July 2009

July 30, 2009 01:50 p.m.
This Week’s Clickable Pages-revised

The stock market bulls appear to have the upper hand in the markets this week, but I don’t think they have the better arguments. This week we look at a few analysts who make the case for caution, plus some other interesting writing I have come across.

One of the best explanations of how the financial crisis came about and where it is likely to lead is from David Smick, a little-known former Federal Reserve member. Read his essay here.

You cannot open an IRA without using a custodian. The term implies the person or company has some obligations and duties. Apparently that is not the case. The IRS decides who can be a custodian but doesn’t really police them or place any requirements on them. Bernie Madoff, for example, had a favorite custodian to which he referred all investors who wanted him to invest their IRA. Read more about this here.

Do you need more specifics about how to prepare for retirement? Check out this article on a “retirement boot camp.”

Young people used to receive some financial guidance from their parents and grandparents. That doesn’t happen much these days, or the kids ignore what older family members tell them. Here’s an alternative way for youngsters to learn about handling money.

Residential real estate drew a lot of headlines this week. Most journalists used the data to declare the housing crisis over or at a bottom. The situation merits a bit more analysis. For a good view of the nuances of the data and what they likely mean, read here. Preview: There is a difference between a bottom in the number of homes sold and a low in prices. The number of homes sold is likely to increase long before prices do.

Transportation is considered an excellent economic indicator. Almost all goods have to be shipped from the manufacturer to a retailer or buyer. Traffic for trucks and trains can be early indicators or turns in the economy. Take a look here at the latest indicators of freight traffic for railroads.

July 23, 2009 05:00 p.m.
A Trip Around the Web

Stocks had a great day today, and have been doing well the last two weeks. After dropping about 7% following a June 12 high, stocks apparently ended their correction. Today’s surge put the Dow above 9000 for the first time since January and the highest close since Nov. 5, 2008. There is momentum in favor of higher stock prices, but there aren’t many fundamentals to support them.

Investors should read Fed Chairman Ben Bernanke’s words closely. He continually says short-term interest rates will be low for quite some time because the economy is weak. Only the tremendous monetary growth from the Fed pushed the economy from its steep decline to stability. But stability is not growth, and job losses will increase steadily unless growth hit the usual post-recession levels of 4% or so. Consider this speech from a governor of the Federal Reserve.

It is a very impressive run from the March lows, but our capital preservation portfolios still are ahead for the year. The Balance Managed Portfolio, for example, is up over 5%. And we don’t have to worry about the markets turning south again.

The stock rally itself is not that impressive when the details are examined. Here is one analysis pointing out, among other things, that 50% of the gain in the Nasdaq is attributable to Apple. Most of the Nasdaq’s return is complements of 10 stocks.

Despite the strong earnings and a lot of cheerleading, banks are not out of the woods yet. Consider this video interview of Christopher Whalen, a banking analyst who was ahead of the crowd on the banking and real estate crisis. The banks are benefiting from subsidies, and they still have a lot of losses to recognize. The other key point, there can be a new round of losses if the employment picture does not improve.

If you didn’t think things were bad last fall and early this year and there was a need for significant action, watch this interview with Fredric Mishkin, a former Fed official. The interesting part is when he talks about how bad things were as late as March 2009.

People like to ask how investors, business executives, and government officials could have made all the mistakes they did. A couple of articles try to answer that, using scientific techniques. This article finds that group thinking even by mindless drones such as ants make better decisions than smart, rational individuals. This article by Malcolm Gladwell delves into the psychology of overconfidence. Behavioral finance argues overconfidence leads to many investor mistakes. You can find further discussions of both topics in my book, Invest Like a Fox, Not Like a Hedgehog.

July 16, 2009 10:00 a.m.
Some Rays of Sunshine?

JPMorgan announced earnings significantly above expectations. This follows solid earnings from Intel and Goldman Sachs. In addition, weekly jobless claims dropped below 600,000 for the first time in a long-time and were significantly below 600,000. The weekly claims, however, were muddled by the seasonal adjustment process and changes in the auto industry.

The profits for JPMorgan and Goldman Sachs came from investment banking and trading. The nuts and bolts banking business of JPM is having problems. Reserves for loan losses continue to rise and now are more than twice the level of a year ago. JPM said the quality of mortgages and credit cards is falling faster than expected and that it did not expect to make a profit on credit cards in 2010. It expects rising losses from prime mortgages.

Meanwhile, the problems at CIT and Advanta are worth paying attention to. Most investors have not heard of either of these companies, but they have been vital sources of funding for small businesses. Businesses with 500 or fewer employees provide most of the employment and economic growth in the country. They need to be healthy. But Advanta stopped issuing credit cards to small businesses, and CIT (which provides loans to small businesses) will soon file for bankruptcy. Many small businesses now must finance themselves on credit cards, and banks are steadily reducing credit card limits. It will be tough for the economy to grow much when small businesses cannot obtain credit.

The bottom line is that there still is not much of a basis for sustainable economic growth. There is the potential for a stock market rally, but it won’t be supported by economic fundamentals.

Here are some spots on the web that are worth your spending some time:

Donald Trump’s law suit was thrown out of court here. Trump claimed he was damaged by an author’s assertion that Trump’s net worth was less than a billion dollars.

Some interesting data about the mutual fund industry from Morningstar here.

The controversy over stocks for the long-term continues. Last week the Wall Street Journal had an article here questioning the data in Jeremy Siegel’s Stocks for the Long Run. A subscription might be required to view it.

Financial services companies have learned to gather and analyze all the data they can about you. Here’s a sample of what credit card companies know about you and how they use that data.

One reason the housing market is having trouble finding a bottom is potential buyers are having trouble qualifying for mortgages. See some examples here.

Health news: No matter your age, having a daily drink of alcohol can reduce the risk of Alzheimer’s according to this.

How detached is the stock market from economic fundamentals? This article argues that Federal Reserve policy is determining changes in the stock indexes.

Here are a couple of interesting pieces on the credit markets. It has been my belief since the credit crisis started that once balance sheets heal, bonds will be better investments than stocks. This two articles indicate we are not at that point yet. Read here and here.

July 8, 2009 03:30 p.m.
This Week’s Reading List

Earnings reports will begin soon. For many investors, that will tell whether we are in a new bull market or a bear market rally that is stretched. While we wait, read some of these items from the last week that are well worth your time.

David Faber of CNBC has a new book on the financial crisis. The channel has an excellent page on the web site, apparently derived from the book, that is a slideshow-type explanation of how the crisis developed. See if here.

Many market observers have pinpointed the bankruptcy of Lehman Brothers as the trigger for the worst of the financial crisis and near meltdown of the economy. The government did not have to save the company to avoid what happened, but it should have ensured the bankruptcy was orderly. For the ultimate insider’s view, from the guy who is winding down the remains of the company, see the video here.

How badly did the bear markets of 2008 hurt retirees? A survey for Charles Schwab and company says 9.5 million retirees now are considering re-entering the workforce. Details here.

For a concise, complete review of why we need to retain a capital preservation mode with our portfolios, see this interview with David Rosenberg, formerly with Merrill Lynch and now with Gluskin Sheff & Associates of Canada. Highlights: The rally since March 9 was not driven by earnings but by an expansion of the P/E multiple, which was a reaction to the end of the doomsday scenario. Current prices have priced in earnings that won’t be seen until 2012. Rosenberg believes we are halfway through a secular bull market that began in 2000.

How easy is it for someone to find your Social Security number and use it to steal your identity? Very easy, according to some researchers. If someone knows where you were born it won’t take much work. See the details here, and guard personal details such as your birthday and place of birth.

Do you still believe in stocks for the long run? So far, it turns out a mattress might be a better way to preserve your capital. Since 1996, three-month treasury bills have had a higher return than the S&P 500, according to Bespoke Investment Group. This change with each fluctuation of the stock index, but it makes clear that we have been in a trading range for a long time. Buying and holding stock indexes has not been a good move for many investors. See the details here.

Housing prices might be declining at a lower rate, but they will keep declining until 2011. That is the forecast from PMI, a major mortgage insurer. The forecast is a telling one, because it comes from a firm that does not have a strong interest in the market’s direction. PMI’s premium volume increases if the housing market is strong, but it makes money whether prices are rising or falling. See its forecast here.

Strong housing markets continue to be caught in the economic and housing downturn. The latest of the previously strong markets to fall is Nantucket Island. See the details here.

Was it Goldman Sachs or AIG that caused the bubble and its subsequent collapse? Last week a story from Rolling Stone made the case for Goldman. This week a piece from Vanity Fair makes a stronger case for AIG.

Looking for a creative way to terminate your credit cards? YouTube is full of videos of people doing just that, through plastectomy. Watch a few of these videos.

July 2. 2009 10:00 a.m.
Some Holiday Reading

Investors continue to battle over whether we are returning to a long-term bull market or still are in a long-term bear market. Today’s employment numbers tilt the argument in favor of the pessimists. I have maintained that it is too soon to bet on a new bull market and better to maintain a cautious diversified portfolio until the economic picture is clearer. While the battle continues, here is a collection of items that caught my eye in the last week and should be entertaining and enlightening for you.

David Rosenberg, formerly of Merrill Lynch and now with a Canadian financial firm, has an astute and clear presentation of the cautious case here. He also raises some interesting questions about the long-term implications of the current crisis. The job losses are predominantly hurting men and young people. He asks what that will do to families and society over time.

A research note from three economists at the Federal Reserve Bank of San Francisco argues that once the recession is over we will have a jobless recovery, a forecast they label “a basis for even greater pessimism about the outlook for the labor market.” Read it here.

You will be seeing more articles like this one. The SEC busted an investment firm it alleges persuaded investors to buy unsuitable investments by courting them with free lunch seminars. Insiders at the SEC recently said they are targeting this marketing technique, popular for years in areas heavy with retirees. While a potential benefit to those who might be duped into bad investments, it is a real blow to those who make savvy investment decisions but used the free lunches to keep their expenses low.

In my book, Invest Like a Fox…Not Like a Hedgehog, I point to research indicating that booms and busts (or bubbles) are an inevitable part of markets and economies. Scientific American has a good article on the scientific basis for bubbles here.

Rolling Stone, an unlikely source, has an extended article critical of Goldman Sachs and its role in developing the bubble economy here.

When Treasury announced plans for both TARP and PPIP, we argued that the programs were likely to fail. The primary reason is that banks don’t want to sell distressed debt at what buyers are willing to pay. There have been plenty of potential buyers for some time. The Wall Street Journal supports the argument here. Subscription might be required.

Are the markets since March 9 duplicating the early part of 2008? It is an important questions, because we know how 2008 ended with all those asset bubbles bursting. Read about it here.

Billionaire Wilbur Ross is one of a number of business owners who say there are no “green shoots” and no economic recovery in the offing. He says we need the government programs because banks are not lending, and consumers are not spending. Read a summary and see a video here.