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.

Short-termism

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.

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.

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.

"I don't need all that extra gas mileage"

Justin here. When I was in high school I had a 1977 International Harvester Scout II, it was the ultimate guys truck: removable top, loud speakers, big wheels, three horns . . . the works. As anyone who wanted to could, I'm able to track my life stages in cars (and miles per gallon). It goes something like this:

• Impending College Travel - Sell Scout (~12mpg) and buy 1999 Chevy Tahoe (~15mpg)
• Married My Lovely Wife - Inherit and drive her 1992 Honda Accord (~24mpg)
• My Wife Starts Commuting 100 miles per day - Sell '92 Accord (~24mpg) for '00 model (~23mpg)
• Baby On The Way - Sell 2 door Tahoe (~15mpg) for 4 door Toyota 4Runner (~19mpg)
• My Quarter-Life Crisis - Sell Honda Accord (~23mpg) and buy 1991 Toyota Landcruiser (~14mpg)

So my rationale on that last one went something like this: "Due to our low key social lives and my 1.2 mile commute to work, I only drive 4,000 miles/year in this Accord. I change my oil once a year for goodness sakes! It would only cost me $20/dollars per month to drive a car that I love. I really don't need all that extra gas mileage." That last sentence was an actual quote. Al Gore would be ashamed.

I read this article in the NYTimes about 'gas tourism' in Mexico. Folks travel to the border, wait in line, go to the nearest gas station, wait in line, go back to the border, wait in line, and go home. One guy does that trip all day long to fill up a fleet of trucks. One guy even visited an orthodontist and got cheaper braces while south of the border. One guy has been mugged at gunpoint, yet still goes back!

I don't really have that option where I live, so I'm walking home for lunch, taking the more fuel efficient car when able, even borrowing my Mom's volvo station wagon (with embarrassingly feminine 'pet named' vanity license plate) for long trips.

Come to think of it, I might rather be held up at gun point than have one more trucker ask me at the gas pump how her vanity plate acquired the name 'Bunn1e.'

Everyday heroes

Gate City Rotary is taking fund raising to the next, next level. They’ve gone and gotten a bunch of sponsors, rented out the ballpark, hired Sleeping Booty Band, sold raffle tickets, put poster ads in every restaurant, and done a few radio interviews.

JSCO is a sponsor, but yours truly hasn't sold any tickets yet, per se, but I have the best of intentions. I had thought about blogging our poster with a handful of pics of the raffle prize, a fully restored 1976 Triumph TR6, which I would love to drive up and down Sunset Hills, to and from work, and everywhere else. The other night, I even said to Anne “hey, what about hitching up Georgia and River and putting some ice and beer in the Radio Flyer wagon and going door-to-door, down Ridgeway Drive and Madison Avenue, and sell this great party and the charities it will fund?” We could set up the boom box on top. I could almost hear the Isley Brothers singing Caravan of Love. Well, one excuse is as good as another, so they say, so let’s just say the road to you know where is paved with good intentions.

So it was a surprise joy to learn today that my friend and neighbor Beth Sheffield has already surpassed Gate City Rotary in promoting the event in Sunset Hills, and beyond. Beth found out about the fundraiser, not from me, but because she already knew Father Marc and supports his orphanage. I know it's just a matter of holding the winning ticket when that number gets called, but it sure would be awesome if Beth and her husband Gardner won the TR6. (Gardener, you may recall, joined a group of Gate City Rotarians last December to help kids in the Glenwood Tutoring Program make and hoist Lighted Christmas Balls down at Grace Community Church.) I can’t think of a better couple to win the Triumph. Who knows, they might even offer guided tours in the TR6, top down, heater on, Sleeping Booty on the boom box, Lighted Christmas Balls glowing...