multiple contraction

Reading Rule #1 by Phil Town, I was struck of how high multiples were back then (5 or 10 years ago).

For example, two of his favorites were WFM and HOG.

For WFM, PE has gone from 43.7 in 2001 to 34.0 in 2006 to 32.8 TTM. Well actually not that bad here. Looking at the ten year chart, the price has gone from under 20 to near 80 in late 2005 to 10 in late 2008 and is back near 60. Revenue growth went from 24% in 2001 to 19% in 2006 to 12% in 2010.

For HOG, PE has gone from 38 to 18 to 28. P/S has gone from 4.9 to 3.1 to 1.8. The price has gone from almost 50 to the 70s in 2006 down to 10 in early 2009 and is now at 38. Revenue growth 16, 16, 2.

Others.

MSFT. PE went 61, 26, 10. PS 14, 7, 3. Price around 36 ten years ago to 22 in 2002 back to 36 in 2007, down to 16 in early 2009 and currently 25. Revenue growth 10, 11, 7.

CSCO. PE -63, 29, 12. PS 6.5, 5.7, 2.0. Price 18 to 10 in 2002 to 33 in 2007 to 15 in 2009 to 26 in 2010 and currently 15. Revenue growth 18, 15, 11.

ORCL. PE 32, 25, 21. PS 7.6, 5.7, 4.6. Actually not bad. Price near 20 to under 10 in 2002 to over 35 early this year and currently 32. Revenue growth went from 7 to 22 in 2006 to 15 in 2010.

JNJ. PE 32, 18, 15. PS 5.5, 3.7, 3.0. Price has gone from 50 (which turned out to be the ten year low also reached in 2003 and 2009). It hit a high of 70 in 2008. Dipped back to 50 in 2009. And currently at 66. Revenue growth 13, 6, 0.5.

PG. PE 37, 23, 17. PS 2.8, 3.0, 2.4. PG has gone from the low 30s to the mid-70s in 2007, dipped down to the high 40s in 2009 and is back up to 64. Revenue growth -2, 20, 0.

Looking over the data, stocks look pretty cheap just looking at the multiples (but growth slowed too which probably explains a lot). And the second thing is that there were opportunities to buy and sell during the decade. Buy and hold wouldn't have worked as well (assuming you bought and sold at the right time).

Well let me add the growth data above too. Looking at it, the revenue growth really wasn't that high back in 2001. But it had probably fell off a lot already from 1999, 2000 levels.

Global Century Investments

straight talk

- via tairbear00

Ten don'ts from Philip Fisher

I have taken a few wooden nickels during my investment career, although when I bought them I thought they were solid gold. As it turns out the gold was merely a thin veneer which covered a piece of rotting wood. Most of my "wooden nickels" were a result of not paying attention to Philip Fisher's "Ten Don'ts For Investors."

The more I read about investing the more I appreciate the philosophy and writings of Philip Fisher. His influence upon modern investment thought is extremely pervasive; many of the concepts that he wrote about five decades ago have become nearly ubiquitous among value investors. Bits and pieces of his philosophy appear in almost every synopsis or profile of every value investor or fund manager who is worth his salt.

Today's article deals with the famous don'ts that Fisher explained in precise detail in his classic work, "Common Stocks and Uncommon Profits." I will follow the don'ts with some personal analysis.

-- by John Emerson

Arnold Van Den Berg recommends books

The books that I would recommend reading can be divided into three categories: investing, philosophy and health.

For investing, I would recommend reading "The Intelligent Investor." I also believe reading Berkshire Hathaway’s current and historical annual reports (located on the Berkshire website), "The Essays of Warren Buffett: Lessons for Corporate America" by L.A. Cunningham, and the "Cardozo Law Review Volume 19" is well worth the time. The late Philip Fisher wrote several books that are very good: "Common Stocks and Uncommon Profits", "Conservative Investors Sleep Well," "Pathways to Wealth Through Commons Stocks," and "Developing an Investment Philosophy." Seth Klarman’s "Margin of Safety: Risk-Averse Value Investing Strategies for the Thoughtful Investor" is a good book about risk. An easy, but good, read for those just getting started would be "Value Investing Made Easy" by Janet Lowe. Then there is Roger Lowenstein’s "When Genius Failed: The Rise and Fall of Long-Term Capital Management;" there are some great lessons in that book. And for a more in-depth understanding, lifetime study, and reference is "Security Analysis" by Benjamin Graham and David Dodd.

As for philosophical books, I would like to recommend several that have had a major influence on my life: "From Poverty to Power," "Eight Pillars of Prosperity" and "As a Man Thinketh." These are written by James Allen who is my favorite author. James Allen was a man who devoted his life to seeking the truth. He wrote many other books that are all worth reading. Each of these books has tremendous lifetime principles – you must read these books over and over because each time you do, you will get more out of them. I have been reading James Allen’s "From Poverty to Power" for more than 30 years. It’s only after you experience something that you can go back and say, “Oh! Now I understand this!”, so I prefer to read his and other good books many times over, rather than just reading more books that don’t seem to add more than the original great works.

A sub-category of philosophy is goal setting. Here, I would recommend "Think and Grow Rich" by Napoleon Hill, and "The Wisdom of Your Subconscious Mind" and "The Knack of Using Your Subconscious Mind," both by J.K. Williams. J.K. Williams spent over 50 years studying the subconscious mind.

In the area of health, I would recommend "The China Study" by Dr. Colin Campbell. It is my personal feeling that this book will be as important to health one day as "Security Analysis" is to stocks.

Inside Job

How did it happen -- the financial collapse that began in 2008 and cost millions of people their savings, their jobs and their homes? That is the question Charles Ferguson set out to answer in his award-winning documentary, Inside Job.

Costco Connection: Did you feel it was worse than you thought it was?
Charles Ferguson: Unfortunately, I did. When I started making the film, if someone had told me we'd find out that ... all of the investment banks has been secretly creating securities that they hoped would fail and then profiting against them, I wouldn't have believed it. I would have said, "That doesn't happen in the United States. We don't do that."

-- Costco Connection, March 2011

Mark Haines

Veteran journalist Mark Haines, a fixture on CNBC for 22 years, died unexpectedly Tuesday evening. He was 65 years old.

Haines, founding anchor of CNBC's morning show "Squawk Box," was co-anchor of the network's "Squawk on the Street" program, providing insight and commentary sometimes humorous and occasionally acerbic.

CNBC President Mark Hoffman called Haines a "building block" of the financial networks' programming. Hoffman said Haines died at his home.

"With his searing wit, profound insight and piercing interview style, he was a constant and trusted presence in business news for more than 20 years," Hoffman said in a statement to CNBC employees. "From the dotcom bubble to the tragic events of 9/11 to the depths of the financial crisis, Mark was always the unflappable pro.

Haines was well-known around the newsroom for giving his colleagues on-air nicknames. He was responsible for calling David Faber "The Brain," Joe Kernen "The Kahuna" and Steve Liesman "The Professor." If a colleague every complained about it, he would respond, "What's worth more, your name or the nickname?"

Haines held a law degree from the University of Pennsylvania Law School and was a member of the New Jersey State Bar. In 2000, he was named to Brill’s Content’s "Influence List."

Haines we known for a lawyer-like determination to get at the truth, pressing guests for answers if they tried to avoid his questions. CNBC reporters and anchors remembered Haines holding them up to the same standard.

***

Not surprisingly, all of the regulars are recalling Mark this morning.

silver selling off (oil too)

Silver's decline this week reached an unprecedented 25.4%. Silver for July delivery settled down 8% to $36.24 an ounce today and was off an additional $1.70 an ounce to $34.54 in electronic trading after New York trading closed. From Wednesday's settlement price, silver is off 12.3%.

The price plunge wasn't unexpected. Silver had jumped 57% between Dec. 31 and Friday and 28.3% in April alone.

Thursday's fall was largely in reaction to a fourth margin increase in a bit more than week, and there were reports of new margin increases Friday and Monday.

Margins have increased 84% in less than two weeks. Rarely does anyone pay full price for a commodities contract. The only question is how much of the price one must put up to take a position.

Some of the selling was in response to reports that big investors in gold and silver, such as George Soros, have been reducing their positions.

Gold, meanwhile, settled down $40.80 to $1,481.40 and was trading at $1,472 in electronic trading. That's a total loss of some 2.8%.

The selling in gold and silver also hit exchange-traded funds that buy silver.

The iShares Silver Trust (SLV) plunged 11.9% to $33.72. Based on the close, it's off 27.5% this week. The ETF rose 25 cents after hours to $33.96. Trading volume today was an astounding 294 million shares -- 30% higher than the volume in the SPDR S&P 500 (SPY) ETF, which tracks the entire S&P 500.

The SPDR Gold (GLD) ETF fell 2.9% to $143.47, a 5.8% decline on the week. Like the silver ETF, it was higher after hours at $143.67.

***

Crude settled down $9.44 to $99.80. It had dropped to as low as $98.25 around 12:30 p.m. ET. It was off an additional 28 cents to $99.52 in electronic trading.

If the oil sell-off holds or continues in the days ahead, motorists may get a small break at the gas pump. Gasoline was averaging $3.985 a gallon today, according to AAA's Daily Fuel Gauge Report. It takes a week or so before lower prices turn up at gas stations.

Energy stocks plunged on the oil sell-off. Chevron (CVX) was off 2.6% to $101.94; Exxon Mobil (XOM) dropped 3% to $82.26. Those declines subtracted more than 40 points from the Dow.

Eighteen of the 20 stocks in the Dow Jones Transportation Average ($DJT) were higher, led by Delta Air Lines (DAL), up 7% to $11.20. The index was up 53 points to 5,445.

Munger on Trump

At an event this afternoon, the Buffett right-hand man was asked about the possible GOP Presidential candidate.

According to Andrew Ross Sorkin his simple response was "Obviously I think he's a jerk."

Buffett's comment was a little bit more reserved: "He will not be president."

***

Munger interview

How often should you rebalance your portfolio?

Rebalancing is a way to maintain the risk/reward ratio that you have chosen for your investments.

In addition, rebalancing also forces you to buy temporarily under-performing assets and sell over-performing assets (buy low, sell high). This is the exact opposite behavior of what is shown by many investors, which is to buy in when something is hot and over-performing, only to sell when the same investment becomes out of style (buy high, sell low).

However, in taxable accounts, rebalancing will create capital gains/losses and therefore tax consequences. In some brokerage accounts, rebalancing will incur commission costs or trading fees.

Some people rebalance on a certain time-based schedule – for example, once every 6-months, every year, or every 2 years. Others wait until certain asset classes shift a certain amount away from their desired targets before taking any action. A good source of research articles about which method is optimal can be found at the AltruistFA Reading Room. I’ve been reading through them the past few days, and I’ll try to provide a very general overview of the articles here.

So what is best? You may be surprised by the fact that not only is there no clear agreement on the answer to this question, but many of the articles actually contradict each other!

*** [now searching with google instead of bing, which was linked from moneycentral]

the correct question may not be “How often should I rebalance?”, but rather “How far should I allow my asset classes to stray from their target allocations before I rebalance?”. Rebalancing only when an asset class reaches 150% of the target allocation, for example, will perhaps result in a more tax efficient and more profitable portfolio.

***

there are two common methods when it comes to rebalance frequency. First, you can use a time-based interval. What this means is you rebalance on a regular schedule, regardless of what the market has done. Some people do this quarterly, while others semi-annually or annually. Basically, you set a date and a frequency and rebalance like clockwork.

While that will work, it is still fairly arbitrary and a lot can happen in the markets between your rebalance intervals. In my opinion, a better way is to set thresholds for your investment mix and rebalance based on when an investment crosses the threshold. For instance, if you set a threshold of 5% that would mean that any time one of your asset classes exceeds 5% of your target one way or the other, it’s time to rebalance back to your target. The key with this method is to set a threshold that isn’t so low that you’re rebalancing every month, but not so high that it takes five years before you exceed a threshold. Either way, the benefit of this method is that you’re rebalancing based on actual market conditions, not just an arbitrary timeline you set.

10 Tenets of Value Investing

In “Value Investing: Tools and Techniques for Intelligent Investment” (in my opinion, one of the best books ever written on the merits of value investing), James Montier outlines a list of 10 tenets that represent his investment philosophy.

buying the dips

Morningstar tested whether "buying the dips" is a good investing strategy.

Their study showed that it is an underperforming strategy.

However...

Buying on dips hurt risk-adjusted returns over one-month horizons for almost every asset class. The result may seem counterintuitive in light of value investors' historical outperformance. However, value hunting and dip-buying are distinct strategies. Value is pegged to fundamental measures such as book value or earnings, whereas dip-buying is a price-driven rule--technical trading, really. It's possible for an asset to shed dollars and still be overpriced. Value is also realized over years-long horizons, while our dip-buying strategy only held for a month (though there were extended periods where it rode markets down). There's evidence that the worst-performing assets over the previous years go on to outperform in the long run as mean reversion brings valuations back up to historical norms.

Joe Battipaglia

Read in Richard Band's Journal that Joe Battipaglia passed away of a heart attack.

Wall Street veteran Joseph Battipaglia, chief market strategist at Stifel Nicolaus, died at 55 from an apparent heart attack on Thursday according to Fox Business Network.

Battipaglia, well known in the finance industry for his opinionated views, was the former chairman of investment policy at brokerage Ryan Beck & Co, before it was acquired by Stifel in 2007. He also worked in executive positions at Gruntal & Co. and as an analyst at Exxon Corporation and Elkins & Co.

Battipaglia made a name for himself a decade ago as a consummate Wall Street optimist, remaining bullish on stocks up to and following the he bursting of the Internet bubble. His willingness to express his opinion to anyone who asked, unlimited availability and never-ending enthusiasm for the financial markets made him a media darling.

***

Kudlow says goodbye.

Cavuto remembers Joe.

new home sales fall

New home sales unexpectedly fell, tumbling 16.9% month-over-month (m/m) in February to a record low annual rate of 250,000 units, below the 290,000 rate forecasted by economists surveyed by Bloomberg, but January's figure was upwardly revised by 17,000 to a 301,000 annual unit rate. The median home price fell 8.9% y/y and dropped 13.9% m/m to $202,100. Inventory of new homes for sale fell to 186,000 units, representing 8.9 months of supply at the current sales rate, up from 7.4 months in January. February's surprising drop was paced by a 57.1% tumble in the Northeast.

New home sales are considered a timelier indicator of conditions in the housing market than existing home sales-which fell more than forecasted on Monday-as they are based on signings instead of closings. So the report dampened the outlook for avoiding a double dip in the housing sector and the start to the spring selling season. The sharp drops in prices for new homes illustrates the rising competition from the existing home front amid rising foreclosures and tight credit conditions that have increased the amount of all-cash buyers, which both are putting downward pressure on the values sellers can demand.

The Charlie Sheen Stock Index

Unless you never watch TV, never listen to the news on the radio, and never look at magazine covers, you know who Charlie Sheen is. Star of the extremely popular TV show Two and a Half Men, earning around 1.8 million dollars an episode, he has been in the news daily during the last couple weeks due to the disagreement between him and the show’s producers regarding the cancellation of the show. Sheen’s outspoken comments have made headlines, and he has been the guest on several talk shows. So it is only fitting that we look at the companies that have a connection to Charlie Sheen to see how their stocks have performed.

Stockerblog.com was the original developer and creator of numerous celebrity stock indexes, including the Paris Hilton Stock Index, the Gisele Bunchen Stock Index, the Heidi Klum Stock Index, and the Angelina Jolie Stock Index. Now it is time for the Charlie Sheen Stock Index, details of which can be found at WallStreetNewsNetwork.com. Based on the companies that have some connection to Sheen, the Sheen Index has outperformed the Dow Jones Industrial Average, since the beginning of this year, the beginning of last year, the beginning of 2009, and the beginning of 2008. As a matter of fact, since the February 24 radio broadcast of the Charlie Sheen interview hosted by Alex Jones, the Charlie Sheen Stock Index rose 2.0% versus only 0.8% for the Dow.

The Seven Immutable Laws Of Investing

I'm generally not all that enthralled with Montier and his writing. But this article is a very simple summary of principles that you should take with you every day in your investing journey.

Avoiding big mistakes is far more important than finding grand successes.

1. Always insist on a margin of safety
2. This time is never different
3. Be patient and wait for the fat pitch
4. Be contrarian
5. Risk is the permanent loss of capital, never a number
6. Be leery of leverage
7. Never invest in something you don't understand

-- Canadian Value

the momentum strategy

the data on price momentum seem to show remarkable long-haul success. As I noted last month, Tom Hancock--co-head of GMO's global quantitative equity team--has crunched the numbers and found that, between 1927 and 2009, a simple strategy of investing in stocks with the highest trailing-12-month returns surpassed the broader market by 3 annualized percentage points.

And Yet … A healthy dose of skepticism is in order. While momentum may look terrific under laboratory conditions, it can be devilishly difficult for actual investors to exploit.

[see also buy low or buy high]

two-year bull market topping out?

The bull market is fast approaching its second birthday.

In just four weeks—on March 9, to be exact—it will have been precisely two years since the Dow Jones Industrial Average hit its closing low for the 2007-2009 bear market, at 6,547. The S&P 500 index on that day closed at 677.

Both averages today are nearly double where they stood then.

In preparation for what no doubt will be lots of celebrations and self-congratulatory back-slapping among the bulls, I am devoting this column to comparing the current bull market to its predecessors over the past century. How many of them even lasted two years? Compared to those that did, how does the current one's valuation stack up?

The first step in answering these questions was to construct a list of past bull markets. I followed the precise definition employed by Ned Davis Research, the institutional research firm: For them, a bull market requires one of three conditions to hold: (1) at least a 30% rise in the Dow in 50 calendar days, (2) at least a 13% rise in the Dow in 155 calendar days, or (3) at least a 30% reversal in the Value Line Geometric index. Since the beginning of the last century, using this definition, there have been 27 bull markets prior to the current one.

The current bull market's age is right in line with the typical length of those prior bull markets. The median length of the 27 bull markets is 1.9 years, which is exactly how old the current one is. That means that half of those prior bull markets didn't even make it to their second birthday.

How does the current bull market's valuation compare to those prior ones that did live to be at least two years old? Unfortunately, the comparison is not an encouraging one for the bulls.

Consider a modified P/E ratio that was made famous in the late 1990s by Yale University professor Robert Shiller, particularly in his book Irrational Exuberance. This modified P/E is one in which the denominator is average inflation-adjusted earnings over the trailing 10 years—sometimes called P/E10, or CAPE (for Cyclically Adjusted Price Earnings ratio).

The CAPE has a markedly better forecasting record than the simple P/E. Another reason to prefer the CAPE: The simple P/E gets artificially inflated during economic downturns, when trailing earnings are depressed.

The current CAPE, according to Professor Shiller's website, is 23.7. The average of comparable levels for this valuation metric at the two-year point of those prior bull markets that lived this long is 18.0. At least according to this measure, therefore, the stock market's current valuation is 32% higher than where it stood at the comparable points of prior bull markets.

An even more alarming comparison comes when focusing on those prior occasions when the CAPE was as high as it is currently. Over the last 100 years, there have been only three other occasions when the CAPE was that high: In the late 1920s (right before the 1929 stock market crash), in the mid-1960s (prior to the 16-year period in which the Dow went nowhere in nominal terms and was decimated in inflation-adjusted terms), and the late 1990s (just prior to the popping of the internet bubble).

To be sure, a conclusion based on a sample containing just three events cannot be conclusive from a statistical point of view. Still, regardless of the historical comparison, it will be hard to argue that the current stock market is undervalued or even fairly valued.

-- Mark Hulbert [via bdparts]

Cramer's Funds

I'm looking through the book Jim Cramer's Stay Mad For Life (that I got via paperbackswap).

In the last chapter he lists his 11 best mutual funds which he chose on their managers ability to lose less than the market in down years. He based the ratings on the years 2000-2006. Well, now we have have four more years of data.

The market has been up in three of those four years, with the S&P 500 losing 37% in 2008. Let's see how Cramer's funds did in those years.

CGMFX: -48.18% (though it did crush the market 79.97% to 5.49% in 2007)
DAGVX: -36.01% (and just about matching the S&P 500 in the other three years)
BRAGX: -56.16% (like CGMFX it outperformed in 2007 at 25.80%)
RHJSX: -39.80%
SHRAX: -42.40%
BUFSX: -29.84% (but it underperformed in 2007 at -0.33%)
FBRVX: -33.85% (but manager Chuck Akre has left to form his own fund AKREX)
PSLAX: -39.48%
HRTVX: -39.53%
BERWX: -27.09% (it underperformed in 2007 at -3.68%)
MUHLX: -40.39% (and also underperformed in 2007 at -9.66%)

So four of the 11 outperformed in 2008.

How about some of my funds?

FAIRX: -29.70% (and also outperformed in the three other years as well)
TAVFX: -45.61%
FLPSX: -36.17%
OAKLX: -36.22%
OAKIX: -41.06%
JAVLX: -41.97%
MFOCX: -40.75%
GABGX: -45.92%
FCNTX: -37.16%
FDGFX: -42.96%
ASVIX: -27.63%
BSCFX: -40.24%
WVALX: -40.74%
JENSX: -29.97%
RCAPX: -33.71%
SLSSX: -44.72%
SWPSX: -39.27%
HFCGX: -43.69%
LMGTX: -60.44%
LMOPX: -65.49% (83.14% in 2009)
FDSSX: -41.66%
MUTHX: -37.92%
MDISX: -26.55%
JAWWX: -45.02%
FIEUX: -44.02%
PRASX: -60.99%
AKREX: N/A

So only four of my funds were down less than 30%: FAIRX, ASVIX, JENSX, MDISX. And three of my funds were down over 60%: LMOPX, LMGTX, PRASX.

That should be telling me I should buy FAIRX. And sell the Legg Mason funds.

new home sales rise

New home sales increased far more than expected, jumping 17.5% month-over-month (m/m) in December to an annual rate of 329,000 units, above the 300,000 rate forecasted and November's figure was downwardly revised to a 280,000 annual unit rate. The median home price rose 8.5% y/y and 12.1% m/m to $241,500. Inventory of new homes for sale fell to 190,000 units, the lowest level since January 1968, per Bloomberg. At the current sales pace, it would take 6.9 months to exhaust the supply of homes on the market, down solidly from November's 8.4 rate. New home sales are considered a more timely indicator of conditions in the housing market than existing home sales-which also jumped over 12% m/m in December-as they are based on signings instead of closings.

New home sales have rebounded further from the all-time low of 274,000 reached in August, due to high affordability and the recent improvement in consumer sentiment as economic data has improved as of late. However, for all of 2010, sales are down 14% compared to the last year, at a level of 321,000, which is the lowest level in data going back to 1963, per Bloomberg. Moreover, the housing market continues to be weighed down by reluctance by homeowners to make large purchases while still facing high unemployment and reduced ability to trade up, as nearly a quarter of all homeowners have negative equity in their homes.

Schwab's Chief Investment Strategist Liz Ann Sonders notes in her latest commentary, House of the Rising Sun: A Check-Up on Housing, that most measures of housing affordability have improved markedly, but the key to improving demand may lie on job growth as the prospects for employment and housing are likely more linked today than any time in history, given the severity of the crisis in both. Liz Ann also points out that housing has probably broadly bottomed, but the path up is likely to be relatively flat, elongated and volatile among geographic regions. Along with a downturn in the unemployment rate, other necessary ingredients for a health recovery in housing would be a further loosening of the credit environment, no significant (further) spike in mortgage rates, and general improvement to consumer confidence. Again, we believe the prospects for housing are improving, though certainly not stellar, but our optimism about the economic recovery could feed into better-than-expected housing news as well. Read the rest of the article and other timely commentary by Schwab experts at www.schwab.com/marketinsight.

Charlie Munger quotes

Spend each day trying to be a little wiser than you were when you woke up.

In my whole life, I have known no wise people (over a broad subject matter area) who didn’t read all the time — none, zero.

Choose clients as you would friends.

The best armour of 0ld age is a well-spent life preceding it.

When you borrow a man’s car, always return it with a tank of gas.

If only I had the influence with my wife and children that I have in some other quarters!

Take a simple idea and take it seriously.

In business we often find that the winning system goes almost ridiculously far in maximizing and or minimizing one or a few variables — like the discount warehouses of Costco.

Don’t do cocaine. Don’t race trains. And avoid AIDS situations.

We look for a horse with one chance in two of winning and which pays you three to one.

You’re looking for a mispriced gamble. That’s what investing is. And you have to know enough to know whether the gamble is mispriced. That’s value investing.

It takes character to sit there with all that cash and do nothing. I didn’t get to where I am by going after mediocre opportunities.

A great business at a fair price is superior to a fair business at a great price.

All intelligent investing is value investing — acquiring more than you are paying for.

You must value the business in order to value you the stock.

No wise pilot, no matter how great his talent and experience, fails to use his checklist.

There are worse situations than drowning in cash and sitting, sitting, sitting. I remember when I wasn’t awash in cash — and I don’t want to go back.

…it never ceases to amaze me to see how much territory can be grasped if one merely masters and consistently uses all the obvious and easily learned principles.

Once you get into debt, it’s hell to get out. Don’t let credit card debt carry over. You can’t get ahead paying eighteen percent.

If you always tell people why, they’ll understand it better, they’ll consider it more important, and they’ll be more likely to comply.

Spend less than you make; always be saving something. Put it into a tax-deferred account. Over time, it will begin to amount to something. This is such a no-brainer.

You don’t have to be brilliant, only a little bit wiser than the other guys, on average, for a long, long time.

Three rules for a career: 1) Don’t sell anything you wouldn’t buy yourself; 2) Don’t work for anyone you don’t respect and admire; and 3) Work only with people you enjoy.

I won’t bet $100 against house odds between now and the grave.

I try to get rid of people who always confidently answer questions about which they don’t have any real knowledge.

…being an effective teacher is a high calling.

I believe in the discipline of mastering the best that other people have ever figured out. I don’t believe in just sitting down and trying to dream it all up yourself. Nobody’s that smart…

Without numerical fluency, in the part of life most of us inhibit, you are like a one-legged man in an ass-kicking contest.

In my life there are not that many questions I can’t properly deal with using my $40 adding machine and dog-eared compound interest table.


[from Canadian Value via gurufocus]

Five for 2011

I'm too late for the chucks_angels Fearless Five contest, but I thought I'd throw in my picks here in writing.

I think I'll just pick some of my low P/E stocks and hope for a rebound this year (or one of these years). So let me take a look..

CECO. Forward P/E 7.4. Current price 21.17. Battered education firm showing recent signs of life. Actually I'd like to buy it under 18.

WFC. Forward P/E 11.4. Current price 31.99. It's well off the bottom, but still looks fairly cheap. Could gain further if they raise the dividend.

HPQ. Forward P/E 8.7. Current price 45.59. Has already recovered about half of last year's peak-to-trough drop. Wouldn't be surprised if it gets back to the 53 peak this year.

C. Forward P/E 11.1. Current price 5.07. Similar story to WFC, but more volatile. Actually already near the 52-week high.

ALL. Forward P/E 8.0. Current price 30.62. Has already doubled from the 2009 low, but the insurers still have a ways to go before hitting the pre-dive levels.

OK, check back in a year..

buy low or buy high?

You may have heard the investment adage: Buy low and sell high. This is one of the oldest pieces of investment advice. However, putting this advice to work is easier said than done.

One of the biggest challenges is determining what is "low." We did some research and found surprising results.

By buying stocks at their 52-week low, you're more likely to own the wrong stocks most of the time. Buying at the 52-week high, however, showed promising results.

dividend stocks outperform

Over the last 36 years, dividend stocks outperformed the rest of the S&P 500 by 2.5% annually, and they outperformed nonpayers by nearly 8% every year, all while paying out cash to their shareholders, according to a study from National Data Research.

Dividend investing is "a sustainable strategy that will be a key driver for performance and total return in 2011," said Lawrence Glazer, Managing Partner with Mayflower Advisors, in a recent appearance on CNBC. Glazer encouraged investors to reconsider top dividend-paying "Dogs of the Dow" such as Verizon(VZ), Johnson & Johnson(JNJ), Merck(MRK) and Kraft Foods(KFT), blue chips that have offered decades of dividend increases and sustainable payouts, many with stronger yields than 10-year treasury notes.

the new tax law

After weeks of heated Congressional negotiations on Capitol Hill, President Obama has signed the tax bill into law. The new law temporarily extends the 2001 and 2003 federal income tax rate cuts, extends unemployment insurance for 13 months, provides new payroll tax breaks, reinstates the estate tax, and more.

The good news: The new law will give taxpayers a bit of clarity—and an opportunity to plan with relative confidence knowing that the playing field won’t change dramatically, at least for two years. But beyond that, an increase in the Medicare tax for upper-income Americans is slated for 2013. And more changes are likely in the future, given the pressure to raise revenues to reduce the deficit, and talk of sweeping tax reform.

Cramer says Dow 13,365

People do a lot of top down analysis at this time of the year, trying to figure out how much the Dow and the S&P could go up--or down--in the coming year. That's not my style. As someone who is a stock picker, I like a bottoms up approach, analyzing each Dow component to come up with what I think the most visible index will deliver in 2011.

Here's my annual analysis, case by case, that adds up to a target of 13,365 for the Dow Jones next year -- a 16% gain from current levels and a bountiful return -- based on a prognostication of the performance of the individual members of the venerable index.

stocks still look cheap

corporations are sitting on a cash pile worth $1.9 trillion -- the largest, as a percentage of total assets, since 1959. Slowly, the money is finding its way into stocks. Without getting technical, the reason is simple: Stocks are offering a higher earnings yield -- a higher implied return -- than bonds.

For most of the past 30 years, the equity risk premium has been negative. This is because stocks offer the potential for capital gains and have built-in inflation protection. Bonds don't.

But now that's changed, and bond yields are lower than equity yields. So it makes sense to borrow cheaply (via corporate bonds) and invest. After all, stocks haven't offered this kind of premium since 1980, when Kenny Rogers topped the charts and "Star Wars V: The Empire Strikes Back" first hit theaters. By other measures, such as free cash flow yield versus corporate bond yields, stocks haven't been priced so attractively compared to bonds since the early 1960s.

11 Core Themes for US Investors in 2011

"You see, most blokes will be playing at 10. You're on 10, all the way up, all the way up...Where can you go from there? Nowhere. What we do, is if we need that extra push over the cliff...Eleven. One louder." ---Nigel Tufnel, Spinal Tap.

Our New Year gift to you: 11 brief themes that we see driving next year's markets. The three main theme groups are: Growth, Pricing Power and Business Model Changes.

Our macro backdrop has the world already moving into the Second Phase of the Bull Market. The global industrial cycle is re-accelerating again after an autumn dip, and the resulting upswing in IP should drive global equity markets higher in 2011. The recovery is poised to move from rebound to expansion as easier policy conditions support broader-based growth. The Capital Goods sector is well positioned to benefit from this bounce.

Among our Growth themes, we think in 2011 we will see the first growth market for Technology in over a decade. The main drivers of this shift will be both secular and structural including Cloud and Bandwidth Consumption. If Technology once again grows faster than nominal GDP, then watch out for an upward re-rating of that sector's valuation multiples.

In Pricing Power, we see inflation as a positive for certain retailers. Bring on Inflation for those oligopolistic sectors like supermarkets, home improvement and pet supply. In more competitive sectors like apparel & footwear it is the strength of
the brand that will determine the inflation pass-through ability.

And among the world's changing business models, we think the media and internet sectors may be severely impacted by Over-the-Top video. As internet-delivered video gains ground fast next year, those companies reliant on the value of their cable networks will likely feel a real squeeze.

[from Credit Suisse]

Bush tax cuts extended

Barack Obama is bowing to Republican demands to extend a deep tax cut for wealthier Americans, to the fury of some of the president's allies who say he has succumbed to "blackmail".

In a bruising political battle that appears to set the tone for Obama's dealings with the Republicans in Congress following their victories in last month's midterm elections, the president had sought to extend a tax cut for middle-class Americans introduced by the Bush administration seven years ago which expires at the end of this month. But he wanted to see a return to pre-cut rates for households with an income above $250,000 a year, on the grounds that wealthier Americans could afford to pay more. The move would generate trillions of dollars for the financially-strapped treasury over the next decade.

The Democratic leadership believed that provided the middle class was looked after, the Republicans would find it difficult to justify tax cuts for the wealthy. The House of Representatives, still controlled by Democrats until the new Congress is sworn in next month, passed Obama's plan by a clear majority last week. But Republicans blocked the legislation in the Senate at the weekend and said they would rather see everyone's taxes rise than agree to scrapping the cuts for the wealthy.

Some Democrats called on Obama to stand firm and let the Republicans carry the blame for the inevitable middle-class backlash. But leading Democrats say the president is backing down and has agreed to extend tax cuts for everyone. In return, the White House appears to have extracted an agreement to extend benefits for the long-term unemployed.

Today Obama said that his priority is to "prevent the middle-class tax increase" that would have come about if there was no agreement. "There's some serious debates that are still taking place. Republicans want to make permanent the tax cuts for the wealthiest Americans.

"I have argued that we can't afford it right now. But what I've also said, we have to find consensus here because a middle-class tax hike would be very tough not only on working families, it would also be a drag on our economy at this moment," he said. "We've got to make sure we're coming up with a solution, even if it's not 100% of what I want or what the Republicans want."

***

[12/17/10] WASHINGTON (AP) - President Barack Obama signed into law Friday a massive tax package that frayed his relations with liberals, caused him to abandon a pledge not to extend tax cuts to the rich and heralded a new balance of power in Washington.

Dramatic both as an economic and a political accomplishment, the agreement sets the stage for Obama's new relationship with Republicans, who as of January will have a majority in the House and will have narrowed the Democrats' majority in the Senate.

With the benefits of the package expiring in two years, the law also places taxes at the center of the political debate ahead of the 2012 U.S. presidential elections.

Displaying a new style of compromise, Obama invited Democrats and Republicans alike to the White House for the signing of the bill that will cost $858 billion over two years and that contains provisions to address the concerns of both parties.

"It's a good deal for the American people; this is progress and that's what they sent us here to achieve," Obama said as a rare bipartisan assembly of lawmakers looked on.

The bill was the result of a deal hashed out just 10 days earlier in order to avert a scheduled Jan. 1 tax increase and renew jobless benefits. To strike the bargain, Obama had to set aside his vow to extend tax cuts only for middle and working class Americans, and enact an estate tax that is more generous to the wealthy than he initially had sought.

Failure to pass the bill would have resulted in tax hikes for most Americans as cuts approved under the administration of former President George W. Bush were set to expire.

On Thursday, liberal House Democrats threatened to torpedo the bill forcing a delay and the House battled over the measure late into the night before passing the bill 277-148 at about midnight. The Senate on Wednesday passed it by an overwhelming 83-15 margin.

Supporters say the package, which included additional reductions in payroll taxes, could help stimulate the U.S. economy. But it will also add to a growing deficit that has become a big concern among many voters.

A number of conservative Republicans joined some liberal Democrats in opposing the bill for that reason.

10 Socially Responsible Companies

In recent years, consumers have begun to weigh the social impact of different businesses when deciding where they want to shop. One survey earlier this year from three consulting firms found that the majority of consumers (55%) would rather purchase a product from a socially responsible company than buy the same product from a company that is not socially responsible.

Of course, it can be difficult to determine which companies truly give back to society, so we’ve compiled a list of the 10 most socially responsible companies currently doing business based on three criteria: charitable donations, environmentally friendly policies and the fairness of their hiring practices.

The companies are

3rd Most Charitable: Abbott Laboratories
2nd Most Charitable: Tyson Foods
The Most Charitable: Pfizer
3rd Best Hiring Practices: AT&T
2nd Best Hiring Practices: Johnson & Johnson
The Best Hiring Practices: Sodexo
3rd Greenest Company: Timberland
2nd Greenest Company: General Electric
The Greenest Company: Stonyfield
The Wild Card: IBM

[via Zacks, 11/22/10]

dataroma

Besides gurufocus, dataroma looks like a pretty cool way to check out what some of the top value managers are holding.

Among the top owned stocks are MSFT, JNJ, WFC, KO, WMT, BRK.B. (What do they have in common? All Buffett-related stocks if you include the fact that Buffett is a good friend of Bill Gates.)

[via a post from globalfinancepartners @chucks_angels]

existing home sales rise

[10/25/10] Existing home sales jumped 10% month-over-month (m/m) in September to an annual rate of 4.53 million units, compared to the 4.1% increase to 4.30 million units forecasted by economists surveyed by Bloomberg, and from August's downwardly revised 4.12 million units. The median existing-home price fell 2.4% from a year ago to $171,700, and was 3.3% lower m/m. The supply of homes fell by 1.9% m/m to 4.04 million units, equating to 10.7 months of supply at the current sales pace. Sales of existing homes reflect closings from contracts entered one to two months earlier.

***

Existing home sales rose solidly, increasing 7.6% month-over-month (m/m) in April to an annual rate of 5.77 million units, from an upwardly revised 5.36 million units in March, and are 22.8% higher versus the same period a year ago. The National Association of Realtors (NAR) said buyers were motivated by the tax credit-which expired in April-improving consumer confidence and favorable affordability conditions. The national median existing home price was $173,100 in April, up 4% y/y, with first-time buyers accounting for 49% of purchases. The NAR added that investors accounted for 15% of the transactions in April. Existing home sales account for the majority of total home sales and the NAR expects figures in May and June to be supported by the tax credit-as existing home sales reflect closings from contracts entered one to two months earlier. Moreover, although concerns about the continuation of increasing home sales remain, the NAR said, "many buyers remain in the market even without the tax credit," as some realtors are noting that they are busy with clients who are entering the market now as a result of improved conditions, while others are welcoming a slowdown from frantic market conditions in recent months. Treasuries remain higher, but did pare some gains following the housing data and as the global equity markets have come off of the worst levels of the day.

However, some of the enthusiasm toward the report may be being tempered by the increase of 11.5% in total housing inventory to 4.04 million existing homes available for sale, which represents an 8.4 month supply at the current sales pace, up from 8.1 in March. Also, distressed home sales were 33% of total sales, and given the elevated amount of homeowners that owe more than the value of their home, expected increasing foreclosures and the addition to supply continue to pose a threat to recovery in the housing market. The Fed has noted this threat as a reason for keeping the fed funds exceptionally low for an "extended period," and Schwab's Director of Market and Sector Analysis, Brad Sorensen, CFA has the consumer discretionary rated underperform, as discussed in Schwab Sector Views: Sea Change?, due to the headwinds facing the housing sector. See more of Brad's outlook on all the major sectors at www.schwab.com/marketinsight.

[Schwab Alerts, 5/24/10]

automatically reinvesting dividends

[I thought I wrote this down somewhere before, but now I can't find it, so..]

With the market rallying over 11K, I decided maybe it's a not so good to continue reinvesting dividends for some of my mutual funds. I already don't do it for the funds in my non-retirement accounts (for tax tracking purposes), but I still have it done for most of my funds in my IRA accounts.

Anyway, since FLPSX is my largest position in my Fidelity IRA, I have decided to take the dividends in cash this quarter (though this may be dumb in this case because this is one of the best funds that I own).

Anyway, you can do this from the Fidelity website without having to call anybody.

Click on Customer Service, Update Your Profile, Dividends and Capital Gains Settings. Then Update the fund you want.

It doesn't update automatically though, it sends a message to Fidelity and apparently they have to manually update on their end as I get the following message.

Your request to modify your dividend and capital gains distributions was successfully received. Fidelity will reflect this change within three to five days.

***

Schwab is more straightforward. In the more actions drop-down box is Dividend Reinv. It tells you the current status and gives the following message.

To change the status, please contact Client Phone Services at 800-435-4000.

best September in 71 years

Despite a modest decline today, stocks enjoyed a September for all time.

The Dow Jones industrials ($INDU) finished September with a 7.7% gain. The Standard & Poor's 500 Index ($INX) was up 8.8%. Both enjoyed their best September performances since 1939. The Nasdaq Composite Index ($COMPX) added 12% for the month, its best September since 1998.

Since 1950, September has normally been the weakest month for stocks, but this time it confounded many analysts. They'd confidently expected the market to slide further after a weak August performance because of worries that the economy was about to sink back into recession.

And many who predicted a bad September see a weak October ahead. The economy faces too many head winds in the months ahead to move higher, they argue.

Ben Graham's selections today

There are 10 criteria in total.

The first 5 criteria measure ‘reward’ and is sensitive to price and earnings changes. The focus in this group of five criteria is on stock price, earnings and dividends.

The second group of 5 offers a measure of ‘risk’ and does not change rapidly with changes in price and earnings. Criteria number 6,7 and 8 represent the financial soundness of companies.

1. An earnings-to-price yield at least twice the AAA bond rate

2. P/E ratio less than 40% of the highest P/E ratio the stock had over the past 5 years

3. Dividend yield of at least 2/3 the AAA bond yield

4. Stock price below 2/3 of tangible book value per share

5. Stock price below 2/3 of Net Current Asset Value (NCAV)

6. Total debt less than book value

7. Current ratio great than 2

8. Total debt less than 2 times Net Current Asset Value (NCAV)

9. Earnings growth of prior 10 years at least at a 7% annual compound rate

10. Stability of growth of earnings in that no more than 2 declines of 5% or more in year end earnings in the prior 10 years are permissible.


Not a single stock will be able to pass this filter today. When the screen reaches no. 3, only around 30 stocks make it. When you hit the fourth condition, the list becomes 0.

bullish sentiment is lowest since March 2009

Bullish sentiment fell 9.4 percentage points to 20.7% in the latest AAII Sentiment Survey. This is the lowest that expectations for stock prices to rise over the next six months have been since March 5, 2009. The historical average is 39%.

Neutral sentiment, expectations that stock prices will stay essentially flat over the next six months, rose 2.4 percentage points to 29.8%. The historical average is 31%.

Bearish sentiment, expectations that stock prices will fall over the next six months, rose 7.0 percentage points to 49.5%. This is a seven-week high for pessimism. The historical average is 30%.

As stated above, bullish sentiment is at its lowest level since March 5, 2009, the approximate bottom of the last bear market. Short-term market bottoms also occurred when bullish sentiment fell to 22.2% on November 5, 2009, and 20.9% on July 8, 2010. However, bearish sentiment was above 55% on all three of those dates, versus its current reading of 49.5%.

[via libertarians_2000]

rising rates and the stock market

With core inflation in the U.S. at its lowest level in decades and concern over the economic impact of the credit crisis in Europe, the Federal Reserve may continue the holding pattern that has been in place since December 2008 into next year before raising interest rates.

Whether interest rates begin rising this year or next, many equity investors are already concerned that a shift toward higher rates from such exceptionally low levels might derail a market recovery.

Historically, periods of rising rates have been associated with poor equity performance. But this is not always the case, particularly when rates are just beginning to rise after recessions.

... It is not that unusual, however, for stocks to perform well at least in the early stages of rising rate cycles because “investors are more comforted by improving economic fundamentals and corporate earnings than they are worried about rates at that point,” says Brian Rogers, T. Rowe Price’s chairman and chief
investment officer.

“A rising rate environment tends to be negative for stocks later in the cycle when the Fed tries to slow the pace of economic growth to ease inflationary pressures. That’s probably an issue for 2012 or later.”

Also, the initial rate hikes will comein the wake of the worst financial crisis since the 1930s, so Mr. Rogers adds, “Investors will be relieved because it will signal improving economic conditions globally.”

Indeed, in the nine instances since 1954 when the Federal Reserve first raised the federal funds rate following a recession, the S&P 500 Index recorded an average gain of almost 14% in the subsequent 12 months, rising in all but one of these periods.

-- T. Rowe Price Report, Summer 2010

investing via satellite

As part of a growing trend among hedge funds and Wall Street firms, Cold War-style satellite surveillance is being used to gather market-moving information.

The surveillance pictures are often provided by private- sector companies like DigitalGlobe in Colorado and GeoEye in Virginia, which build and launch satellites and take pictures for US government intelligence agency clients and private-sector satellite analysis firms.

That means there are two links in the chain before the satellite data gets to Wall Street—a satellite firm takes the pictures and sells them to an analysis firm, which scrutinizes the images and sells the aggregated data to hedge funds and Wall Street analysts.

As an example of how Wall Street getting in on this techhology, the UBS Investment Research issued its earnings preview for Wal-Mart's second quarter, which publicly revealed that UBS had been using used satellite services of private-sector satellite companies to gather the comings and goings of the parking lots at Wal-Mart stores. “UBS proprietary satellite parking lot fill rate analysis points to an interesting cadence intra-quarter and potential upside to our view,” the report read.

UBS analyst Neil Currie had been looking at satellite data on Wal-Mart during each month of 2010, and he’d concluded that there was enough correlation between what he was seeing in the satellite pictures of Wal-Mart’s parking lots to the big-box chain’s quarterly earnings, that he was ready to incorporate that data into UBS’ report on Wal-Mart, which releases its earnings on Tuesday.

By counting the cars in Wal-Mart’s parking lots month in and month out, Remote Sensing Metrics analysts were able to get a fix on the company’s customer flow. From there, they worked up a mathematical regression to come up with a prediction of the company’s quarterly revenue each month.

And what the satellite analysts found surprised the UBS team, which was already well versed in the ins and outs of Wal-Mart’s business.

In the second quarter, the satellite analysts had spotted a surge in traffic to Wal-Mart stores during the month of June, which was 4 percent ahead of the same month a year ago. That, they speculated, was driven by an aggressive Wal-Mart price rollback marketing campaign that brought a lot more customers into the stores that month.

Because they could see that traffic showing up in the parking lots, the satellite analysts came up with a much different projection for the company’s quarterly earnings in the second quarter than the UBS team did using traditional methods.

UBS predicts that Wal-Mart’s second quarter sales will be up from the first quarter, but down a percent against the same period a year ago. But the satellite analysts figure that the number will come in 0.7 percent higher—not lower—based on the traffic surge they saw in the parking lots.

[via Value Man @chucks@angels]

weath inequality in America

15 Mind-Blowing Facts About Wealth And Inequality In America

The rich are getting richer and the poor are getting poorer. Cliché, sure, but it's also more true than at any time since the Gilded Age.

While politicians gloat about our "recovery," our poor are getting poorer, our average wages are still falling behind inflation, and social mobility is at an all-time low.

But, yes, if you're in that top 1%, life in America is grand.

1. The gap between the top 0.01% and everyone else hasn't been this bad since the Roaring Twenties

2. Half of America owns only 2.5% of country's wealth. The top 1% owns a third of it.

3. Half of America has only 0.5% of America's stocks and bonds. The top 1% owns more than 50%!

And so on..

[via pbo @chucks_angels]

(see also the rich get richer)

*** 8/31/12

Though the correlation isn't perfect, it's clear that -- by these measures -- as disparity between people grows, social health deteriorates.

To prove his point, Wilkinson also introduced a graphic that American residents could better relate to. Using the same measure of income disparity, he plotted how trust deteriorates in individual states when income disparity is high.

[if you think about, it makes sense]

*** 9/12/12


The wealth gap between the richest Americans and the typical family more than doubled over the past 50 years.

In 1962, the top 1% had 125 times the net worth of the median household. That shot up to 288 times by 2010, according to a new report by the left-leaning Economic Policy Institute.


That trend is happening for two reasons: Not only are the rich getting richer, but the middle class is also getting poorer.

Most Americans below the upper echelon have suffered a decline in wealth in recent decades. The median household saw its net worth drop to $57,000 in 2010, down from $73,000 in 1983. It would have been $119,000 had wealth grown equally across households.

The top 1%, on the other hand, saw their average wealth grow to $16.4 million, up from $9.6 million in 1983. This is due in large part to the growing income inequality divide, as well as the sharp rise in value of stocks over the period.

[so much for trickle down]

I don't trust marketocracy

I was sitting on a big gain on AIPC as it got bought out by Ralcorp. I had 3000 shares which I hadn't sold yet, priced at 54 which was the buying price of Ralcorp.

Suddenly on July 23, the AIPC shares disappeared. But no sign of the money! I figure marketocracy owes me $162,000!

(Good thing this isn't real money :)

Stay tuned to see if the money ever shows up.

The Fiscal Illusion Effect

As the debate rages over letting some of the Bush tax cuts expire, Republicans have raised their starve-the-beast theory from its coffin. They insist that government (the "beast") can be shrunk by cutting taxes: The less money government has, the less government there can be.

Time has not been kind to this theory. The beast never did better than when tax-cutting Republicans were in charge.

The fiscal grown-ups who used to run the Republican Party didn't cotton to reducing taxes before spending in normal times. But Ronald Reagan offered the far more pleasurable doctrine of just cutting taxes.

"Well, if you've got a kid that's extravagant, you can lecture him all you want to about his extravagance," Reagan said in his 1980 campaign. "Or you can cut his allowance and achieve the same end much quicker."

No one turned the starving-beast theory into baloney faster than Reagan, who followed his tax cuts with a spending binge fueled by massive borrowing. What he did, in effect, was cut the extravagant kid's allowance and then hand him 10 credit cards.

The national debt doubled under Reagan. It doubled again under George W. Bush, who followed the same reckless path. (At least Reagan subsequently raised taxes in the face of soaring deficits.)

Frustrated fiscal conservatives - a group that includes Democrats, Republicans and, above all, independents - are assessing another tool for imposing budgetary discipline: the "Fiscal Illusion" effect. Totally contrary to starve-the-beast, it promotes raising taxes as the better way to contain government.

$1.47 trillion

New estimates from the White House on Friday predict the budget deficit will reach a record $1.47 trillion this year. The government is borrowing 41 cents of every dollar it spends.

That's actually a little better than the administration predicted in February.

The new estimates paint a grim unemployment picture as the economy experiences a relatively jobless recovery. The unemployment rate, presently averaging 9.5 percent, would average 9 percent next year under the new estimates.

The Office of Management and Budget report has ominous news for President Barack Obama should he seek re-election in 2012 — a still-high unemployment rate of 8.1 percent. That would be well above normal, which is closer to a rate of 5.5 percent to 6 percent. Private economists don't think the unemployment rate will drop to those levels until well into this decade.

The Giving Pledge

MORE than three dozen billionaires, including well-known philanthropists such as David Rockefeller and New York City mayor Michael Bloomberg and less familiar big donors such as Lorry Lokey, founder of Business Wire, have promised at least half of their fortunes to charity, joining a program that Bill and Melinda Gates and Warren Buffett started in June to encourage other wealthy people to give.

The pledge has been a matter of debate in philanthropic circles, with experts dismissing it as a publicity stunt and others predicting that it would produce a flood of new money to support non-profit groups.

The program has predicted that it will draw $600 billion into philanthropy - or about twice the estimated total amount given by Americans last year - although Buffett acknowledged that some of the money would have been donated anyway: ''It's not like all or half of the money represented is added money - but some of it is added.''

He said he thought the real value of the pledge was found in the example that it set and in the sentiments expressed in the letters posted on the website.

Perhaps the biggest surprise on the list was Larry Ellison, the founder of Oracle, who became the bad boy of philanthropy after he withdrew a $115 million gift from Harvard in protest over the resignation of Lawrence H. Summers as president.

In a brief note addressed ''To Whom It May Concern'', Ellison disclosed that he had assigned 95 per cent of his wealth to a trust and noted that he had given hundreds of millions of dollars away for medical research and education. ''Until now, I have done this giving quietly - because I have long believed that charitable giving is a personal and private matter,'' Ellison wrote. ''So why am I going public now? Warren Buffett personally asked me to write this letter because he said I would be 'setting an example' and 'influencing others' to give. I hope he's right.''

Buffett said the number of people who had agreed to sign on was at the high end of his expectations. He said some people who did not agree to sign the pledge were planning to give away most of their wealth but did not want to draw attention to those plans.

Some went on ''a tirade'' about the government and rising taxes, Buffett said - declining, of course, to name them.

''A few got into that, and there are some that have a dynastic attitude toward wealth,'' he said.

''That tends to be the case where they themselves inherited this money and maybe feel some sort of intergenerational compact about it.''

The rich list

Paul Allen; Laura and John Arnold, Michael Bloomberg, Eli and Edythe Broad, Warren Buffett, Michele Chan and Patrick Soon-Shiong, Barry Diller and Diane von Furstenberg, Ann and John Doerr, Larry Ellison, Bill and Melinda Gates, Barron Hilton, Jon and Karen Huntsman, Joan and Irwin Jacobs, George Kaiser, Elaine and Ken Langone, Gerry and Marguerite Lenfest, Lorry Lokey, George Lucas, Alfred Mann, Bernie and Billi Marcus, Thomas Monaghan, Tashia and John Morgridge, Pierre and Pam Omidyar, Bernard and Barbro Osher, Ronald Perelman, Peter Peterson, T. Boone Pickens, Julian Robertson jnr, David Rockefeller, David Rubenstein, Herb and Marion Sandler, Vicki and Roger Sant, Walter Scott, Jim and Marilyn Simons, Jeff Skoll, Tom Steyer and Kat Taylor, Jim and Virginia Stowers, Ted Turner, Sanford and Joan Weill and Shelby White.

NEW YORK TIMES

***

Right-wingers respond.

How Peter Lynch destroyed the market

Peter Lynch didn't just beat the Street ... he absolutely destroyed it.

Reflect on his record for a second. Lynch ran Fidelity's Magellan Fund from 1977 to 1990, beating the S&P 500 in all but two of those years. He averaged annual returns of 29%. That's a mind-blowing figure. It means that $1 grew to more than $27; if you invested as little as $37,000 with him in 1977, you were a millionaire in 1990.

Fortunately for us, he's willing to share his secrets. To achieve his stunning track record, he clung to eight simple principles.

[via How Warren Buffett destroyed the market via How Warren Buffett destroyed the market via WBIFC]

Dow 14000 in 2011?

The Cabot Market Letter says that "from the market's low point in the year of the midterm elections (like 2010) to its high the following year (2011), the major averages have averaged a gain of nearly 50%."

The letter concludes that "with a Dow low of 9,687, a rally into 2011 could carry the index well above 13,000 and even to 14,000. It might sound crazy, but history suggests it's not just possible but likely!"

cheapest in three decades?

Stocks are trading near their cheapest levels in almost three decades. It's a buying opportunity if you're brave enough to face the risks that have scared off investors lately.

S&P 500 stocks are trading at a price-to-earnings ratio of about 13 times their expected earnings for the next 12 months, according to the research firm Birinyi Associates. Going back to 1990, the average has been around 19; the lower the P/E ratio, the cheaper the stock is considered.

Except for the market meltdown from late 2008 to early 2009, stocks haven't traded at such a cheap level since 1982, when the price was about eight times expected earnings.

***

[8/2/10] Or is the market overvalued?

***

[8/13/10] gurufocus says market is fairly valued (as of this writing)

voodoo economics

Now there are many things one could call the Bush economy, an economy that, even before recession struck, was characterized by sluggish job growth and stagnant family incomes; “vibrant” isn’t one of them. But the real news here is the confirmation that Republicans remain committed to deep voodoo, the claim that cutting taxes actually increases revenues.

It’s not true, of course. Ronald Reagan said that his tax cuts would reduce deficits, then presided over a near-tripling of federal debt. When Bill Clinton raised taxes on top incomes, conservatives predicted economic disaster; what actually followed was an economic boom and a remarkable swing from budget deficit to surplus. Then the Bush tax cuts came along, helping turn that surplus into a persistent deficit, even before the crash.

But we’re talking about voodoo economics here, so perhaps it’s not surprising that belief in the magical powers of tax cuts is a zombie doctrine: no matter how many times you kill it with facts, it just keeps coming back. And despite repeated failure in practice, it is, more than ever, the official view of the G.O.P.

***

Where did the term voodoo economics come from? It was George Bush (Sr.) describing Reaganomics.

Before Reagan's election, Reaganomics was considered extreme by the moderate wing of the Republican Party. While running against Reagan for the Presidential nomination in 1980, George Bush had derided Reaganomics as "voodoo economics".[35] Similarly, in 1976, Gerald Ford had severely criticized Reagan's proposal to turn back a large part of the Federal budget to the states. Since Reagan's presidency, however, Republican federal politicians have for the most part continued to support his program of low taxes and private sector growth.

***

[8/11/10 looking up the Laffer curve as mentioned by buddy in response to my response to his tax hike chain mail]

If there's one thing that Republican politicians agree on, it's that slashing taxes brings the government more money. "You cut taxes, and the tax revenues increase," President Bush said in a speech last year. Keeping taxes low, Vice President Dick Cheney explained in a recent interview, "does produce more revenue for the Federal Government." Presidential candidate John McCain declared in March that "tax cuts ... as we all know, increase revenues." His rival Rudy Giuliani couldn't agree more. "I know that reducing taxes produces more revenues," he intones in a new TV ad.

If there's one thing that economists agree on, it's that these claims are false. We're not talking just ivory-tower lefties. Virtually every economics Ph.D. who has worked in a prominent role in the Bush Administration acknowledges that the tax cuts enacted during the past six years have not paid for themselves--and were never intended to. Harvard professor Greg Mankiw, chairman of Bush's Council of Economic Advisers from 2003 to 2005, even devotes a section of his best-selling economics textbook to debunking the claim that tax cuts increase revenues.

The yawning chasm between Republican rhetoric on taxes and even informed conservative opinion is maddening to those of wonkish bent. Pointing it out has become an opinion-column staple. But none of these screeds seem to have altered the political debate. So rather than write yet another, I decided to find out what Arthur Laffer thought.

Laffer is a bona fide economist with a doctorate from Stanford. He's also largely responsible for the Republican belief that tax cuts pay for themselves. Now 67, Laffer runs economic-consulting and money-management firms in Nashville. About the best I could get out of him on the question of whether the Bush tax cuts have paid for themselves was "I don't know."

Senate passes financial overhaul bill

The Senate passed the financial overhaul package in a final vote Thursday, ending more than a year of wrangling over the shape of the landmark legislation. The focus now shifts to the monumental task of implementing the new regulations over coming weeks and months.

The 60 to 39 decision came just before 3 p.m, only a few hours after Democrats cleared a final procedural hurdle by securing enough votes to break a GOP filibuster. The bill now goes to the White House for President Obama's signature.

Three Republicans -- Scott Brown of Massachusetts and Olympia Snowe and Susan Collins of Maine -- joined 57 members of the Democratic caucus in supporting the bill. Sen. Russell Feingold of Wisconsin was the lone Democrat to oppose the measure, saying it failed to go far enough in reining in the financial recklessness and regulatory failures that led to the recent financial crisis.

The House passed the bill late last month, shortly after a House-Senate conference committee had merged earlier versions of the bill into a final, 2,300-page product.

Obama probably will sign the legislation into law next week, aides said, solidifying his second major legislative victory of the year behind the revamp of health care.

large cap stocks look cheap

Based on Morningstar indexes, over the past 10 years, large-cap stocks have lost 2.7% per year while small caps have gained 4.8% per year. This outperformance of small caps has caused them to look more expensive relative to large caps. On a price/earnings basis, small caps currently trade at about 15.6 times earnings while large caps trade at about 14.1 times earnings. Thus, small caps trade at about an 11% premium to large caps. This is wide by historical standards, as over the past 10 years, small caps have traded at a slight discount to large caps on average.

In the midst of the tech bubble, large caps traded at a P/E of 31 times while small caps traded at 16 times. Part of the reason that small caps currently trade at a premium is that analysts expect them to have better earnings growth over the next three to five years. However, we feel that GDP growth is likely to disappoint, which will impact stocks with higher growth expectations more severely than stocks with more muted expectations.

Doug Kass calls the bottom for the year

New York City is in the midst of a serious heat wave, but on Wall Street the stock market is on a major cold streak. Stocks are down 9 of the past 11 sessions. Even Tuesday's higher close was still well off the highs of the day.

Doug Kass of Seabreeze Partners, famous for calling the market bottom in March 2009, isn't worried. In fact, he's bullish. "I think we've seen the lows of the year," he tells Tech Ticker guest host Jon Najarian of OptionMonster.com. "The market's are traveling on a path of fear and share prices have significantly disconnected from fundamentals," he says.

Kass predicts stocks will rise 10%-12% by year's end on the back of strong earnings and a better-than-expected economic recovery. He says positive trends in the ISM manufacturing and non-manufacturing index and improved labor market conditions point to "moderate domestic economic expansion, not a double dip."

Trading at around 11 times earnings, stocks are fairly inexpensive, says Kass. He notes stocks generally trade at around 15 times future earnings, and even higher in periods of tame inflation and low interest rates, as we're currently experiencing.

It may not be a V-shaped rally like that of 2009, but Kass says we've just started building a base, which could lead to a fundamentally stronger and longer-lasting rally in the future.

[via bdparts]

Krugman is depressing

For the last several months, Princeton professor Paul Krugman has become increasingly agitated about what he feels is a disastrous mistake in the making -- a sudden global obsession with "austerity" that will lead to spending cuts in many nations in Europe and, possibly, the United States.

Krugman believes that this is exactly the same mistake we made in 1937, when the country was beginning to emerge from the Great Depression. A sudden focus on austerity in 1937, it is widely believed, halted four years of strong growth and plunged the country back into recession, sending the unemployment rate soaring again.

In Krugman's view, the world should keep spending now, to offset the pain of the recession and high unemployment--and then start cutting back as soon as the economy is robustly healthy again.

Those concerned about the world's massive debt and deficits, however, have seized control of the public debate, and are scaring the world's governments into cutting back.

Which fate is worse? It depends on your time frame.

Cutting back on spending now would almost certainly make the economy worse, at least for the short run. Not cutting back on spending later, meanwhile (and Congress has shown no ability to curtail spending), will almost certainly keep us on a road to hell in a handbasket.

The White House's own budget projections show the deficit improving as a percent of GDP to about -4% by 2013. After that, however, even the White House doesn't think things will get much better. After a few years of bumping along at about -4%, the deficit will begin to soar at the end of the decade. And thanks to the ballooning costs of Medicare, Medicaid, and Social Security--along with inflating interest payments from all the debt we're accumulating--the White House expects the deficit to soar to a staggering -62% of GDP by 2085.

What Krugman and his foes agree on is that that's no way to run a country. And it's time we finally faced up to that.

In the meantime, we'll continue to fight about what to do in the near-term. And Krugman thinks he has lost that war and we're headed for another Depression.

***

Many prominent investors, and economists are now warning that our economy is in big trouble. On the left many are arguing for more stimulus spending, while on the right many are arguing for cutting spending. The one theme these "doomsayers" have in common is that they all are painting a not so pretty picture of the US economy.

On the left, Nobel Laureate Paul Krugman recently penned a frightening op-ed in the New York Times. Krugman, warned that the United States has entered the initial stages of a third Depression. In his view, inadequate fiscal and monetary stimulus, coupled with obsessive worry about short-term, record breaking budget deficits, are increasing the probability of a long, deflationary-driven Depression.

On the right, economists, and politicans are calling for the Government to cut spending, which they predict will lead to the collapse of the dollar at current rates. Ron Paul, and Peter Schiff have called for painful spending cuts, higher interest rates, and end to bailouts.

Li Lu on BYD

What I think we are doing today with our investment in BYD in China is really helping China march towards a modern era of prosperity. BYD is providing a solution to both China and the US, to migrate from the past to a way that gets us out of the unsustainable carbon age that we live in. Global warming is a vital concern to every human being, so China is providing a great contribution to everybody with BYD. America has had a great history of invention and here is a great company in China that is about to make a major contribution to human civilization with cheap electric vehicles and solar power.

Ultimately we will have to get our energy from the sun. Most of the energy, even fossil fuels (plants that die and then go into the ground), all originally come from the sun. So if you can figure out a way to take energy from the sun and power vehicles, while using batteries to store it, inexpensively — will really make renewable energy power everything. The combination of those things holds the key to the future of industrial civilization that we are about to embark on. We didn’t set out with BYD with this in mind, it just happened that way. With great companies, it only looks logical in retrospect. Think about how Bill Gates started Microsoft. I don’t think he knew up front that he would take the entire market — at that time it did not exist. It is the same way with our investment in BYD. Ultimately, I think finding an inexpensive way to store energy that we harness from the sun will be a huge contribution for both China and the US, but more broadly our entire civilization.

[via lethean46]

The 200-day moving average

The market dispatch people (Elizabeth Strott and Charlie Blaine, not to mention Reitmeister below) keep mentioning the 200-day moving average as a key technical indicator. So what's up with that? Here's a Mark Hulbert article about it.

***

ANNANDALE, Va. (MarketWatch) -- It was Voltaire who famously said that the perfect is the enemy of the good. And, though he wasn't talking about investing, he very well could have been: The relentless pursuit of a "perfect" market timing system can lead to an inferior result.

Take market timers who rely on the 200-day moving average to determine whether they should be in or out of the stock market. It is by no means a perfect system, as I'll discuss in a moment. But, by the same token, it has proven difficult -- in practice -- to do better.

Though trend-following systems have a long history, I suspect that the popularity of the 200-day moving average in recent decades can be traced largely to Richard Fabian, who during the 1970s began championing a 39-week moving average (virtually the same as a 200-day moving average). At the time, Fabian was editor of the Telephone Switch Letter, an advisory service that has since gone through several metamorphoses and is now edited by his son, Douglas Fabian, and called Doug Fabian's Successful Investing.

Fabian the Elder told subscribers that they need not spend more than a minute a week determining whether they should be in stock mutual funds or cash. If the market was above its average level of the previous 39 weeks, then they should be in the market -- and otherwise in cash.

Compared to almost all other market timing systems I monitor, this one was the simplest. And yet, it also turned out to perform quite well: For the decade of the 1980s, for example, it was the very best performer of any tracked by the Hulbert Financial Digest.

Still, the approach was (and is) not perfect, and Fabian was one of the first to say so. He often said, for example, that a 52-week moving average system would produce superior long-term returns than the 39-week system. He nevertheless stuck with the 39-week average because he believed that investors would not be willing to sit out the intermediate-term declines that a longer-term moving average would require.

Researchers in recent years have raised even more serious theoretical questions about this market timing system. One was that its market-beating potential appeared by the late 1990s to have become greatly diminished, leading some to speculate that the veritable golden-egg-laying goose had been killed by too many investors trying to follow the 200-day moving average. (Read my 2004 column mentioning some of this research.)

Another chink in the 200-day moving average's armor is the argument, advanced by Ned Davis of Ned Davis Research, that the approach works primarily during secular (long-term) bull markets. One of the hallmarks of cyclical (shorter-term) bull markets, according to Davis, is that during them, trend-following systems tend not to work. (Read my Sept. 1, 2009 column on Davis' argument.)

Given these apparent defects, you might think that doing better than the 200-day moving average would have been relatively easy, especially in recent years. But it hasn't been.

We know because Fabian the Younger has been trying to improve on it, almost from the point he took over the advisory service from his father in the early 1990s. On balance, his deviations from the mechanical 39-week moving average system have cost his model portfolio.

The Dilbert Portfolio

When I heard that BP (BP, news, msgs) was destroying a big portion of Earth, with no serious discussion of cutting their dividend, I had two thoughts: 1) I hate them, and 2) This would be an excellent time to buy their stock. And so I did. Although I should have waited a week.

People ask me how it feels to take the side of moral bankruptcy. Answer: Pretty good! Thanks for asking. How's it feel to be a disgruntled victim?

I have a theory that you should invest in the companies that you hate the most. The usual reason for hating a company is that the company is so powerful it can make you balance your wallet on your nose while you beg for their product. Oil companies such as BP don't actually make you beg for oil, but I think we all realize that they could. It's implied in the price of gas.

Perhaps you think it's absurd to invest in companies just because you hate them. But let's compare my method to all of the other ways you could decide where to invest.

Technical analysis
Technical analysis involves studying graphs of stock movement over time as a way to predict future moves.

It's a widely used method on Wall Street, and it has exactly the same scientific validity as pretending you are a witch and forecasting market moves from chicken droppings.

Identify well-managed companies
When companies make money, we assume they are well-managed. That perception is reinforced by the CEOs of those companies who are happy to tell you all the clever things they did to make it happen.

The problem with relying on this source of information is that CEOs are highly skilled in a special form of lying called leadership. Leadership involves convincing employees and investors that the CEO has something called a vision, a type of optimistic hallucination that can come true only in an environment in which the CEO is massively overcompensated and the employees have learned to be less selfish.

Track records
Perhaps you can safely invest in companies that have a long history of being profitable. That sounds safe and reasonable, right?

The problem is that every investment expert knows two truths about investing: 1) Past performance is no indication of future performance. 2) You need to consider a company's track record.

Right, yes, those are opposites. And it's pretty much all that anyone knows about investing. An investment professional can argue for any sort of investment decision by selectively ignoring either point 1 or 2. And for that you will pay the investment professional 1% to 2% of your portfolio value annually, no matter the performance.

Buy companies you love
Instead of investing in companies you hate, as I have suggested, perhaps you could invest in companies you love.

I once hired professional money managers at Wells Fargo (WFC, news, msgs) to do essentially that for me. As part of their service they promised to listen to the dopey-happy hallucinations of professional liars (CEOs) and be gullible on my behalf. The pros at Wells Fargo bought for my portfolio Enron, WorldCom and a number of other much-loved companies that soon went out of business.

For that, I hate Wells Fargo. But I sure wish I had bought stock in Wells Fargo at the time I hated them the most, because Wells Fargo itself performed great. See how this works?

Do your own research
I didn't let Wells Fargo manage my entire portfolio, thanks to my native distrust of all humanity. For the other half of my portfolio I did my own research. (Imagine a field of red flags, all wildly waving. I didn't notice them.)

My favorite investment was in a company I absolutely loved. I loved their business model. I loved their mission. I loved how they planned to make our daily lives easier. They were simply adorable as they struggled to change an entrenched industry. Their leaders reported that the company had finally turned cash positive in one key area, thus validating their business model, and proving that the future was rosy. I doubled down. The company was Webvan, may it rest in peace.

But what about Warren Buffett?
The argument goes that if Warren Buffett can buy quality companies at reasonable prices, hold them for the long term and become a billionaire, then so can you.

Do you know who would be the first person to tell you that you aren't smart enough or well-informed enough to pull that off? His name is Warren Buffett.

OK, he's probably too nice to say that, but I'm pretty sure he's thinking it. However, he might tell you that he makes his money by knowing things that other people don't know, and buying things that other people can't buy, such as entire companies.

-- by Scott Adams

Austrian Economics

Austrian economics vs. Keynesian economics (a discussion on gurufocus)

Extraordinary Popular Delusions

Extraordinary Popular Delusions and the Madness of Crowds by Charles Mackey is considered must-reading by many investment professionals. The material is classic, but I found the writing archaic and the reading of it sometimes ponderous. (After all, it was written in 1841.) The book is available for free on the internet, for example at

http://www.litrix.com/madraven/madne001.htm

I found Richard Band's summary of the pertinent sections of the book much more readable (and shorter). That summary is found in Chapter 2 of his book Contrary Investing. It's out of print but you can get it cheap used at Amazon.

[via value_investment_thoughts 7/31/05 (that long ago?) since I'm considering swapping my mostly unread copy at paperbackswap]

Hmmm.. that link no longer works (though it's sort of still at archive.org). Try this one (linked from wikipedia)

Senate passes financial reform

The U.S. Senate voted 59-39 late Thursday to pass the most sweeping financial reform legislation since the Great Depression in an effort to prevent a repeat of the financial crisis of 2008.

The bill would create a consumer protection agency, place new capital restrictions on banks and increase oversight of derivatives trading. Critics have slammed the bill for not addressing Fannie Mae (FNM) and Freddie Mac (FRE), the government-backed mortgage companies that many say contributed to the financial market meltdown.

Four Republicans voted for the bill, and two Democrats voted against it. The legislation will now have to be reconciled with the House version, then both chambers of Congress will vote on the final bill.