This edition of Musings finds us at the onset of the holiday season that begins with Thanksgiving Day taking stock of our manifold blessings. After all, there are life-enhancing and occasionally palliative effects to be had from having an “attitude of gratitude”. And even if this should be a more or less daily habit, having a holiday designated to focus us in that direction, and so near the end the year no less, is not a bad idea. So I have come up with a list, over and above the usual items that come to mind each year, that pertain to this oh so quickly used up year.
Yes, I am thankful not only that I was born in what is all but certainly the greatest country ever, but have lived a life that has enabled me to see so much of it. My life’s work made it possible for me to be able to visit nearly all fifty states, usually in a rental car down highways and by-ways rarely traveled by tourists. It is a vastly sprawling, intricately marvelous place. The “going out and meeting real people who do real work”, tapping into the passions of not a few of the individuals out there who make material progress possible, was perhaps the best part of my long working life. That said, based on what I am reading, I am glad I am not traveling as much as I used to. If what we are reading about recent “enhancements” to airport security is reasonable accurate, the allure of such adventure has been seriously diminished. To be honest, I was not particularly vexed with the security regimen as implemented post 9/11. While the phony posturing to avoid the appearance of profiling has been annoying, how bad was it to take off one’s shoes and belt and otherwise add about ten minutes to an hours-long journey that for most of human existence would have been fraught with danger and taken days if not weeks, if it were possible at all? But now it appears that even though the terrorists have, in 9+ years since the incident that finally got our attention, managed to successfully target an aircraft exactly, umm, not even once, we have take it up a level. This latest spasm of mindless risk aversion is not how you wear down a determined foe. It is more like how a brand new public employees union asserts its place at the trough. We should all be thankful come Thanksgiving 2011 if Congressional oversight reels these clowns in, and re-directs what passes for a war of terrorism (just because the Administration won’t refer to it as such doesn’t mean that isn’t what it is.) in more efficacious directions.
And speaking of Congress, this was a year to be thankful that however corrupt it often seems, the electoral process can still send clear signals of voter discontent. Indeed, for as long as any of us can remember, the invulnerability of Congressional incumbency has been one of those noxious things that everyone laments and no one expects to ever change. Not so much in 2010! With the dismemberment of “news” oligopolies, this diminished security for incumbents looks to be a durable trend. We should be profoundly thankful that the “system” has once again proven to be not nearly as corrupted as we have been tempted to believe. Of course, gerrymandering and set-asides being what they are, there will probably be at least 100 of the 435 seats that even a corpse could keep. We should not be surprised to see the Progressive Caucus as a percent of Congress continue to approximate the just under 20% of voters who self-identify as Liberal. The Red/Blue map should remain about the same, with red taking up far more space but blue holding onto its enclaves of dependency large and small. (Blue seems to dominate where water transport or power once provided economic advantage and so established the sort of quasi-feudal power structures that can hang on by cultivating a culture of dependency.)
This consideration of the national map brings us to an item that I am each year even more thankful for, that I was able to exit the “happening place 150 years ago but its been downhill ever since” that was the Hudson Valley and move to the great Republic of Texas. There are very good reasons, having nothing to do with oil wells, that Texas, which is really like a whole country, has held up much better than so much of the rest of the country these past few years. It also doesn’t hurt that November can be denoted by picking the last of the melons, planting cool weather crops and taking my grandson swimming in the river. However, thinking about how good we have it here in Texas gets me thinking nervously of evolving notions of federalism. I find myself suddenly sympathetic towards Germany, another State that has gotten things relatively right and finds itself digging deep to have to bail out the likes of Greece and now Ireland (a not so long ago bucolic land now badly debauched by a dozen or so wise-guys). Who the heck knows how long California can live of Revenue Anticipation Notes? It is not hard to see traditional notions of federalism being strained as the 45 or so most responsible states get dragged into the role of enablers of the five or so most profligate. We should be very thankful at some future Thanksgiving if the new Congress manages to shape our federalism in ways that minimize the degree to which the rest of us have to share in consequences of perpetually-adolescent fiscal behavior.
As I shift my focus to the recent “commoditization” of the Markets, I find myself intensely grateful that I am not one of the poor saps who have to manage sourcing for the world’s sweatshop we call China. It has never been easy to manage the planning and acquisition of material inputs to support even moderate growth. The problem for China is not so much the rapidity of its growth, much of which is coming from the inclusion of activities that didn’t get counted or simply didn’t happen in the subsistence portions of the economy (e.g., basic hygiene, light bulbs and the electricity they use). What is really making it tough for the folks who have to keep the factories going and the trucks running is the recent emergence of such vast pools of risk capital that by virtue of instantaneous communications and computing power stand ready, willing and able to jump onto or off of anything their algorithms tell them might be a trend. In light of how much this “speculative interest” seemed to aggravate things the last time the global economy boomed and then hit a bump, this should concern us all. For all the song and dance around “financial reform”, the power of the algo to vex purchasing managers, jazz the price of tortillas in Mexico and otherwise unleash torrents of unintended consequences seems to have been unaffected by our collective near death experience of 2008. That so many asset classes are correlating so tightly has not gone unnoticed, but the price we all seem to pay (as consumers and participants in the “real” economy) when the tail that is speculative interest starts to wag the dog that is the economy seems to have been quickly forgotten. I’ve got a hunch that if the bets I currently have on, mostly around Web 2.0 and the aerospace cycle, do not live up to my expectations it will have had something to do with the increasingly difficult task of acquiring commodities for actual use in production.
That said, however disruptive market forces can be when they get out of hand, we should be thankful indeed that the animal spirits that drive the dance between price and value are alive and well. How alive and well was amply demonstrated this past week by the reception accorded the IPO of Government Motors. It was kind of fun to watch, if one was willing to let one’s cynicism off its leash. The bankers and the publicists all played their parts and yet despite some very ominous references along the lines of “lack of internal financial controls” and a going on eleven year experience with equities that you would think would produce distaste if not revulsion, the public waddled up to the trough and dug in. This “fear of missing out on something” is elemental to the human condition, never really going away but more or less evident as “herd” factors ebb and flow. It bolsters my sense that a decade past when the last Tech Bubble popped, we are in the early stages of yet another silly season for Tech (buzzwords: apps, cloud, advertising).
That animal spirits short circuit what would otherwise be powerful forces of informational efficiency is what makes it possible for adept investors to buy low and sell high, and for this we need to be grateful. It’s like thanking God for the sun and rain and the turn of the seasons, and so much else so easily taken for granted. Sure, that (hopefully) once-in-a-generation stampede of roughly two years ago put me in a seemingly precarious place. (When I got blown out of a job much earlier in life, I took consolation that “at least I wasn’t one of those 55 year olds!”) Despite the untimely loss of what I had thought would be the last job I would ever need and the severe erosion inflicted on retirement accounts that were pretty much 100% in equities, it wasn’t the end of the world. Indeed, the freedom of action made possible by said job loss allowed me to make a few decisions that have since made our financial situation better than ever. A major element of this would be the subject of the last subject of gratitude I will mention before I head off into holiday mode, one of those lessons in investor mental hygiene that need to be occasionally re-learned. To wit, not getting too caught up trying to buy at the exact bottom or sell at the exact top, and not beating oneself up for being what only feels like being way too early (as long as one has kept some buying power in reserve). This was driven home by one of my stocks getting a takeover bid this past week. I have followed Ladish Corp. (LDSH) for a very long time and felt fairly confident paying $13+ back in early 2009 that unless the world really was coming unglued, it was worth a lot more than that. I had the opportunity to buy more at around $10. By time I was adding even more at about $7.50, I was feeling at least a little chastened about the impulsive initial buy and second guessing myself. Fast forward about eighteen months, and a bid valued at about $48 from long time supplier Allegheny Technologies (ATI -$50) makes all that self recriminating agita about markedly less than perfect execution seem silly. Especially considering that half of the consideration that is ATI stock is likely to at least double in value over the next few years, in my estimation.
So many things to be thankful for, but who’s counting? Having a happy holiday.
Tuesday, November 23, 2010
Saturday, November 6, 2010
Buy the Rumor, Buy the News?
The Market showed just how strong it is this week. Having sat through more instances of “buy the rumor, sell the news” than I care to remember, I was fully prepared to see something of a pullback given this week’s Trifecta. We had the electorate rendering its verdict against the despotism that calls itself Progressivism, the Fed announcing the terms of its latest truckload of monetary easing, and the culmination of another earnings season that showed the global economy still gaining traction. It seemed more than plausible that a 20%+ surge in the NDQ in nine or so weeks had more than adequately discounted all this, that somewhere along about Wednesday or Thursday, “sell the news” should have kicked in. On the surface, there was nothing all that surprising in any of these developments, other than maybe the $600B being higher than what we take to be the consensus estimate. But no, instead of a “pause that refreshes” that normally occurs when something so enthusiastically anticipated gets cleared up, there was almost imperceptible hesitation before the Market tacked on Thursday’s big gain and then refused to pull back from that on Friday. What’s up with that?
The election outcome really was hardly surprising, though a highly encouraging sign did appear in the aftermath. Who, save that 20% of us living in that parallel universe we might call the Progressive Bubble, could possibly be surprised that there would not be a rightward shift in the legislative branch caused by a felt need amongst a plurality of the other 80% to send a message to an arrogant and dangerously out of touch executive branch? Musings saw the seeds of this clear back on March 25, 2009:
It occurred to me that this time, the collective efforts of this crew had thus far been so amateurish, so evocative of Commencement Day at Clown College and so presumptuous of success as to perhaps set a land speed record for blowing one’s political wad. One of the reasons the Market didn’t seem to mind that which was objectionable about the Clinton Administration was that it, too, rapidly squandered its ability to render things like “health care reform” and had to spend the rest of its years triangulating and otherwise playing it safe. The Market doesn’t seem to mind nickel-dime changes that actually happen so much as the prospect of Big Change with even bigger and grossly unknowable unintended consequences. One also senses enormous tensions building up among the acolytes and variously sordid hustlers who are impatiently awaiting a payback for helping bring all this into being, the sort of tensions that invariably corrode the efficacy of the endeavor. The wheels might not have come completely off of the Hope-N-Change Express, but I think we have heard at least a few lug nuts clattering down the highway. The Market has breathed a sigh of relief that all that talk of radical change looks to be just that, a lot of talk. Damage will be done, to be sure, but nothing like what was in mind as pundits were setting their sights on DJIA 5000.
Imagine the odds I could have gotten had I thought this through at the time and found a casino willing to take a bet against the Republicans regaining the House in 2010! What I think might have been incremental about the election was that, unlike in 1994, the resurgent opposition is not taking their victory as a sign that it is time to ram through a mandate and otherwise run the table. No, they are calculating the percentages and playing the longer game. They will put the Progressive element even more on the defensive by offering incremental improvements that would be political poison to oppose. For example, that “file a 1099 for every purchase over $600” provision that got secreted into the Health Care bill. Can we please have the name of the tone deaf dimwit who stuck that in there? This is a tremendous impediment to jobs creation not just because of the quantifiable compliance burden it imposes but the signal that it send to every business owner, large and small, as to just how intensely involved their “partners” in government might try to get in the months and years ahead. You get a clear and vivid sense of this by talking to any business owner about how they feel about it, but that’s not something that anyone in the Administration seems capable of doing. It is a wet blanket smotherer of entrepreneurial spirits of the highest order. The good news is that it and measures like it are easy targets that fit well in the Republican game plan. How many Democrats, having witnessed the slaughter of November 2, are going to vote against measure to repeal this monstrosity, especially those 23 Democratic Senators who are up for re-election in 2012? So I think that investors at the margin got a little more confident that not only have the enemies of ownership been routed, but that either at least a few of the most egregious enterprise dampeners will be addressed in the weeks ahead or there will be an even more pronounced stampede to the right in two years.
In terms of substance, the Fed action strikes me as a nonevent, like a kid jumping in front of a parade so he could tell his folks that he led them across town. This sentiment is rooted in what the earnings season told us, a development that was only surprising if you believed that the summer slowdown was anything more than an inventory adjusting speed bump. As previously noted, knocking a few more basis points off of lending rates is not going to stimulate borrowing and so hiring by either the cash rich or barely-hanging-on enterprises that make up most of the economy. To the extent that rates drop, the greater impact will be a negative one on savers. What QE2 does seem to have done is send a signal to those who unleash tsunamis of buying or selling on a daily basis that “risk on” is, for the time being, much more prudent than “risk off”. So on more days than not, money pours out of safe havens and into just about anything that has the potential to go up in price. At least for now.
Also lending impetus to the upward bias in equity prices is the calendar. The number of weeks until every money manager’s 2010 performance get indelibly printed is rapidly dwindling, and not a few of them are wishing they had been more fully invested. This alone makes me think that the intermediate up-leg that commenced in earnest on September 1 will continue for a few more weeks at least. And as we look to 2011, I see a global economy not only gaining traction but perhaps even shifting gears. While large swathes the US economy continues to face dreadful obstacles, the export oriented portions are thriving. What will likely put 2011 in a much better place than 2010 will be that construction activity appears poised to swing from being a drag on the aggregate (declining) to being at least a slight positive. It is also likely that while lay-offs by state and municipal entities will continue, the rate at which these necessary cuts are made will slow. It adds up to more spending power coursing through the economy, more discretionary spending on things that millions of households have underspent on for the past four years. The resultant improvement in GDP and earnings should be such that we should not be surprised to see the Bull Market tack on a third year. That said, I believe the intermediate trend that commenced on September 1 has advanced to the point that thinking about selling, harvesting a few positions around the edges in order to insure that one has buying power the next time the Market goes into one of its periodic swoons, probably ought to be taking precedence over thinking about adding new positions. But that is a tactical consideration in what remains a positive long term outlook.
The election outcome really was hardly surprising, though a highly encouraging sign did appear in the aftermath. Who, save that 20% of us living in that parallel universe we might call the Progressive Bubble, could possibly be surprised that there would not be a rightward shift in the legislative branch caused by a felt need amongst a plurality of the other 80% to send a message to an arrogant and dangerously out of touch executive branch? Musings saw the seeds of this clear back on March 25, 2009:
It occurred to me that this time, the collective efforts of this crew had thus far been so amateurish, so evocative of Commencement Day at Clown College and so presumptuous of success as to perhaps set a land speed record for blowing one’s political wad. One of the reasons the Market didn’t seem to mind that which was objectionable about the Clinton Administration was that it, too, rapidly squandered its ability to render things like “health care reform” and had to spend the rest of its years triangulating and otherwise playing it safe. The Market doesn’t seem to mind nickel-dime changes that actually happen so much as the prospect of Big Change with even bigger and grossly unknowable unintended consequences. One also senses enormous tensions building up among the acolytes and variously sordid hustlers who are impatiently awaiting a payback for helping bring all this into being, the sort of tensions that invariably corrode the efficacy of the endeavor. The wheels might not have come completely off of the Hope-N-Change Express, but I think we have heard at least a few lug nuts clattering down the highway. The Market has breathed a sigh of relief that all that talk of radical change looks to be just that, a lot of talk. Damage will be done, to be sure, but nothing like what was in mind as pundits were setting their sights on DJIA 5000.
Imagine the odds I could have gotten had I thought this through at the time and found a casino willing to take a bet against the Republicans regaining the House in 2010! What I think might have been incremental about the election was that, unlike in 1994, the resurgent opposition is not taking their victory as a sign that it is time to ram through a mandate and otherwise run the table. No, they are calculating the percentages and playing the longer game. They will put the Progressive element even more on the defensive by offering incremental improvements that would be political poison to oppose. For example, that “file a 1099 for every purchase over $600” provision that got secreted into the Health Care bill. Can we please have the name of the tone deaf dimwit who stuck that in there? This is a tremendous impediment to jobs creation not just because of the quantifiable compliance burden it imposes but the signal that it send to every business owner, large and small, as to just how intensely involved their “partners” in government might try to get in the months and years ahead. You get a clear and vivid sense of this by talking to any business owner about how they feel about it, but that’s not something that anyone in the Administration seems capable of doing. It is a wet blanket smotherer of entrepreneurial spirits of the highest order. The good news is that it and measures like it are easy targets that fit well in the Republican game plan. How many Democrats, having witnessed the slaughter of November 2, are going to vote against measure to repeal this monstrosity, especially those 23 Democratic Senators who are up for re-election in 2012? So I think that investors at the margin got a little more confident that not only have the enemies of ownership been routed, but that either at least a few of the most egregious enterprise dampeners will be addressed in the weeks ahead or there will be an even more pronounced stampede to the right in two years.
In terms of substance, the Fed action strikes me as a nonevent, like a kid jumping in front of a parade so he could tell his folks that he led them across town. This sentiment is rooted in what the earnings season told us, a development that was only surprising if you believed that the summer slowdown was anything more than an inventory adjusting speed bump. As previously noted, knocking a few more basis points off of lending rates is not going to stimulate borrowing and so hiring by either the cash rich or barely-hanging-on enterprises that make up most of the economy. To the extent that rates drop, the greater impact will be a negative one on savers. What QE2 does seem to have done is send a signal to those who unleash tsunamis of buying or selling on a daily basis that “risk on” is, for the time being, much more prudent than “risk off”. So on more days than not, money pours out of safe havens and into just about anything that has the potential to go up in price. At least for now.
Also lending impetus to the upward bias in equity prices is the calendar. The number of weeks until every money manager’s 2010 performance get indelibly printed is rapidly dwindling, and not a few of them are wishing they had been more fully invested. This alone makes me think that the intermediate up-leg that commenced in earnest on September 1 will continue for a few more weeks at least. And as we look to 2011, I see a global economy not only gaining traction but perhaps even shifting gears. While large swathes the US economy continues to face dreadful obstacles, the export oriented portions are thriving. What will likely put 2011 in a much better place than 2010 will be that construction activity appears poised to swing from being a drag on the aggregate (declining) to being at least a slight positive. It is also likely that while lay-offs by state and municipal entities will continue, the rate at which these necessary cuts are made will slow. It adds up to more spending power coursing through the economy, more discretionary spending on things that millions of households have underspent on for the past four years. The resultant improvement in GDP and earnings should be such that we should not be surprised to see the Bull Market tack on a third year. That said, I believe the intermediate trend that commenced on September 1 has advanced to the point that thinking about selling, harvesting a few positions around the edges in order to insure that one has buying power the next time the Market goes into one of its periodic swoons, probably ought to be taking precedence over thinking about adding new positions. But that is a tactical consideration in what remains a positive long term outlook.
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