Thursday, July 31, 2014

Larry Kudlow

Haven't seen Kudlow's show on CNBC lately.  What happened?  Did the show get cancelled?  Did he get fired?  Did he move to Fox?  Let's see.

Ah, here's the story from March.

"The Larry Kudlow Report" will end its run on CNBC later this month, the network said on Friday, with host Larry Kudlow staying on as a senior contributor.

"Larry expressed his love of the network and personal pride in what had been accomplished on his program over the years but now wanted to slow down just a bit," the network's president, Mark Hoffman, told staff in a memo on Friday. "As an interviewer, he is unfailingly polite and energetic, skillfully grilling guests but always ending a segment graciously.

"Larry has always brought great enthusiasm to every program and appearance," Hoffman said.

The CNBC executive did not say what would replace Kudlow's program — only that the network was "working on plans" for the 7 p.m. Eastern time slot.

Kudlow, 66, will contribute to the "Business Day" program on CNBC, Hoffman said.

In January 2009, "The Kudlow Report" succeeded "Kudlow & Company," which aired from 2005 until October 2008. Before that, starting in 2002, the program was called "Kudlow & Cramer" — with investment guru Jim Cramer as co-host — and from 2001 to 2002, the program was called "America Now."

Featuring a mixture of business and politics, Kudlow's program hosted such guests as former President George W. Bush, former Vice President Dick Cheney, former Secretary of State Henry Kissinger, and current Defense Secretary Chuck Hagel.

Some of his guests from the business world have included media mogul Barry Diller and energy investor T. Boone Pickens.

A columnist and radio program host, Kudlow served in the Office of Management and Budget during the Ronald Reagan White House, worked as chief economist at Bear Stearns on Wall Street, and served as an economist for the Federal Reserve Bank of New York.

[He's only 66?]

Tuesday, July 29, 2014

Social Security and Medicare status update

CHICAGO (Reuters) - If you worry about the future of Social Security and Medicare, this is the week to get answers to your questions. The most authoritative annual reports on the long-term health of both programs were issued on Monday, and while the news was mixed, there are reasons to be encouraged about our two most important retirement programs.

Under the Social Security Act, a board of trustees reports annually to Congress on the status and long-term financial prospects of Social Security and Medicare. The reports are prepared by the professional actuaries who have made careers out of managing the numbers and are signed by three cabinet secretaries, the commissioner of Social Security and two publicly appointed trustees - one Republican, one Democrat.

Here are my five key takeaways from this year’s final word on our social insurance programs.

- Imminent collapse nowhere in sight. Social Security and Medicare face long-term financial problems, but there’s no cause for panic about either program.

Social Security’s retirement program is fully funded for the next 19 years. It has $2.8 trillion in reserves, and that figure will rise to $2.9 trillion in 2019, when the surplus funds will begin depleting rapidly as baby boomer retirements accelerate. Although you’ll often hear that Social Security spends more annually than it receives in taxes, the program actually took in $32 billion more than it spent last year, when interest on bond holdings and taxation of benefits are included.

The retirement trust fund will be depleted in 2034, at which point current revenue would be sufficient to pay only 77 percent of benefits - unless Congress enacts reforms to put the program back into long-term balance.

Medicare’s financial outlook improved a bit compared with last year’s report because of continued low healthcare inflation. The program’s Hospital Insurance trust fund - which finances Medicare Part A - is projected to run dry in 2030, four years later than last year’s forecast and 13 years later than forecast before passage of the Affordable Care Act (ACA).

In 2030, the hospital fund would have enough resources to cover just 85 percent of its expenditures. (Medicare’s other parts - outpatient and prescription drug services - are funded through beneficiary premiums and general revenue, so they don’t have trust funds at risk of running dry.)

Monday, July 28, 2014

momentum investing

A massive academic study looking at the transaction data generated by individual investors over the past two decades basically shows that small traders tend to engage in trades that contribute to momentum returns. The same analysis if applied to the transaction data generated by large institutional investors shows that institutional investors tend to react more appropriately to gains and losses.

Essentially the individual traders are contributing to the returns generated from a momentum-based investment strategy. Basically, stocks that have the greatest ownership by individuals as opposed to institutions tend to show the strongest profits in response to momentum trading strategies.

Now, if it were the case that individuals contributed to momentum returns by behavioral biases, we would expect to see stocks with low volume - which would be more likely to be held by individuals - to exhibit stronger momentum returns. This is exactly what the data shows.

Basically, if you are going to buy momentum stocks, you want to buy those that are owned primarily by individuals as opposed to institutions. The straight-forward reason is that individuals are more governed by their psychology than institutions. As a result, individuals tend to become more risk averse when a stock rises in price and are likely to sell too early. This means that those stocks that have appreciated dramatically in price over the past months are poised to go even higher as they have been unduly sold by individuals who have become risk averse.

Additionally, there is good evidence that over the past seventy years, momentum strategies seem to work much better in periods of economic expansion. Generally speaking, momentum strategies do not work well during recessions and at the turning points when the economy shifts from an expansionary phase to a recessionary phase or vice versa.

If you take a step back and think about it, this makes logical sense. During an expansion, the stocks exhibiting the most momentum will be those which are benefiting the most from the expansion. These stocks will tend to be the most cyclical stocks, and those that will be hit the hardest if the expansion disappoints and the economy begins to contract. Keeping that in mind, if you are going to employ a pure momentum strategy, you must always keep one eye on the economy. If there is a whiff of a recession, you need to be transitioning to more of a value-driven strategy.

-- Mitch Zacks, ZIM Weekly Update     

Where your Dollars Go

Americans today spend their money on the same things they always have, including housing, health care, transportation, food, and entertainment. But while what we spend money on has stayed essentially the same in recent decades, how that spending is distributed has changed in significant ways. In 1952, health care costs made up just 5% of Americans’ annual spending.1 But health care costs have risen substantially over the decades, partly due to the increased cost of advanced medical technology.

Meanwhile, improved efficiency in production and manufacturing methods pushed down the cost of food and clothing. In 1952, Americans spent more than 40% of their income on what they wore and what they ate. Sixty years later, those categories made up just 17% of household spending. At the same time spending has been reduced on food and clothes, the amount spent on financial services and insurance has more than doubled between 1952 and 2012.

                             1952 1972 2012
Food                          29%  21%  14%
Housing                       16%  18%  18%
Health Care                    5%   9%  20%
Transportation                11%  13%  10%
Clothing                      11%   8%   3%
Financial Services/Insurance   3%   5%   7%
Recreation                     6%   7%   9%

-- T. Rowe Price Investor, June 2014

Bill Bernstein

In 2000, Bill (not Peter) Bernstein published his first book, The Intelligent Asset Allocator. It yanked away the punch bowl from the New Era's party. While other investment publications (most notably, the best-seller Dow 36,000) advocated euphoria and heavy doses of then-popular growth stocks, The Intelligent Asset Allocator preached the unfashionable virtues of diversification, caution, and contrarianism. Among its recommendations were REITs and gold stocks. It was, in short, a hopeless cause--the rare investment tome that sold what would succeed, rather than what had already thrived. Obscurity beckoned.

This summer, Bernstein published a sequel: Rational Expectations: Asset Allocation for Investing Adults. Much of the material--the basics of Modern Portfolio Theory, asset allocation, and the efficient-market hypothesis--is familiar, although freshly presented. The changes interested me most, however. They addressed my favorite investment question (typically aimed at fund managers, but applicable to authors as well): What have you learned since you started in the business?

Bernstein writes, "As Warren Buffett famously observed, investing is not a game in which the person with an IQ of 160 beats the person with an IQ of 130. Rather, it's a game best played by those with a broad set of skills that are rich not only in quantitative ability but also in deep historical knowledge, all deployed with Asperger's-like emotional detachment."

In fact, continues Bernstein, being extremely bright and technically accomplished can actually be detrimental to investment performance. As with prom queens, who overstate the importance of beauty, the quantitatively adept will sometimes overestimate the value of their own gifts. The geniuses at Long-Term Capital Management, for example, had rather too much faith in their ability to outsmart the marketplace and rather too little recognition of the possibility that they might be wrong. Bernstein suspects that many of his readers may fit a similar profile and pleads with them to "fill in what may be the shallow areas ... a working knowledge of financial history and a healthy dollop of self-awareness about [their] discipline under fire."

Put another way, a powerful mindset is at least as important for investing success as is a powerful mind. This realization did not come immediately to Bernstein because the mindset came naturally to him. He was willing to follow what the data suggested, regardless of how his actions looked to others, and regardless of whether the market seemed to agree--even if the market's disagreed for several years. (As with other contrarians, Bernstein spent much of the late 1990s doubling down on losing value stocks, and looking ever more foolish in doing so.)

Most people, however, are wired differently. In Rational Expectations, Bernstein painstakingly explains what was mostly implicit in his first book: Emotions destroy investment performance. Somehow, some way, investors must suppress them. The suppression might come from the blessing of nature; from ongoing investment education; through shielding mechanisms such as holding a blind trust; or, most commonly, by cutting back on stocks and holding a lower-volatility asset allocation. One way or another, though, it needs to happen.

Paradoxically, writes Bernstein, the task is hardest for people who are otherwise admirable. He states, "The most emotionally intelligent and empathetic people I know tend to be the worst investors. After all, the very definition of 'empathy' is to feel the emotions of others, which is deadly in investing." Bernstein relays the story of hospital patients who have brain lesions that disconnect their sense of fear; in investment simulations, those patients handily outperform the general population. For most people, investing successfully is a deeply unnatural act.

Sunday, July 20, 2014

still big after all these years

Of the 10 largest companies in the S&P 500 Index in terms of market capitalization in 1992, five still retain that position (ExxonMobil, AT&T, IBM, General Electric, and Procter & Gamble). The other five have been replaced by Apple, Microsoft, Google, Chevron, and Johnson & Johnson.

Mr. Puglia: History will tell you that change occurs and the leadership of the market changes accordingly. It has been very difficult for companies to sustain dominant positions. But it’s much more difficult to sustain leadership in the technology area where companies are subject to shorter product life cycles.
I think it’s noteworthy that IBM has been able to maintain its leadership, and the reason is that it has been strong in services and software rather than being solely subject to product life cycles. It’s also a little easier for companies in staples, such as Procter & Gamble, to maintain leadership over time.

Mr. Berghuis: I was surprised that five of the top 10 are still there. It shows that there is more stability and persistence in our economy and in corporate America than perhaps is commonly perceived.
Our economy is evolving, but that’s not to say that if you invest in a blue chip company today it won’t still be a reasonably vibrant company a generation later if it is well managed.

-- T. Rowe Price Report, Winter 2013

Looking at ETF Database, the other five in 1992 were Wal-Mart, Philip Morris, Coca Cola, Merck, Royal Dutch Petroleum, Bristol-Myers Squibb.  Wait that's six.  IBM is not in their list.

And they have Pfizer instead of Google in 2012.

Apple appeared on the list in 2009 at #5.  Went to #2 in 2010 behind XOM.  Then surpassed XOM in 2012.

Checking the ETF Database, I'm surprised how much the top ten changes every year.  Three of the top ten changed in 2013, 2012, 2010, 2009, 2007.  Five of the top 10 from 2006 are no longer in the top 10.  And the only stocks to remain in the top ten every year since 2006 are XOM, MSFT, PG.

Saturday, July 19, 2014

opposite directions

Main Street and Wall Street are moving in opposite directions.

Individual investors are plowing money back into the U.S. stock market just as professional strategists say gains for this year are over. About $100 billion has been added to equity mutual funds and exchange-traded funds in the past year, 10 times more than the previous 12 months, according to data compiled by Bloomberg and the Investment Company Institute.

The growing optimism contrasts with forecasters from UBS AG to HSBC Holdings Plc, who say the stock market will be stagnant with valuations at a four-year high. While the strategists have a mixed record of being right, history shows the bull market has already lasted longer than average and individuals tend to pile in at the end of the rally.

"If Wall Street, after poring over all known data, comes up with a target and we're already there, and you still see individual investors buying and they're typically the ones that are late to the party, it would seem there is limited upside," Terry Morris, a senior equity manager who helps oversee about $2.8 billion at Wyomissing, Pennsylvania-based National Penn Investors Trust Co., said in a July 8 phone interview.

For most of this year, equity investors have seen little volatility and steady gains, giving them confidence to put money back into the market. Individuals deposited about $9.5 billion in June to stock funds and have added cash in eight of the past 10 months, data compiled by ICI and Bloomberg show. That's a reversal from the five years through 2012, when $300 billion was withdrawn.

Professional investors, such as Nick Skiming of Ashburton Ltd., say that individuals investors are attracted to stocks after seeing others getting rich from a big rally, a time when equities are usually overpriced. The bursting of the technology bubble in March 2000 was marked by mutual funds absorbing a record $102 billion in the first quarter.

"As institutional investors, we're always concerned when the retail investor is actually arriving in the market," Skiming, who helps manage $10 billion at Ashburton, said by telephone from Jersey, the Channel Islands. "The retail investor arrives when they can only see blue skies."

For Laszlo Birinyi of Birinyi Associates Inc., stocks have entered what he calls the exuberance phase, the last of four stages usually seen in bull markets. He still sees more gains to come, citing the skepticism on Wall Street as a sign that plenty of investors haven't bought shares yet.

Relatively expensive valuations will also limit future gains, according to Garry Evans, HSBC's global head of equity strategy in Hong Kong. He said in a report last week that the S&P 500 will finish the year at 2,000, a 1.6 percent gain from last week's close. The index trades at 16.6 times projected earnings, near the highest level in four years, data compiled by Bloomberg show.

The bull market, which has almost tripled the S&P 500's value since 2009, is closer to the end than the beginning, said Walter Todd, who oversees about $980 million as chief investment officer at Greenwood Capital Associates LLC. The rally has lasted 64 months, about a year longer than average, according to data since 1962 compiled by Birinyi and Bloomberg.

"To the extent that investors start to put a lot of money into the market, it would certainly be late," Todd said in a July 9 phone interview from Greenwood, South Carolina. "But to say that the end is going to happen in the next few months, I don't agree with that."

empty floors

UBS AG's trading floor in Stamford, Conn., once teemed with traders occupying a space equal to two football fields. The Guinness World Records recognized it as the biggest such facility on the planet. And the Swiss bank used it to showcase its Wall Street credentials.

Stu Taylor, a former UBS managing director in trading who now runs trading-technology company Algomi Ltd., remembers when guests were brought around the gallery regularly. "It was very much a showpiece," he said.

Today, there are virtually no traders shouting into their phones or staring at terminals. UBS's cavernous floor is taken up mostly by back-office, legal and technology staffers, according to people familiar with the bank.

A spokeswoman for UBS said the trading floor was built for 1,400 traders, but wouldn't disclose the number of employees at the facility.

A deep slump in trading activity in everything from stocks and bonds to currencies is changing the face of Wall Street. Businesses that once contributed disproportionately to the revenues of the world's largest banks are now bleeding jobs and sparking fears of a permanent decline.

Today's markets are "boring," said Thomas Thees, a former head of North American credit trading at Morgan Stanley and a former co-head of fixed income at Jefferies Group. "This is affecting the opportunity to make money, and ultimately the earnings these [trading] businesses can provide."

Global revenue from trading in fixed income, currencies and commodities, or FICC, dropped to $112 billion last year, down 16% from a year earlier and 23% from 2010, according to Boston Consulting Group.

As big banks with large trading operations such as J.P. Morgan Chase & Co., Goldman Sachs Group Inc. and Citigroup Inc. report second-quarter earnings results this week, investors and analysts will be trying to find out whether the slowdown is a temporary funk or a lasting shift.

The forces arrayed against banks' trading businesses are powerful. Since the financial crisis, regulators have limited their ability to take risks with their own money, and have made the process costlier, prompting many to dial back or push in different directions. At the same time, global markets have fallen into an unusually placid pattern that has damped clients' desire to make trades.

"It's been absolutely dead," said Jarrod Dean, a municipal-bond trader at Sierra Pacific Securities in Las Vegas. Municipal-bond trading volumes are down about 30% since last August, he said, while profits are down more than 70%. "We've just got to keep toughing it out," he said.

Friday, July 18, 2014

waiting for the correction

The long bull market in the United States remains intact but there have been some recent stumbles. We would like to see some further selling in order to correct some of the overly optimistic sentiment (a contrarian indicator) that's built up. The Ned Davis Research Daily Crowd Sentiment Poll recently hit its most optimistic level since the end of last year, near levels that have typically preceded a relatively decent pullback.

Additionally, midterm election years (like 2014), have historically brought decent-sized pullbacks in each year going back to 1962—ranging from -8% to -38% with the average decline being -19% (thanks to Strategas Research Partners), but those pullbacks have been followed by substantial rallies over the subsequent 12 months, ranging from 12% to 58% and averaging a whopping 32%.  We haven't seen that type of pullback yet, and history doesn't always repeat, but it does often rhyme.  Bottom line—in our view the possibility of correction is elevated, but we would view such an occurrence as a buying opportunity for those who have been under allocated to equities.

Valuations are being debated, with concerns about overvaluation growing—exacerbated by comments from the Fed related to biotechnology and social networking stocks.  Given continued low interest rates and inflation, the market can likely maintain higher valuations, and current levels are roughly inline with where history has shown they should be.  So while the market is no longer a significantly undervalued story, we don't believe valuations have become an impediment to this bull market.

-- Schwab Market Perspective, July 18, 2014

Friday, July 11, 2014

A brief history of Social Security

Living beyond one's productive, working years is a recent development in human history. Formal programs offering "social insurance" for the elderly were only proposed when people started, in greater numbers, to live beyond their ability to work effectively.

Until the 1840s, the U.S. was primarily an agricultural society in which the majority of people lived in rural areas. Extended families took financial responsibility for older members. But over the next five decades, technology advanced and the lives of workers changed dramatically—and life spans began to rise. Machines set the pace of work. Industrial output consistently outpaced agricultural output.

With better sanitation and health care, life spans increased a full 10 years in just the three decades between 1900 and 1930. By 1920, for the first time in the nation's history, more people lived in cities than on farms, fraying the support system of the extended family. The Great Depression made older Americans' work situations even more challenging—over half of the country's elderly couldn't support themselves.

On August 14, 1935, recognizing the need for federal assistance, Franklin D. Roosevelt signed the Social Security Act into law.

-- T. Rowe Price Investor, March 2013

Saturday, July 05, 2014

why you invest the way you do

People like to assume they can think objectively. But you and I are just a product of the experiences we've had in life.

In 2006, Ulrike Malmendier of U.C. Berkeley and Stefan Nagel of Stanford University looked at how various cohorts of Americans differed in their views about investing.

Controlling for age, wealth, income, and other social factors, how the economy performed during people's young-adult years had a profound impact on how they invested later in life.

Those who grew up during the Great Depression were half as likely to invest in stocks as adults compared with those raised during the roaring 1960s. Those who grew up during the inflationary 1970s were less likely to invest in bonds later in life than those raised during the stable 1950s. Growing up during the prosperous 1980s made you highly likely to favor stocks during the 1990s. "Our findings suggest that individual investors' willingness to bear financial risk depends on personal history," the authors wrote.

This seems obvious, but there's an important takeaway: One person's view of risk can be completely different than someone else's. And not because one person is smarter or has better insight than another, but simply because they were born in a different year.

Emotional experiences also have a downside: Memories are often distorted, so much so that some of what we remember never actually occurred.

For decades, psychologists have interviewed people who had an emotional experience, sprinkled in some fake prompts, and watched their memories fool them on the spot. In one famous example, Lawrence Patihis of U.C. Irvine discussed 9/11 with a group of research subjects, and found that, when prompted, many could vividly describe seeing video of Flight 93 crash into a field in Pennsylvania (this video, of course, doesn't exist). "It just seemed like something was falling out of the sky," one participant said. "I was just, you know, kind of stunned by watching it go down." They weren't lying. This is a common flaw when recalling emotional experiences, as we try to forget painful memories and replace them with pleasant thoughts.

If someone's view of risk is influenced by what year they were born, and people's memories of emotional events may not even be accurate, there's an obvious lesson: When seeking advice, you should consult a variety of different people of different ages and backgrounds who have experienced different things in life.

This isn't a substitute for skill. But if you get all of your investment advice from 50-year-old white guys, you will get opinions from people whose worldview is colored by similar experiences. And those experiences may be incomplete, not relevant to today's world, and biased in thinking the future will resemble their specific past.

A common trait you'll see among the world's best investors is an open and flexible mind. They are happy to hear diverse opinions from people of all different ages and backgrounds. This isn't because they're nice, but because they understand everyone is biased to their own experiences, and that no group has a monopoly on wisdom. Think about the last five years, when lots of angry old men were hyperventilating about looming hyperinflation and the coming collapse of the dollar, while a bunch of college kids who were "ignorant of history" were busy building billion-dollar tech companies. Not being constrained by past experiences can be incredibly valuable.

Wednesday, July 02, 2014

selling too soon

For growth investors, a cardinal sin is missing a successful growth company, such as Wal-Mart, Microsoft, or Apple, early on. But giving up on one too soon, due to a short-term concern, can be almost as painful.

Jack Laporte, who managed the small-cap New Horizons Fund for 22 years and has more than three decades of investment experience, recalls investing in Starbucks when the company went public in 1992. He sold it about two years later due to concerns about a spike in coffee costs cutting into profits. It was a good call at the time because the costs did rise and the stock stagnated for months.

While Mr. Laporte made a nice gain, the company’s later success made him regret the sale. He calculated that by 2006 the fund’s original position in Starbucks would have been worth an Benefiting From Mistakes Even the Pros Have Made additional $200 million.

“I outsmarted myself by trying to trade around a unique company, and that was a very expensive lesson,” he says. “It’s hard enough to find truly great companies like Starbucks with open-ended growth opportunities. When you find them, don’t get caught up in short-term valuation issues if they are growing rapidly.”

-- T. Rowe Price Report, Fall 2011

Tuesday, July 01, 2014

The best investment advice of all time

Billionaires. A miser. A Nobel laureate. A Founding Father. We've rounded up the finest market minds -- dead or alive -- and distilled their timeless wisdom into specific suggestions for stocks, bonds and funds you can buy today. Be warned: You just might get rich.

Read through this slideshow for timeless investment advice from 10 of the world's finest financial minds.

Jack Bogle: "Don't let the miracle of long-term compounding of returns be overwhelmed by the tyranny of long-term compounding of costs."

Sir John Templeton: "If you buy the same securities everyone else is buying, you will have the same results as everyone else."

Warren Buffett: "Whether socks or stocks, I like buying quality merchandise when it is marked down."

Nathan Mayer Rothschild: Information is money

Sam Zell: "Look for good companies with bad balance sheets and understand your downside."

Joseph Schumpeter: "A depression is for capitalism like a good, cold shower."

Peter Lynch: "Everyone has the brainpower to follow the stock market. If you made it through fifth grade math, you can do it."

Alexander Hamilton: "A nation which can prefer disgrace to danger is prepared for a master, and deserves one."

David Tepper: "I am the animal at the head of the pack. . . . I either get eaten, or I get the good grass."

Hetty Green: "All you have to do is buy cheap and sell dear, act with thrift and shrewdness, and be persistent."