Scientist at Work - Dr. Donald A. Redelmeier - Debunking Myths of the Medical World - NYTimes.com

The stock market is roaring ahead this AM on the basis of some ISM data that showed that manufacturing in August was expanding at a more rapid clip than expectations.

So naturally a number of bearish commentators are dismissing the figures as meaningless.

I don't know about other professions but this seems to happen a lot in my business. Once someone declares they are either bullish or bearish they have a hard time accepting data that might indicate a contrary opinion.

I remember reading an story about John Maynard Keynes, the great British economist who was also a very successful investor. He was in a meeting one time, and gave some advice that was different than he had given previously. When someone at the meeting pointed this out, Keynes was reported to have said:

"When the facts change, so do my opinions. What do you do, sir?"

This article from the New York Times describes Dr. Donald Redelmeier, an innovative thinker along the lines of the book Freakonomics (a fun read, by the way). Dr. Redelmeier is apparently not afraid to change his opinion if circumstances warrant:

Another Redelmeier philosophical pearl is “Do not get trapped into prior thoughts. It’s perfectly O.K. to change your mind as you learn more.”

In patient care, he said, he frequently does just that. “I think I know the diagnosis and start the treatment, then follow up and realize I was wrong,” he said. “I intercept a lot of my own errors at a relatively early stage.”

This, not surprisingly, became the basis of some classic Redelmeier research around raising physicians’ awareness of their own thinking — cognitive shortcuts that might lead to a diagnostic error.

Some of Dr. Redelmeier's research is whimsical (e.g. finding that Academy Awards winners live longer than those that are runners-up) but some of his other research on cell phones and driving have actually resulted in changes in the law.

Scientist at Work - Dr. Donald A. Redelmeier - Debunking Myths of the Medical World - NYTimes.com

Is the "Deck" Really Stacked Against the Individual Investor?

A savvy client called me today and asked what I thought about an article that appeared in Barron's last weekend.

In the lead column written by Barron's Alan Abelson (in the August 28, 2010, issue), he mentioned a piece that had been sent to him from a magazine called International Economy.

Abelson wrote that he had never heard of the publication, and neither have I. Still, he spent part of his weekly musings talking about the article called "The Marginalizing of the Individual Investor", and concluded that the authors raised some pretty legitimate points.

http://online.barrons.com/article/SB50001424052970204885704575447721568324514.html#articleTabs_panel_article%3D2

Basically the authors (named Harold Malmgren and Mark Stys) believe that the ordinary investor is being systematically pushed out of the stock market due to the rapid growth in high frequency trading (HFT).

According to the authors, not only do HFT dominate trading, and so order flow, but the ability to capitalize on pricing anomalies in a nanosecond overwhelm the value of fundamental analysis, and make momentum trading the only way to successfully navigate the markets:

For decades, professional investment advisers have continued to teach reliance on “value investing” and “buy-andhold” as long-term guides to successful investment. Chief economists and market prognosticators for financial institutions also continue to urge us to keep focused on “market fundamentals” rather than sell when jostled by disruptive events, expecting “efficient markets” to generate a “fair price” in the whirlwind of market trading. Technology may now have overridden such investment concepts. High-frequency trading platforms are focused solely on ramping up speed and volume so as to maximize tiny gains per transaction. Computerized algorithms that are momentum-sensitive are increasingly high-frequency trading- driven, raising serious doubts about traditional concepts of how markets should work. Investment strategies based on fundamentals such as a company’s long-term performance have been swept aside by high-frequency trading algorithms hunting for inefficiencies in daily pricing and super arbitrage opportunities. In so doing, they open investors to a new form of risk that has not been accounted for in most “buy and hold” asset allocation models.

http://www.international-economy.com/TIE_Su10_MalmgrenStys.pdf

I can see why the authors came to the conclusions they did. As I wrote last week, the data from Ned Davis research indicates that the degree of correlation between stock price movements across all different sectors and industries is currently near an all-time record high - almost 0.80.

Moreover, there is no denying the popularity of exchange-traded funds (ETFs), which make it easier for investors to buy, sell and even short large groups of stocks in a fairly easy fashion. There are now nearly $1 trillion of ETFs outstanding currently.

Finally, market data would also suggest that large program trades being executed by either hedge funds or proprietary trading desks on Wall Street are often as much as 40% of the daily trading volume on the major stock exchanges.

So, my client asked, are we going to start managing money any differently?

My answer at this point is: Not yet.

The dean of security analysis (and mentor of Warren Buffett) was Benjamin Graham. Graham once said that while the stock market is a voting machine in the short run, it is a weighing machine in the long run. That is, while short term stock price movements can often seem random, the longer term trend of market prices will be determined by fundamentals.

Buffett even described the stock market as manic depressive. Sometimes it seems that everything is for sale, and the market despairs that nothing will ever go well again. Other times the market only wants to go higher, as investors are filled with confidence that the world has been forever changed for the better.

The corollary to this is Buffett's dictum that one should be greedy when all are fearful, and fearful when all are greedy. This is why Buffett was a big buyer of stocks in the Panic of the fall of 2008.

It seems to me, then, that today's HFT truly make short-term market timing impossible. Stock prices could vary widely based on programs that are little known to anyone outside the select few that are "in the know".

However, just because prices may more randomly today than they have in the past, I think that Graham's view still is intact - namely, the longer term "weight" of fundamentals will eventually determine stock price trends.

But I think the whole issue of HFT may something to follow closely, especially for regulators.

In Toledo, the 'Glass City,' New Label: Made in China - WSJ.com

I grew up in Toledo, Ohio, so I found this article from yesterday's Wall Street Journal interesting.

The point of the article is the irony that Toledo - nicknamed "The Glass Capital of the World" since it provided glass to the auto industry - needed to import the glass for its new glass museum from China.

Here's an excerpt:

It was a similar story for the Toledo Museum of Art. Only a Chinese company and Spanish and Italian companies could produce the oversize curving panels needed for the futuristic design of its Glass Pavilion. Sanxin says it was paid under $1 million; people involved in the project said it would have cost up to 50% more in Europe.

"We did get some grief about the fabrication until we explained we didn't have a choice," says Carol Bintz, an officer of the Toledo Museum of Art who led the project. "We couldn't find anyone in the United States that could do both the size and make the curvature."

Toledo is now in the midst of struggling to reinvent itself, and to move away from its dependence on the auto industry, but it's difficult. A number of other states are also trying to move towards new technologies to create jobs for it citizens, so in some ways it has become a bidding war in attracting business.

But it's doubtful that Toledo will ever again be a "glass capital". The article describes what China's glass capital looks like; I doubt most American would like this type of industry in their cities:

China's "Glass City" features a skyline of concrete cooling towers characteristic of nuclear power plants, not the expensive equipment Western glassmakers use to reduce pollutants like nitrogen oxide. Mr. Liu says 10% of his capital expenditure goes into pollution controls, that he meets all national standards and is switching to cleaner natural gas.

But Mr. Liu's plant features construction that looks slapdash by Western standards. It is run by engineers seated on wooden benches. A nearby silica sand producer spits mucky water onto the parched land. And trucks ply Shahe roads loaded with bags of synthetic soda ash, the product of a chemical process environmentalists forced out of the U.S. in 1985.

Most of China's glass output is such low quality, it has no market other than China. And much of the Chinese glass now hitting U.S. shores is chiseling into market extremities where profit margins are thinnest: the cheapest salt shakers, table tops and replacement windshields.

It struck me that in some ways China's glass manufacturers today are a little like the Japanese automakers were compared to the U.S. manufacturers a generation ago. Back in the 1960's, "made in Japan" was synonymous with "cheap" and "poor quality" - a far cry from today, when Japan's auto makers dominate world markets, while all but one of the U.S. manufacturers are bankrupt.

Read more: http://online.wsj.com/article/SB10001424052748703428604575418680197041878.html?KEYWORDS=toledo#ixzz0yCOhpUSo

Getting a Will: Six Common Questions - NYTimes.com

Deborah Jacobs brought this good article from the New York Times to my attention on LinkedIn.

Estate planning and wills are subjects that most people like to delay talking about, for obvious reasons. However, taking a few hours to discuss minor details like how to title your assets could someday save your heirs a considerable amount of taxes.

One of the most simple steps - but often overlooked - is to hold your assets in a revocable trust rather than titling in your own name. Here's why:

One of the big reasons people set up revocable trusts, also known as living trusts, is to avoid probate, the court-supervised process to settle a deceased person’s estate. Why? Depending on where you live, probate can be a costly and lengthy process. Attorney, court and other fees often cost up to 5 percent of the value of the estate, Ms. Randolph said. Many Californians choose to use revocable trusts for that reason, she said. Be sure to check the probate laws in your state.

Here’s how the revocable trust works: you put all of your assets into the trust, which remains in your control and can be changed at any time. For the trust to work, you need to retitle all of your assets to the trust (a “pour over” will is also typically used to transfer, or “pour over,” any assets that weren’t in the trust at the time of your death). After you die, a trustee that you name distributes the assets according to your instructions, all while avoiding probate.

Thanks Deborah!


Getting a Will: Six Common Questions - NYTimes.com

Interview with Robert Shiller

This is by way of the blog Zero Hedge.

Robert Shiller of Yale was the author of Irrational Exuberance, which correctly forecast the stock market bubble of the late 1990's. His later work on the housing market was also mostly spot-on, and the Case-Shiller index is one widely cited in the press and academia in describing the current state of housing.

So this interview is worth watching.

Fair warning: Professor Shiller speaks in a fairly monotone voice, so watching this piece for 20 minutes could be tough. The "good' parts (to me) start around 14 minutes or so into the interview, so if you want to skip ahead, by all means.

Or, if you don't want to watch at all, here's Shiller's conclusions: Shiller thinks we are very close to a "double dip" recession; bonds are not in a bubble, but reflect rational fears; and housing could be in trouble for years if we follow the Japan pattern.

Fed Ready to Increase Its Buying of Long-Term Debt - NYTimes.com

The Big Speech by Fed Chairman Ben Bernanke from Jackson Hole, Wyoming, seems to be well-received by the markets.

Stocks are up nicely (S&P+1.3%) despite the fact that the economic data released today was uninspiring (second quarter GDP revised lower to +1.7% from +2.4%, and the U. of Michigan Consumer sentiment numbers show more pessimism than last month).

Meanwhile, the bond market is getting rocked: the 10-year Treasury yield has "soared" by 15 basis points to 2.64%.

Guess the bond folks were hoping for a combination of weaker GDP data and/or more Bernanke mention of Fed direct intervention in the credit markets.

The best line in the talk, I thought, was the following (tip of the hat to Louise Story from the NY Times, who mentioned this on Twitter):

“Central bankers alone cannot solve the world’s economic problems,” he {Bernanke} said.

To which I say: Amen. The Fed has thrown money in the system, driven interest rates down to their lowest level in decades, and yet interest-sensitive sectors like housing have not responded.

One scary statistic: the housing data released a couple of days ago indicated that there was not a single home worth more than $750,000 sold in the month of July in the United States. Not good news for either coasts of the United States, where most of the high-priced housing in the U.S. is located.

My sense is that the other parts of the federal government would love the Fed to come to rescue so that they do not have to address any of the incredibly difficult fiscal challenges that we face.

On the other hand, low interest rates are driving investors crazy, and pushing them in the direction of high yield and emerging market debt in a desperate attempt for more income. I think the swap from stocks to emerging markets bonds makes no sense, but neither does buying higher grade debt issues at yields less than 1%:

Aug. 27 (Bloomberg) -- Investors withdrew a net $7.1 billion from equity funds tracked worldwide in the week to Aug. 25 and put some $5.2 billion into bonds amid concern economies in the U.S. and Europe are losing momentum, EPFR Global said.

A net $5.4 billion was redeemed from U.S. stock funds, while inflows into emerging markets were the lowest in 13 weeks, EPFR said in an e-mailed statement. Developing-nation bond funds took in $1 billion, on course for a record-setting year, while U.S. bond funds drew $2.5 billion, according to the Cambridge, Massachusetts-based research firm.

Fed Ready to Increase Its Buying of Long-Term Debt - NYTimes.com

http://noir.bloomberg.com/apps/news?pid=20603037&sid=aPRxN9th86fU

Amazing Trick Shot Serve by Roger Federer

OK, I know I'm supposed to be focused on the markets and the like - but we're also heading into the US Open, so when I came across this video on Twitter (via YouTube, where it has already been viewed 5.5 million times) I couldn't help but look.

The question is: Does Federer really make this shot (and in a sports jacket, no less):