this friend is very lucky to have him.

In any event, we were talking about bonds and interest rates. One of the main arguments for those who see inflationary pressures building is the huge amount of liquidity that the Fed pumped into the financial system during the credit crisis in late 2008. Lots of easy money, these inflation hawks suggest, will enviably lead to inflation.

However, when I mentioned this point to my client the other day, he simply said, "All the Fed has to do is sell the mortgage-backed securities it holds, and that liquidity vanishes". And I think he's right.

Today's Wall Street Journal has a good article about the internal discussion at the Fed regarding their plans for $1 trillion in mortgage-backed holdings (nearly all guaranteed by Fannie Mae, Ginnie Mae or Freddie Mac).

Fed to Discuss Mortgage-Bond Sales -

Friday, April 23, 2010

Affluent Buying More LTC Insurance

Interesting point - wealthy families buying LTC insurance for their aging parents to protect their own assets.

Affluent Buying More LTC Insurance

Seven Reasons Apple Shareholders Should Be Cautious -

If you had asked me a couple of days ago, I would have told you that I wasn't too worried about Apple stock (ticker: AAPL).

But then I had a visit yesterday from one of the salespeople I work with. This fellow doesn't lack for confidence, shall we say, and always is regaling listeners with stories of how he cleverly performed some task, or closed a deal with a reluctant prospect.

Anyway, he told me proudly that he had bought Apple a year ago, when the stock was selling at $90 per share (it closed last night at $266). He went on to describe how clever he had been in some of his other purchases, with slight digs to investors like me who prefer a "margin of safety" in my investments.

After having done this job for many years, I have observed many times how investors tend to only talk about their "winners", never their losers. This was particularly true in the glory years of the "" stocks, when obscure companies with no profits or revenues soared to unimaginable heights (only to crash in the subsequent years).

Put another (less kind) way: my salesperson friend may be good at doing deals, but past history would suggest he's not so good at investments.

Anytime a stock (or any other investment) is universally liked, it is worth asking just how much "good news" is already reflected in the market price.

And when you see investors bragging that their insights (usually based on some anecdotal tipbit, like loving your iPhone or iPod), it usually time to start heading for the exits. And I am thinking that maybe I am too complacent about my Apple holdings these days.

Everyone, it seems, loves Apple these days, as this piece from this morning's Wall Street Journal points out.

Seven Reasons Apple Shareholders Should Be Cautious -

Thursday, April 22, 2010

Fidelity Investments: Roth IRA's

Good overview from Fidelity on Roth IRA converstions, answering some of the most common questions.

Fidelity Investments:

Managing Retirement Income: Part IV

Figuring out how much a retiree can withdraw from their accumulated savings is one of the most difficult calculations a financial planner faces.

First is the obvious question: no one knows where "the finish line" is. With advances in medical technology, it is safe to assume that we all will live longer than our grandparents, yet this really doesn't help too much.

Next is the question of inflation. Health care costs - one of the major expenses older folks face - have been rising faster than the general rates of inflation. Whether the most recent healthcare initiatives from Washington will change this trend is obviously uncertain.

What about the returns on the savings? The last 10 years have been poor for the stock market, and bond yields today are uninspiring. What return assumption should be used in planning?

I could go on, but the attached article does a reasonable job of trying to address some of the issues. More to follow.

Managing Retirement Income: Part IV

Posted using ShareThis

FT Alphaville » The coming M&A cycle

As a previous post this week indicated, we probably are just beginning the cycle of M&A activity: easy credit availability coupled with intense pressure on companies to improve revenue growth will be major catalysts.

That said, the most interesting reason from this article in the FT notes that CEO's of bigger companies get paid more compensation.

FT Alphaville » The coming M&A cycle

More on Disinflation Trends

From Morgan Stanley by way of the blog Clusterstock

Wednesday, April 21, 2010

Robert Shiller Real Estate Housing Market

Interesting albeit depressing read from Dr. Shiller on the housing market and on stocks.

As you can read from this interview (published on the blog Motley Fool), Shiller is skeptical that the recent improvement in housing prices will continue, since they have been sparked largely by government intervention (i.e. tax credits, Fed buying of mortgage-backed securities).

That said,he is not saying abandoning stocks, since the yields on alternatives are so low.

Robert Shiller Real Estate Housing Market

Posted using ShareThis

Roth IRA Rollovers Could Affect College Financial Aid

From Financial Advisor magazine. Honestly, this really hadn't occurred to me.

This also could affect people who receive Social Security - the higher income could reduce their monthly benefit.

Roth IRA Rollovers Could Affect College Financial Aid

Posted using ShareThis

Economic Scene - As Markets Fizzle, Buying May Cost Less Than Renting -

Long story in this morning's New York Times about renting vs. buying a home.

The most interesting part to me was the concept of a "rent ratio" Here's a couple of paragraphs from the article discussing the concept:

A simple way to do the comparison is to look at something called the
rent ratio: the purchase price of a house divided by the annual cost of renting a similar one. The number 20 provides a useful rule of thumb. When you do the math, you discover that a ratio above 20 means you should at least consider renting, especially if you may move again in the next five years or so. When the ratio is well below 20, the case for buying becomes a lot stronger.

In many large metropolitan areas, including New York, Los Angeles, Chicago, Houston, Dallas, Atlanta and South Florida, the average ratio is now 16 or lower. It was more than 25 in several of these places at the peak of the bubble, about five years ago. With a ratio as low as 16 and interest rates as low as they are, the costs of owning can be less than the costs of renting — and buyers will end up worse off only if prices fall considerably more.

Economic Scene - As Markets Fizzle, Buying May Cost Less Than Renting -

Tuesday, April 20, 2010

Investment Writing: Treasurys vs. Treasuries -- Which is the right spelling?

I have been having a good (online) dialogue with Susan Weiner about this subject.

First: Susan offers all types of consulting services relating to financial writing, and her website is definitely worth visiting ( And, in full disclosure, she has done some work for my employer, Boston Private Bank and Trust Company.

Given her profession, questions like what the correct plural spelling of the US government debt is interesting to her (and to me!).

To my mind, if someone buys a lot Treasury bonds issued by the government, the plural should be "Treasurys" not "Treasuries" but it appears (once again) that I am in the minority.

My argument is that a room full of representatives of, say, the Murphy family is the "Murphys" not "Murphies". However, as the attached note from Susan indicates, both seem to be acceptable, but most financial journalist prefer Treasuries.

On to other weighty issues!

Investment Writing: Treasurys vs. Treasuries -- Which is the right spelling?

More on Deflation Risks

I had a good meeting with some clients this morning. However, an issue came up which brought to mind my favorite topic these days: namely, the risk of deflation.

My clients were discussing some property they wanted to buy, and they wanted to move the transaction along quickly since everyone knew interest rates would be higher by the end of this year.

When I asked how they "knew" rates would be higher, they looked at me with a funny expression: How could interest rates not be higher?

Well, in a deflationary environment, interest rates move lower, not higher. The massive deleveraging trend that we are seeing in the consumer, and the large cash "hoarding" by corporate America, all indicate that prices in general are moving lower, or at least not rising.

As I repeated often on this blog in recent weeks, the trend of prices seems to be moving lower, not higher. I read a piece from the research outfit Ned Davis Research, Inc. which highlighted a couple of these trends:

  • Core CPI fell to 1.1% from 1.3% on a YOY basis in the most recent report, the slowest pace since November 2003. Median CPI fell to 0.6%;
  • Manufacturing unit labor costs fell 6.6% last year, the most since the data began in 1947;
  • Essentially all inflation indicators are lower than when Bernanke began to worry about the risk of deflation in 2002-03.

Ned Davis Research thinks the Fed will not raise rates any time soon; I agree.

Friday, April 16, 2010

Why the U.S. Can't Inflate Its Way Out of Debt

Interesting post from the Motley Fool investing website.

I just met with a couple of very smart clients today who insisted that not only were interest rates going to head higher but that inflation was almost certainly around the corner. Their reasoning - just as the majority of commentators I hear - is that our government will rekindle inflationary pressures to enable to pay down our massive government debt burden without having to raise taxes or cut spending.

However, this article points out the flaw in this reasoning; namely, that as prices and interest rates move higher, so too do the fiscal obligations of the US government. Since the large majority of fiscal expenses are tied to either interest payments or to entitlement programs, higher rates of inflation and interest rates mean the fiscal deficit could get worse, not better.

Why the U.S. Can't Inflate Its Way Out of Debt

Posted using ShareThis

J.P. Morgan’s Braunstein: ‘Optimism Is Back!’ So, Ahh, Where Are the Deals? - Deal Journal - WSJ

Although we have seen a number of M&A deals announced in recent months, there is good reason to believe that we could see many more transactions during the rest of the year.

This in turn could boost overall stock prices, as investors see deal flow as a sign that corporate America believes that company prices in the public market are trading below intrinsic value.

This morning's Wall Street Journal has a short article about this subject in it's "Deal Journal" column. I have attached the full link, but here are the four main reasons the article cites for a possible increase in M&A:

1. Easy access to capital and low cost of capital;
2. Corporate America is awash with cash;
3. The rise in stock prices over the past year means more sellers may believe that they can get fair value for their companies;
4. CEO's looking for more growth may find it in other companies instead of internal initiatives.

J.P. Morgan’s Braunstein: ‘Optimism Is Back!’ So, Ahh, Where Are the Deals? - Deal Journal - WSJ

Thursday, April 15, 2010

"Climbing the Wall of Worry" - Excerpt from My Quarterly Letter

We're having a few "production problems" getting my regular quarterly letter out, but hopefully it will be in the mail soon. In the meantime, I thought I would post the strategy portion of the piece that will be going out:

Climbing the Wall of Worry

After a rocky start in January, the equity markets recovered nicely, and positive returns were registered across most sectors in the first quarter of 2010.

For the fourth consecutive quarter, stocks outperformed bonds, which represents the longest "win streak" for stocks since the seven quarter winning streak in 1996-97 (according to Ned Davis Research).

Interest rates were essentially unchanged. The 10-year Treasury bond yield started the year at 3.83% and ended the quarter at 3.84%.

However, if there is a “consensus bet” in the investment community, it is that interest rates are going to rise. I am still not convinced, as deleveraging cycles in history have normally lead to deflation and lower interest rates, but clearly I am in the minority.

The emerging markets were the global stock market laggards, while the U.S., Japan and the U.K. were the market leaders, illustrating that economies and stock markets don't always move together;

Corporate bonds - especially lower quality bonds - were hugely popular. Investors apparently have put any memories of the recent credit crisis firmly behind them, and are grabbing any yield they can.

The worst performer across the asset classes? Cash. As we all know, money market rates are very low, and with the Fed essentially “on hold” for the foreseeable future, this is one area that probably doesn’t make much investment sense for anyone other than the most bearish investor.

I think that stocks could continue to rally, but at a slower pace than last year. There's too much cash on the sidelines; interest rates are too low; and there's too much pessimism for stocks to have a serious correction baring an unexpected global economic event.

Still, I do agree with the consensus in one respect: I don't know how the economy can suddenly turn robust given the high unemployment rates and huge debt burdens at the government and consumer levels.

George W. Bush's 2010 Tax Miracle -

OK, I've been trying to avoid politics on this blog, so please don't take this post as a position for or against former President Bush.

Still, this article in today's Wall Street Journal highlights something that many have overlooked in their discussions of Roth IRA conversions.

Namely, the IRS is doing this to raise revenue, not to offer attractive retirement benefits to citizens.

And, according to this article, the possible tax revenues could be enormous, depending on how many people decide to do the conversion.

Quoting from the piece:

My firm, Trend Macrolytics, estimates that there is at least $9 trillion in these tax-deferred vehicles. About 60% of that, or $5.4 trillion, is in the hands of the wealthiest 10% of households, and most of that is eligible to be converted If just 10% of it is converted, then taxes would be paid on $540 billion at a 35% rate - generating a $189 billion revenue surprise for the US Treasury.

My point? If you think about the conversion as simply a vehicle for the government to get your tax dollars early - and not a benevolent windfall opportunity - the Roth conversion may not necessarily the golden opportunity that some are promoting.

George W. Bush's 2010 Tax Miracle -

Wednesday, April 14, 2010

Economic data don't point to boom times just yet

Now that earnings season is upon us - and a number of companies are reporting profits well above Street expectations - it was sobering to read this article this AM in the Washington Post.

Maybe it is all just inventory rebuilding....

Economic data don't point to boom times just yet

Tuesday, April 13, 2010

The Other April 15 Tax Return -

Good review of the rules on gift taxes from Deborah Jacobs.

The Other April 15 Tax Return -


Good read from The Economist on Japan.

The two paragraphs that I think our relevant to our bond market (and interest rates) in the United States:

One senior bureaucrat in the finance ministry returned from a G7 meeting in Canada in February, his ears ringing with worries about Greece—and, by extension, Japan. But he appeared to find it more wearying than alarming. “For years we have been hearing warnings that Japanese-government bonds are going to collapse. It’s like the doomsday view of the dollar,” he moaned. Pointing to a trading screen on the wall where ten-year Japanese bond yields were yielding a meagre 1.4%, he noted that the market was still holding firm (in Greece, yields were about 7% at the time). He believes that Japan still has plenty of room to avoid a fiscal implosion.

In the short term, there are grounds for sharing his confidence. In many sovereign-debt crises, the trigger is not the level of debt, but the government’s inability to finance it. In a recent IMF working paper, Kiichi Tokuoka notes that in recent years there has been scant linkage between Japanese government-bond yields and the size of Japan’s debt and deficits. Indeed, when net debt was less than 20% of GDP in the early 1990s, ten-year bonds yielded 7%. As the debt has soared, yields have moved in the opposite direction (see chart 2).

Monday, April 12, 2010

Trichet: Some Euro Zone Countries May Need to Accept Deflation - Real Time Economics - WSJ

Whatever happened to inflating their way out of government deficits? Could it be that governments are finding it more difficult than the consensus expects?

Trichet: Some Euro Zone Countries May Need to Accept Deflation - Real Time Economics - WSJ

Interest Rates Have Nowhere to Go but Up -

This article appeared on the front page of the New York Times yesterday.

If everyone agrees that interest rates are going to more higher (which I still don't, by the way), wouldn't it seem logical that prices in today's bond market already reflect the "sure thing"?

It is rare, in my opinion, that you can actually make money by being on the side of the overwhelming consensus. I will be blogging more about this soon, but I wanted to post this article.

It was only a year ago that everyone "knew" that the stock market was going to move lower (the S&P 500 is up over +50%), for example.

Interest Rates Have Nowhere to Go but Up -

Sunday, April 11, 2010

Please do not change your password - The Boston Globe

I loved this article!

I don't know about you, but I have so many passwords that I have trouble remembering them all. At home, for example, I have 3 1/2 pages of passwords for banking, news services, security systems, Apple, Amazon, etc. It's ridiculous (not to mention frustrating).

And so today, in this morning's Boston Globe, comes this article that it appears that all of this password security may not be all that effective after all.

Here's hoping that someone will come up with a better system.

Please do not change your password - The Boston Globe

Thursday, April 8, 2010

Sovereign debt crisis at 'boiling point', warns Bank for International Settlements - Telegraph

I am in the middle of reading a terrific book about the auto industry.

Written by Paul Ingrassia, a long-term industry reporter for the Wall Street Journal, the book does a good job at detailing the many mistakes that both management and labor unions made over the last few decades that lead to the bankruptcy of Chrysler and General Motors.

The problems of the auto industry were known for decades. Indeed, my first job after graduating from the University of Michigan in the late 1970's was at Comerica Bank in Detroit, where some of my colleagues were heavily involved in the first Chrysler bailout.

After Chrysler repaid the government in 1983, it was back to "business as usual" for the Big Three auto companies, and they enjoyed a number of years of prosperity. However, the problems in the industry were never properly addressed, which lead to their eventual ruin.

I am reminded of this when I read stories about the huge fiscal debt problems at both the federal as well as the municipal levels. We all read the stories and say "Gee, this is a real problem" but then, when there is no immediate impact, we assume that somehow the problems will all work themselves out.

This was the case in the auto industry. Most analysts knew that the labor contracts the Big Three were signing were saddling future generations with unsustainable burdens, but no one really seemed to care. The Japanese auto manufacturers were producing better cars at attractive prices, but this too was viewed as more of a curiosity than a concern.

So today we think that the fiscal problems are more of an intellectual discussion than a real issue. But the day of reckoning is coming, and may be here sooner than we think.

In the end, there are really only two choices to make: either raise taxes significantly (on everyone, not just higher income taxpayers) or cut government expenses (which largely rests on the highly unpopular decision of reducing payments to seniors and pensioners).

Sovereign debt crisis at 'boiling point', warns Bank for International Settlements - Telegraph

Tuesday, April 6, 2010

Emerging Markets: High Growth does not mean High Returns

Good challenge to conventional wisdom (thanks to Susan Weiner for tweeting this!)

Emerging Markets: High Growth does not mean High Returns

FT Alphaville » Investors really ♥ junk. We mean really.

Here's an interesting post from today's Financial Times.

Investors are worried about stocks - "too risky!" "the economy is going to double-dip!" "valuations are stretched!"

And no one loves US government debt : "just look at the deficits!" "Obamacare is going to bankrupt us all!" "massive inflation is heading our way!"

But junk bonds - bonds issued by debtors who, by definition, are highly risky credits - are wildly popular. As the FT post notes, BB-rated bonds returned +39% over the last 12 months - but investors in CCC-rated debt more than doubled their money.

In light of the conventional wisdom, this makes no sense. If the economy is really going to tank, junk bonds will get smacked. But investors desperate for yield don't seem to care.

Something is going to give.

FT Alphaville » Investors really ♥ junk. We mean really.

Monday, April 5, 2010

Deflation on the prowl as Bernanke shuts down his printing press - Telegraph

Interest rates continue to creep higher - the Treasury 10-year is now at 4.0%. Are the bond "vigilantes" right, and are raising rates anticipating higher inflation?

Or, is this a buying opportunity for yield buyers, with deflationary pressures building?

I think the latter, and so apparently does Ambrose Evans-Pritchard of the London Telegraph.

(By the way, I found this chart off the internet; it does not come from the article).

Deflation on the prowl as Bernanke shuts down his printing press - Telegraph / Companies / Financial Services - Macro hedge funds fail to profit from crisis

Along the same lines as my previous post, often times the so-called "smart money" is every bit as fallible as every other investor.

Difference is, of course, is that the smart money gets its fees as long as it holds the funds. / Companies / Financial Services - Macro hedge funds fail to profit from crisis

Saturday, April 3, 2010

Pension Funds Fail to Reap Rewards in Private Equity -

I have written a number of posts recently about how pension and endowments funds have been abandoning the stock market in favor alternative investments, including private equity.

However, as this article from today's New York Times discusses, the monetary rewards for most private equity investors has been fabulous - for the managers. Unfortunately, the actual investors in these funds have had disappointing returns, to say the least.

In my opinion, lots of investors are seduced by the idea that there is someone, somewhere, who has the "magic keys" to investment success, and will bet heavily on funds whose returns may not be realized for years, if at all.

Caveat emptor.

Pension Funds Fail to Reap Rewards in Private Equity -

Friday, April 2, 2010

Friday Market Thoughts

It's pretty quiet in the office today.

It's Good Friday, which means the stock market is closed. The bond market was open briefly for a few hours this AM so that traders could react to the monthly unemployment report, but now that is closed also.

So today I'm mostly working on getting my thoughts together for my quarterly letter. Here's some of the key points I'll probably be discussing:
  • For the fourth consecutive quarter, stocks outperformed bonds, which represents the longest "win streak" since the seven quarter winning streak in 1996-97 (according to Ned Davis Research). Still, an unofficial poll of my clients would suggest that no one feels like we're in the midst of a new bull market;
  • Interest rates were essentially unchanged. The 10-year Treasury bond yield started the year at 3.83% and ended the quarter at 3.84%. Again, all I am hearing is that interest rates have to begin to start to rise soon (even though I don't necessarily agree);
  • The emerging markets were the global stock market laggards, while the U.S., Japan and the U.K. were the leaders, illustrating that economics and stock markets don't always move together;
  • Corporate bonds - especially lower quality bonds - were hugely popular, demonstrating that investors have put the credit crisis firmly behind them, and are grabbing any yield they can;
  • The worst performer across the asset classes? Cash.
So the Big Question is: What to do now?

I still think we could continue to rally - maybe another 10% or so more - and then we'll have to take a look. There's too much cash on the sidelines, interest rates are too low, and there's too much pessimism for stocks to have a serious correction baring an unexpected global economic event.

Still, I do agree in one way with the consensus in that I don't know how the economy can suddenly turn robust given the high unemployment rates and huge debt burdens at the government and consumer levels.

Final thought: I ran across this quote from Steve Galbraith, formerly chief investment strategist at Morgan Stanley and now partner of Maverick Capital. Steve was giving a talk at a conference sponsored by Grant's Interest Rate Observer in New York last month:

"Starting and endpoints matter," he said, pointing to a graph of S&P 500 returns over the past 75 years, "and we started from a ridiculously blown-up level. But the reality is, even with the rally we've just had in the markets, this has still been the second-worst decade ever for stocks. And I'd much rather be investing now than 10 years ago."

Thursday, April 1, 2010

MarketBeat Chartbook: Closing the Books on the First Quarter - MarketBeat - WSJ

If you can't wait for my quarterly letter, here's some good charts from today's Wall Street Journal summarizing the first quarter of 2010:

MarketBeat Chartbook: Closing the Books on the First Quarter - MarketBeat - WSJ

401(k) Losses Linger for Young People - Planning to Retire (

Interesting research from the Center for Retirement Research at Boston College.

As the article notes, the investing experience of the Gen X group has been considerably worse than prior generations, and future returns will need to be considerably higher than historic norms in order to have the same retirement resources as older Americans today.

401(k) Losses Linger for Young People - Planning to Retire (

Posted using ShareThis