Thursday, August 27, 2009
From DailyWealth – Great Post by Dan Ferris:
Psychologists call it “recency bias.”
It’s when you assume what just happened recently will continue to happen indefinitely. In the stock market, when “up” is happening all around you, it’s normal to abandon any thought of “down.”
But I strongly caution you, especially when taking new positions: Don’t forget to look down. Don’t buy because stocks have gone up. Buy only what is cheap and safe.
The stock market has few investors looking down now. The American Association of Independent Investors (AAII) sentiment index says only 40% of investors are bearish. It was 70% bearish back in March.
Everyone was looking down then. Now, they’re all looking up. They don’t want to miss the fireworks.
Looking down right now isn’t easy. Some of the world’s most famous and successful investors are having trouble doing it. Author, hedge-fund manager, and former Morgan Stanley analyst Barton Biggs isn’t looking down. He says it’s a new bull market. George Soros isn’t looking down. He says the economic stimulus worked and the bottom is in.
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Wednesday, August 26, 2009
From Lew Rockwell
Help give Ben Bernanke nightmares by pre-ordering Ron Paul’s next bestseller, End the Fed, for just $13.19, in a handsome hardback edition. This important work can strike a moral, economic, libertarian, and constitutional blow at the central government, the central bank, and their cartel of banksters and Wall Street crooks, if we help.
Step One is helping make sure that End the Fed debuts at #1 on Amazon.com on its publication date, September 16, 2009. This will light a firecracker underneath the establishment, and advance the cause of freedom and sound money by leaps and bounds.
Ever since it was schemed by the Rockefeller, Morgan, and Kuhn-Loeb banking families in 1913, and signed into law by the inflationist-warmonger Woodrow Wilson, the Fed has been instrumental in more than 100 wars, the giant welfare state, the American empire, recessions and depressions — including this one — the rip-off of middle-class living standards, and the subversion of American freedom.
If we want the peaceful, commercial republic of the Founders’ dream, prosperity and civilization, sound money and free markets, we must End the Fed.
Second Quarter 2009 Quarterly Review and Outlook by Van Hoisington and Dr. Lacy Hunt
DEBT ACTS AS A BRAKE ON THE MONETARY ENGINE
One of the more common beliefs about the operation of the U.S. economy is that a massive increase in the Fed’s balance sheet will automatically lead to a quick and substantial rise in inflation. An inflationary surge of this type must work either through the banking system or through non-bank institutions that act like banks which are often called “shadow banks”. The process toward inflation in both cases is a necessary increasing cycle of borrowing and lending. As of today, that private market mechanism has been acting as a brake on the normal functioning of the monetary engine.
For example, total commercial bank loans have declined over the past 1, 3, 6, and 9 month intervals. Also, recent readings on bank credit plus commercial paper have registered record rates of decline (Chart 1). The FDIC has closed a record 52 banks thus far this year, and numerous other banks are on life support. The “shadow banks” are in even worse shape. Over 300 mortgage entities have failed, and Fannie Mae and Freddie Mac are in federal receivership. Foreclosures and delinquencies on mortgages are continuing to rise, indicating that the banks and their non-bank competitors face additional pressures to re- trench, not expand. Thus far in this unusual business cycle, excessive debt and falling asset prices have conspired to render the best efforts of the Fed impotent. The 100% plus expansion in the Fed’s balance sheet (monetary base) has done nothing to rekindle borrowing and lending or revive even the smallest spark of inflation. What is clear is that as long as private market factors in the monetary/credit creation process are shrinking, as they are now, the risk for the economy is deflation, not inflation.
By Niels C. Jensen
“You can’t beat deflation in a credit-based system.”
Robert Prechter
As investors we are faced with the consequences of our decisions every single day; however, as my old mentor at Goldman Sachs frequently reminded me, in your life time, you won’t have to get more than a handful of key decisions correct – everything else is just noise. One of those defining moments came about in August 1979 when inflation was out of control and global stock markets were being punished. Paul Volcker was handed the keys to the executive office at the Fed. The rest is history.
Now, fast forward to July 2009 and we (and that includes you, dear reader!) are faced with another one of those ‘make or break’ decisions which will effectively determine returns over the next many years. The question is a very simple one:
Are we facing a deflationary spiral or will the monetary and fiscal stimulus ultimately create (hyper) inflation?
Unfortunately, the answer is less straightforward. There is no question that, in a cash based economy, printing money (or ‘quantitative easing’ as it is named these days) is inflationary. But what actually happens when credit is destroyed at a faster rate than our central banks can print money?
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How Did We Get It So Wrong:
So how did we get it so wrong? How did we get here? Let’s go back to first principles: Ideas have consequences. And bad ideas tend to have bad consequences. We’ve taught two generations of financial managers theories that were patently absurd. Rob Arnott is going to be here later with us for the panel discussion. Rob recalls standing in front of 200 academics, professors in schools that teach economics. He asked them, “How many of you believe in the efficient market hypothesis?” Something like two or three raised their hands. “How many of you teach it?” All of them raised their hands.
We have been teaching generations of MBA students economic garbage. Gaussian curves and things you could model. The classic line is from Ibbitson, is a brilliant professor and a brilliant mind, who said economics is a science. No it’s not. It’s barely an art form. It’s voodoo. That’s what we practice. We look at the entrails of the Wall Street Journal and try to predict the future. Sometimes it’s about as bloody as sheep entrails. CAPM… poor Harry Markowitz’s Modern Portfolio Theory got so twisted beyond recognition. I remember being with Harry Markowitz. I gave a speech at a big hedge fund conference about five years ago, talking about why Modern Portfolio Theory was not going to work. The next year it was the 50th anniversary of Modern Portfolio Theory, and they brought Harry out to speak. He of course talked about why it was. I remember meeting him in the hall of this big hotel. And I asked him a couple of questions; I forget what they were because he so staggered me with, “Oh, you missed the whole concept of correlation and assets. Correlations change.”
And he started drawing quadratic equations in the air. But because I was standing in front of him, he was drawing them backwards so I could see them. I mean, this guy is absolutely brilliant. But he’s right, you should have a diversified portfolio of noncorrelated assets; but as John was showing yesterday, correlations in a crisis all go to one.
What money managers did was to create models that said, “If you do this, diversify your portfolio like this, and here are all your noncorrelated asset classes — see what happens? You get long-term positive results.”
And they would project that into the future. But they didn’t project crises, when correlations go to one. Modern financial theory only works in models if you assume a few things that are patently not true in the real world. So we trained a generation of managers and investors that they should buy 60% stocks and 40% bonds. Yet for the last 40 years, bonds have outperformed stocks. Where was that in the model?
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From Wired
As you shove your way through the crowd in a baseball stadium, the lenses of your digital glasses display the names, hometowns and favorite hobbies of the strangers surrounding you. Then you claim a seat and fix your attention on the batter, and his player statistics pop up in a transparent box in the corner of your field of vision.
It’s not possible today, but the emergence of more powerful, media-centric cellphones is accelerating humanity toward this vision of “augmented reality,” where data from the network overlays your view of the real world. Already, developers are creating augmented reality applications and games for a variety of smartphones, so your phone’s screen shows the real world overlaid with additional information such as the location of subway entrances, the price of houses, or Twitter messages that have been posted nearby. And publishers, moviemakers and toymakers have embraced a version of the technology to enhance their products and advertising campaigns.
“Augmented reality is the ultimate interface to a computer because our lives are becoming more mobile,” said Tobias Höllerer, an associate professor of computer science at UC Santa Barbara, who is leading the university’s augmented reality program. “We’re getting more and more away from a desktop, but the information the computer possesses is applicable in the physical world.”
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From Wired Magazine by Gary Wolf:
The Internet’s great promise is to make the world’s information universally accessible and useful. So how come when you arrive at the most popular dating site in the US you find a stream of anonymous come-ons intermixed with insults, ads for prostitutes, naked pictures, and obvious scams? In a design straight from the earliest days of the Web, miscellaneous posts compete for attention on page after page of blue links, undifferentiated by tags or ratings or even usernames. Millions of people apparently believe that love awaits here, but it is well hidden. Is this really the best we can do?
Odd perhaps, but no odder than what you see at the most popular job-search site: another wasteland of hypertext links, one line after another, without recommendations or networking features or even protection against duplicate postings. Subject to a highly unpredictable filtering system that produces daily outrage among people whose help-wanted ads have been removed without explanation, this site not only beats its competitors—Monster, CareerBuilder, Yahoo’s HotJobs—but garners more traffic than all of them combined. Are our standards really so low?
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Tuesday, August 25, 2009
SSRN Working Paper:
Several studies have examined whether a manager having an MBA or CFA leads to superior portfolio performance. However, these studies have yielded mixed conclusions. A possible reason is that most have considered only MBA or CFA alone, and most have not controlled for managers’ style targets. We examine MBAs and CFAs together, controlling for market conditions and style targets. We find that the CFAs do add value, but even more significantly (especially in light of events in recent months) – CFAs reduce and MBAs increase Tracking Error.
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From FT Alphaville
Pimco’s chief executive (Mohamed El-Erian) comments on Ben Bernanke’s reappointment for a second term at Chairman of the Federal Reserve.
President Obama’s announcement reappointing Fed Chairman Bernanke for a second four-year term does, and should, command broad based support.
Bernanke has played a major role in designing and implementing policies that averted an even larger global destruction of jobs and living standards around the world. Indeed, crisis management has defined Bernanke’s first term. His second term promises to be equally challenging as it will be defined by four major issues.
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From BlogHer
It’s been a precipitous fall. The balance in the majority of 401(k)s keep going lower and lower and lower.Now,to add insult to injury, investors are learning that it’s not just the stock market that is hurting their bottom line, it’s the fees being charged by their 401(k)provider.
“The financial industry is a scam. Advisers and money managers earn more on your money than you do, ” says Michael Edesess,Partner and Chief Investment Officer of Fair Advisors, and author of the 2007 book, The Big Investment Lie.“The problem with 401(k)s is that in very many cases the costs are greater than the tax benefits, making them a net negative wealth-builder.”
About those costs – do you have any idea how much you are being charged in administration fees for your 401(k)?
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investing | Graham | 
10:12 pm | 
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