Wednesday, July 23, 2008

The greatest story never told

The center stages of the world are crowded - "Just a short time ago, says Patrick J. O'Hare of, "there was a fear of owning financial stocks. Now there is a fear of not owning them." These are times when whatever good numbers get published or whatever progress we make towards correcting the policies and practices that led to our excesses and the mess we’re now in, the markets could care less.

Patrick Toomey is president of The Club for Growth. A graduate of Harvard University with a degree in government, he served as a member of the U.S. House of Representatives from Pennsylvania’s 15th Congressional district from 1999-2005. In 2005, he co-founded Team Capital Bank, and is co-chair of its board of directors. He also sits on the boards of directors of the Lynde and Harry Bradley Foundation and the Commonwealth Foundation. Recently, Toomey spoke at Hillsdale College. He says we need to start telling this story, and also to think about its causes. An introduction follows -

“The fact of the matter is that we in the United States, and to a lesser degree the entire world, have just lived through---and continue to live in---the greatest period of prosperity in human history. Over the last 25 years, more wealth has been created, more people have been lifted out of poverty, standards of living have been elevated more dramatically, and the quality and length of life have improved, more than ever before in recorded history. Unfortunately, as Larry Kudlow says, this is "the greatest story never told." Click here the read Toomy's speech.

Monday, July 21, 2008

Market sentiment and anxiety 07172008

The AAII sentiment survey (membership required) measures the percentage of individual investors who are bullish, bearish, and neutral on the stock market short term; individuals are polled from the AAII Web site on a weekly basis. Only one vote per member is accepted in each weekly voting period.
For the week ending July 16, bullish sentiment rose to 25.00% from 22.17%, equal to 1.29 standard deviations below the mean. Bearish sentiment rose to 58.14%, equal to 2.9 standard deviations above the mean. Anxiety Index rose from -11.9% to -8.8%, equal to 0.47 standard deviations below the mean. Click chart to resize.

Sunday, July 13, 2008

Market sentiment and anxiety 07102008

The AAII sentiment survey (membership required) measures the percentage of individual investors who are bullish, bearish, and neutral on the stock market short term; individuals are polled from the AAII Web site on a weekly basis. Only one vote per member is accepted in each weekly voting period.

Sentiment data is displayed along with a proprietary anxiety index. The chart above includes something that the AAII version doesn’t. Click chart to resize.

At every date along the X Axis of this chart, you can see what the S&P500 did one year out from that date. For example, if you put your finger on the X axis on October 19, 1990, for example, and then moved your finger up to where the S&P500 intersects with that date, you’ll see that the S&P500, in the 12 months following, was up 26%. During the last 21 years there have been 14 or so occurrences where negative sentiment outweighed positive sentiment, and by a pretty big margin. (Resize chart by clicking and dragging handles.)

Couldn't help noticing Tuesday David Tice agreed to sell his David W. Tice & Associates investment management firm to Federated Investors Inc. for up to $142.5 million. Is this this pure coincidence or did Tice decide bearish sentiment was high enough (and bullish sentiment low enough) to sell out? Tice, who founded the Prudent Bear and Global Income Fund in 1995, will remain with Federated Investors. The purchase price, if certain conditions are met, could be 8.53% of assets under management. Is that a record? Guess Tice knows how to run a Bear fund, and a thing or two besides.

Friday, July 11, 2008


The chart (click to enlarge) shows annual turnover rate (churn rate) for shares of NYSE listed companies. The black axis (Y1) shows annual turnover increasing dramatically from 10 to 30 percent during 1940 to 1980. During 1998 to 2008, turnover increased from 76 to 139 percent. Time held (years) is shown on the red axis (Y2); each NYSE share was "held" continuously by an investor four to eight years, presumably before it was sold, during 1940 to 1980. In the last ten years, this "holding period" has been punctuated from sixteen months to down to less than 9 months.

  • Such a churn rate imparts higher transaction costs to investors; with greater trading also comes the risk of making greater mistakes.
  • An investment requiring 2 - 3 years time for the market to recognize potential increases in intrinsic value faces unprecedented opposition, in an environment that typically keeps its shares less than nine months before selling to buy another.
  • Corporate managements, under ever increasing pressure from stockholders, financial analysts, global competitors, and takeover groups sacrifice long-term strategic vision in the pursuit of beating "next quarter's earnings guidance."
  • In contrast, a group of Fortune most admired corporations for "long-term investment" had an average turnover rate of close to 60 percent in 2005.

Short-termism destroys wealth. CFA® Institute occupies the forefront in a vital challenge to raise awareness and to challenge the wide range of short-termism's stakeholders to exercise leadership in the effort to win a war against the unnecessary destruction of capital. CFA® Institute's excellent resources may be accessed here.

source: NYSE Factbook, Forbes, CFA® Institute, Jonathan Smith & Co.

Wednesday, July 09, 2008

Did someone say Trillion dollar deficit?

Bill Gross, by many accounts, is one of the wisest persons on the planet, at least when it comes to fixed income investing. His perspectives and explanations about plain old Main Street Economics are worth knowing; I recommend adding him to your Reader.

Gross prefaces his July 2008 Investment Outlook with this…

“Thought I would jot down this little note to President Obama. It’s a little presumptive of course; first that he’ll even be President (he will) and second that he’d read it (he won’t). But presumptiveness is an inherent requirement of an investment manager and so I shall proceed.”
If the prospect of a one Trillion Dollar Deficit by the year 2011 makes you just a little curious as to how something like that could really happen, take the next five minutes and read Bill Gross’ letter to Senator Barack Obama.
History may not repeat itself, but it does rhyme. Take a look at what happened to another nation when their deficit grew out of hand to nearly 11% of their GDP.

Tuesday, July 08, 2008

The Golden Toilet

Justin here. Meir Statman once said that rational investors are investors who “always prefer more wealth to less and are indifferent as to whether a given increment to their wealth takes the form of cash payments or an increase in the market value of their holdings of shares.”

I don't know when we started misquoting him, but in our office we are constantly reminding each other that "rational investors are not concerned with the timing or form of wealth."

For example, a rational investor would be indifferent to $50 won on a lottery ticket, $50 in a Christmas card, $50 from the Home Depot returns desk, or $50 from a paycheck. I don't know about you, but for whatever reason, I spend the Christmas and Home Depot dollars very differently.

I thought about Professor Statman as I read this article in the Wall Street Journal about Lam Sai-wing, a Hong Kong entrepreneur who built his fortune around a golden toilet.

Mr. Lam owned a jewelry manufacturing company and was contemplating how to turn it into a successful retail venture. His idea to make a golden toilet (when gold was $200/ounce) eventually snowballed into a golden palace that, at its height, attracted 100 tourist groups per day and did $100 million in sales annually.

Mr. Lam seemed to be doing the rational thing when gold hit its peak at $1,003.20 - he started selling off the palace bit by bit. See if you can find where the rational turns to irrational.
He is melting down golden chandeliers, armchairs and armored knights and selling gold by the ton to fuel growth plans that include hundreds of new retail outlets in mainland China. But even with the selloff, one thing is certain: the toilet stays.

"I don't care if gold hits $10,000 an ounce," Mr. Lam says. "I'm not melting it down."
Interesting. He'll sell everything else at a gain somewhere under 200% but won't sell the toilet, even if it goes up 4,900% or roughly 10x the historic peak! Talk about flushing money down the toilet.