Friday, August 31, 2012

energy independence

As it turns out, we have found so much natural gas and oil in this country, with the new procedures and the new technology, that we can become energy independent in less than ten years, maybe even by the end of the decade.

If we start exporting natural gas, which we will in less than four years, from McAllen Texas there will be the first LNG terminal, just the one in McAllen is going to produce $70 to $80 billion a year of positive trade balance.

If we start exporting value-added natural gas, in the form of fertilizers and plastics and other products that you make from natural gas, we could have a positive trade balance in less than ten years.  That would be a shock to the world.  Nobody sees that coming.

massive economic catastrophe

Once again, it's time for our daily dose of morning cheer..

In a newly released documentary that went viral last month, a team of influential economic experts say they have discovered a "frightening pattern" they believe points to a massive economic catastrophe unlike anything ever seen in the history of the world.

And according to these experts - who have presented their findings to the United Nations, the UK Parliament and a long list of world governments - the catastrophe may happen well before Americans hit the polls in November.

"What this pattern represents is a dangerous countdown clock that's quickly approaching zero," said Keith Fitz-Gerald, the Chief Investment Strategist for the Money Map Press, who predicted the 2008 oil shock, the credit default swap crisis that helped bring about the recession, and the Greek and European fiscal catastrophe that is still wreaking havoc until this day.

"The resulting chaos is going to crush Americans." 

Saturday, August 25, 2012

fading affect bias

There's a theory in behavioral psychology called the fading affect bias. In simple terms, it states that negative emotions leave our memories much faster than positive ones -- a sort of natural aversion to unpleasant thoughts.

In 1948, psychologist Sam Waldfogel gave a group of participants 85 minutes to write down every event they could remember from the first eight years of their life, and rank them as pleasant, unpleasant, or neutral. Logically, events should have been spread evenly between the three. But they weren't. Pleasant memories outweighed negative ones by almost twofold. People had a distinct positive bias when recalling their past.

So, what's this mean for your investments? People worry and the economy slows down. Then they get over it and it recovers. Same story again and again. John Maynard Keynes called these shifts animal spirits -- "a spontaneous urge to action rather than inaction." The important thing is that they happen consistently and predictably. You get to choose whether you want to stop worrying before the crowd, or wait and follow the crowd. It's the epitome of being fearful when others are greedy, and greedy when others are fearful. And it may be the single largest factor in determining whether you'll be a successful investor or not.

Wednesday, August 22, 2012

Echo Boomers

Liz Ann Sonders writes:

In history, few forces have been as strong behind stock returns as demographic trends: movements in population, age, gender and employment status, among others. Much focus has been on Baby Boomers, especially as they begin to retire, and their effect on markets in the future. Yes, they're now more risk-averse than ever, and this is not likely to change. But what about a key generation behind them?

Those born after 1980 are generally considered "Millennials," but I prefer the description "Echo Boomers," as they represent many of the children of Baby Boomers. Millennials are often characterized as having less financial savvy and weaker job prospects than their Boomer parents. The result is an impression of a generation equally as disenfranchised from the stock market as the Baby Boomers.

However, I think many may be underestimating the positive impact this generation may have on investing trends. I recently read an interesting report on the subject by Turner Investments in which it noted that the Millennials are "digital natives"—the first generation raised with technologies such as personal computers, the Internet and smartphones that prior generations had to adapt to later in life.

My two children (ages 12 and 16) can't fathom that I had to rely on libraries, books, encyclopedias and a typewriter when I was a college student. But they're part of a generation that's become completely reliant on "new" technologies. Eight of 10 of Millennials sleep with their cell phones in reach (count my kids in the 20% that don’t, though they would if we let them).

The Millennials are highly educated: About 40% of college-age Millennials are enrolled in higher education—the greatest percentage in US history. Yes, some of that's a result of the rough economic ride they've been on over the past decade or so. They've had to suffer two economic/market crises since 2000, starting with the bursting of the technology bubble and followed by the bursting of the housing bubble and the attendant financial crisis. The dearth of jobs has hit the generation particularly hard. About a third of 18-29 year olds are unemployed, under-employed or simply out of the work force.

Don't underestimate the Millennials

Turner offers seven reasons why the financial prospects of Millennials may be much better than is popularly supposed and why Millennials may "bring about a Great Bull Market of the 21st Century":

1. The Millennial generation is huge at more than 85 million—even larger than the Baby Boomers' 81 million. It wasn't until Boomers were in their 30s that they began to truly make their presence felt in the stock market. The great bull market of the last century was the result. My additional perspective: vehicles like 401(k)s make it easier and more "automatic" for this cohort to invest.

2. Millennials' financial struggles thus far are actually fairly typical of early adult life: paying for education, finding a first job, relocating, buying a first house and learning the vocational ropes.

3. Macroeconomic headwinds facing Millennials—notably high unemployment and depressed housing—are likely to be temporary. My additional perspective: housing has likely already found its bottom and household formation has jumped significantly since its lows.

4. Baby Boomers once faced similar macroeconomic headwinds (during the late 1970s and early 1980s), but were still able to subsequently invest in stocks and drive the market to new highs during their peak earning years.

5. Despite all of their financial troubles, Millennials are savers and are already investing in stocks. Twenty-something investors have more stocks in their 401(k) accounts today than their counterparts did a decade ago, according to the Investment Company Institute. About 80% of 20-somethings had devoted at least 60% of their 401(k)s to stocks in 2010 (the latest year of data) versus 70% in 2000.

6. Millennials tend to be optimists and are more willing to take risks relative to their parents' generation. About 29% of all entrepreneurs are Millennials, according to the Kaufman Foundation, suggesting an appetite for risk.

7. Millennials are putting emerging nations in a demographic sweet spot. The ratio of workers to the total populace in East Asia rose from 47% in 1975 to 64% in 2010. In Latin America the ratio rose from 44% to 56%, and in South Asia it rose from 45% to 55%. A sizable new class of investors is surfacing around the globe.

Food for thought.

Kass bearish

“It is time to say good bye to the bullish days of summer,” says Doug Kass, a hedge-fund manager at Seebreaze Partners. “We might now be approaching a crucial inflection point in the world’s equity markets.”

Kass says he is “more bearish” now than he has been in quite some time, largely due to several metrics pointing toward extreme levels of complacency. He notes sentiment polls, fund-flow data and a low VIX as well as troubling economic fundamentals as evidence to be cautious.

“I am very concerned about the potential for a disappointing downturn in corporate profits, the likely deterioration in China’s economy and a more rapid decline in the eurozone’s economy than is generally expected in the months ahead,” Kass says. I will move back into a long position when conditions dictate, but, for now, with extreme levels of complacency, I am more bearish than I have been in a while.”

Monday, August 20, 2012

the history of tax rates

Contrary to what many think, tax rates have generally been decreasing since the 1970s.  The top rate in the 1970s used to be 50%, declined to as low as 28%, and is now 35%.  The top long-term capital gain rates used to be 39.9% and is now 15%.  The top dividend rate used to be 70% (!) and is now down to 15%.

[Now, I see the top tax rate used to be 7% in 1913, then more than doubled to 15% in 1916, then zoomed to 67% in 1917.  It reached as high as 92% in 1952. [The capital gain tax rate  has ranged from 7% to 49.88% (in 1977). And the dividend tax rate has ranged from zero to fully taxable (100% of the ordinary income rate).]

Should you sell some securities now, before long-term capital gains rates go up? Currently, profits on long-term investments (those held more than one year) are taxed at a top rate of 15%. The Obama Administration has proposed raising the top rate back to 20% for families making over $250,000 and keeping it at 15% for everyone else. If Congress takes no action, the top rate is scheduled to return to 20% for securities held between one and five years, and 18% for those held more than five years for everyone (23.8% and 21.8% respectively including the new healthcare law surtax for high earners).

Tuesday, August 14, 2012

Bloomberg Billionaires Index

I was familiar with the Forbes 400, but not this index of billionaires worldwide.

Carlos Slim tops the list with 72.7 billion
Bill Gates is second at 63.5 billion
Warren Buffett is third at 45.5 billion
Barely ahead of Amancio Ortega Gaona at 45.1 billion
Surprisingly Larry Ellison is not far behind at 40.0 billion and could easily overtake Buffett should ORCL continue to outperform BRK.A.

Looking at the 2010 Forbes 400 list, Buffett was comfortably ahead of Ellison 45 to 27.  Then again, in 2000, it was Ellison 58, Buffett 28.

And now I see that Forbes has their own list of billionaires and lists Bernard Arnault fourth at 41B.  Arnault is 15th on the Bloomberg list at 25.0 billion.

Monday, August 06, 2012

how important is turnover?

Overall, turnover proved to have a smidgen of predictive power, but it was not as strong or consistent as the best predictors. While fees, stars, and manager tenure produced a nice stair-step down, the turnover results were lumpier. So while the cheapest quintile beats the next-cheapest quintile and so on, turnover didn't work that way.

Instead, we had rather flat results up until the highest-turnover quintile, where results really plummeted. So, put turnover behind stars, expenses, and manager returns, but put it ahead of active share. Along asset-class lines, turnover had some predictive power for equity funds. Shopping for low-turnover balanced funds would have actually hurt performance, and turnover had no effect--positive or negative--in bond funds. No big surprise there.

The results are pretty close to what other studies have found. For example, Roger Edelen, Richard Evans, and Greg Kadlec found a small impact for turnover in their paper, "Scale Effects in Mutual Fund Performance: The Role of Trading Costs." However, in their study it wasn't as powerful as expense ratios or their estimate of trading costs.

[see also]