Wal-Mart's growth strategy

Wal-Mart predicts sales will grow faster next year

Wal-Mart Stores Inc (WMT) expects slightly stronger sales growth next year as it makes changes such as opening more smaller U.S. stores and shutting 50 poorly performing stores in Brazil and China, executives said on Tuesday.

Of course they do.  Everyone always expects better sales next year.  And it looks like Wal-Mart has a plan, although it does depend on technological glitches, government failure, and greed (pretty good bets these days, I think):

EBT card system failure leads to empty shelves in Louisiana Walmart stores

The Louisiana Department of Children and Family Services is investigating possible fraud allegations stemming from the incidents, according to a spokesperson.

Nope, no fraud there.  It was all just a mistake.  Cuz, you know, it's really hard to have any idea whatsoever how much you've actually got left to spend on those darn cards.  This woman's story demonstrates just how hard it is:

One woman in Springhill was detained by police after trying to get $700 worth of food when she only had 49 cents on her card.

Yeah, the management at Wal-Mart really came through, in a clear case of helping their fellow man:

“We did make the decision to continue to accept EBT cards during the outrage so they could get food for their families,” Walmart representative Kayla Whaling said. 

Well, my guess is it turned out to be a pretty darn good day for sales at Wal-Mart.  I just have a sinking feeling that the taxpayers will be the ones footing the bill.

Risk premium

Even though our government is a week closer to default, the market risk premium appears to be edging lower.  This is one of those times that maybe the stock market doesn't behave terribly rationally.  Then again, maybe it is perfectly rational.  After all, can't we be relatively certain that Congress won't allow a default?  I'm not so sure.

Anyway, the market risk premium is sitting right about the same as last week, about 7.5%, perhaps a bit low considering the risks.  That said, I wouldn't exactly be loading up the truck right now, unless you've got the inside scoop on a great investment that no one else knows about, which is unlikely.  Also, about the same as last week, it looks like low beta stocks are still undervalued relative to high beta stocks.

As of right now, it looks like we'll be off to a rocky start on the week, with S&P futures in Sydney currently down 0.9%.  As we approach actual default, I would expect increasing volatility.  If we actually do default... well, maybe the Fed will just buy ALL the outstanding Treasuries and be done with it.  After all, it wouldn't much matter if the government defaulted then since the interest payments made to the Fed are basically just refunded back to the government anyway.  Clearly, there's nothing to worry about here.

Spin

Stocks soar on hopes for deal to avoid US default

No kidding.  Only, I guess market participants forgot that a possible default wasn't actually priced in to stocks.  So, the Dow (^DJI) ended the day up over 2%, or over 300 points.  And why?  Because of this:

The gains accelerated after House Speaker John Boehner told reporters that the House would take up a short-term extension of the government's borrowing authority.

Okay, I guess that's good news, since the deal would avoid a default next week.  But, isn't that really just ensuring yet another crisis over the same thing in what, a few weeks or months?

"It allows politicians to turn down the heat a bit while still keeping the broader issues on the front burner," Ablin said.

The last time the debt ceiling became an issue was 2 years ago.  The way I see it, Congress has had 2 years to figure out what to do this time, since it hasn't been a secret that we would yet again reach the debt ceiling.  It definitely hasn't been a secret since sometime in May when Treasury said it was implementing special measures to prevent hitting the debt ceiling.  All this accomplishes is a delay, and an even bigger crash should a default actually materialize.  Awesome!

Worst of all, this just shows the government doesn't even need to spin things any more.  Investors will provide their own spin.  So, remember that post I wrote yesterday about the market risk premium being surprisingly close to historical norms?  Well, I haven't figured it yet, but I'm sure it's back to some really comfortably low number now.  And more than that, I'm fairly sure that low beta stocks are even more under-valued relative to high beta stocks now.

In another bullish signal, small-company stocks rose even more than the rest of the market.

And small-company stocks tend to be high beta stocks.

Market imbalances

Last weekend, I built a model using the Dow Industrial stocks (^DJI) to determine what the market risk premium is for stocks.  The results weren't exactly what I expected.  I have, from time to time, estimated the market risk premium using some "back-of-the-envelope" calculations to get a feel for whether market valuations in general were high or low.  The last time I did that, I estimated a market risk premium that was, on an historical basis, relatively low, perhaps 4 or 5%.  So, I was somewhat surprised to find that using this model revealed that the risk premium is currently (as of last weekend) about 7 or 8%, or about average for the last few decades.  And this result implies that current stock valuations are, in general, about average.

Knowing this, an investor might think that the stock market isn't accurately reflecting the risk of default on U.S. debt, and I have to agree with that, especially given the other global risks that we are facing.  These are not average times, and being that the risk premium should be a reflection of investor fear, the risk premium should be high.  It isn't.

In fact, one other surprising result from this model was that low beta stocks tended to be undervalued relative to high beta stocks.  It's as if investors are not looking at beta as a measure of risk, but rather a measure of reward.  Both of these are somewhat true, since a stock with a beta of 2 would be expected to rise twice as much as the market, but it would also be expected to decline twice as much, and it appears investors are ignoring that second part, perhaps because no one really believes the market is going to correct, or crash, any time soon.

And the result of this thinking, for whatever reason it is happening, is that there are some imbalances in the stock market, resulting in a better risk/reward ratio for lower beta stocks in general.  It's important to keep in mind that this is just a general statement and should not be taken as a recommendation to start loading up on low beta stocks.  But, perhaps, it does provide a good starting point for where to look for value priced stocks.

Sometimes you really don't want to follow the herd

You say Twitter, I say Tweeter: Investor mix-up?

A bankrupt electronics retailer appears to have gotten caught up in the investor fervor for Twitter.

Apparently, there was some confusion between the tickers TWTR and TWTRQ.  Just a guess, but I doubt that there's ever been an IPO with a ticker that ended in Q, except maybe Q.  Of course, the fair thing to do would be to cancel all the purchases, because it's an easy mistake to make!?!  Takes a couple of seconds to check what the company name is too.  Besides, Tweeter, Twitter, what's the difference?

It just seems un-American to me to stop trading because of some confusion.  I mean, why shouldn't we be allowed to profit from someone else's confusion?  It happens in the real world all the time, so why not in the Wall Street dream world?

This is probably a good demonstration of the herd mentality that often takes over in stocks.  Someone got excited because a stock started moving up, and not having any idea why it might be moving up decided they needed to get some of that.  Besides, if we're going to stop trading because of some confusion, then we might as well just shut down the stock exchanges altogether.  In case nobody noticed, there's a lot of confusion in the market.

What are the facts?

Government Shutdown: Good News or Bad News for the Economy?

But there are reasons to think this would be good.

I already knew that.  In fact, I can think of all kinds of good possible outcomes if the government shuts down.  I'm still waiting to hear what would be so bad about a government shutdown.

Be that as it may, the article explains how a government shut down could help ease the passage of a debt limit increase.  Basically, a government shut down is supposed to lead to market turbulence (which it apparently has, unless you subscribe to the notion that I do: that stocks are in general overvalued and due for a correction), Republicans will be blamed, and "outside players" will pressure the GOP to cut a deal.  Please.  This isn't a good.  It's more of the same.  Many of the problems we in the U.S. face today are the result of a whole lot of deal cutting and compromising.  Instead of compromising between two ideologies, why not just give up the ideology and do what's best?  Anybody that thinks that the actions of politicians demonstrates their willingness to stand up for what they believe is right is just plain wrong.  It is a demonstration of their unwillingness to think rationally about each situation.  This doesn't apply to just Republicans; it applies to all politicians.  They need to learn to separate their thinking from their emotions.  But, that might lead them in a direction they don't really want to go: they may realize how wrong they've been.

But the author of this article has issues of his own:

This is a fact.

I think somebody needs to reeducate the author about the difference between fact and opinion.  There's barely anything factual in the article, and certainly not the "fact" that this statement refers to:

[E]veryone knows that if the government shuts down, and the polls ask which side is responsible, the majority will say the Republicans.

Speculation about what's going to happen in the future is just speculation, not fact.  But here is a fact:: I blame the Democrats for any shutdown because they passed Obamacare in the first place.  It wasn't popular then, and from what I've heard from people around here, it isn't now.  The Democrats want to claim as fact that Obamacare is popular now, apparently thinking that Obama's reelection means people like Obamacare.  Obamacare isn't popular with me, and it isn't with a lot of people.

Anyway, it's time for politicians to stand up and say "When the facts change, I change my mind.  What do you do?" (a quote sometimes attributed to Keynes, but called in to question here).  What I mean by that is that politicians need to consider the facts as they are currently.  Instead of pushing some ideological agenda and then allowing the other party to gut that agenda with their own ideology, let's take a look at what is really the best for our country, and for individuals.  Too often, with compromise, we end up with legislation that doesn't accomplish what it's supposed to accomplish, all because the politicians are worried that their constituents may not think that the best thing is, in fact, the best thing and not something to be compromised.  Take a look at the "Three-Fifths Compromise" for an example.  The compromise was meant to gain support for the new Constitution, and while it achieved that, it can also be argued that it ensured that voters in slave states had greater say in the government than they would have had; it ensured a higher rate of importation of slaves to gain additional voting power; and in the end, it led to slavery lasting much longer than it probably would have without it.  Is that good?

I usually save this sort of rant for my personal blog, but happened on the article while looking for business news.

Inside information

Some traders got 'no taper' decision news earlier

Well, not necessarily.  It does seem that way though.  But just suppose that someone decided right before the announcement to make a big bet on the announcement.  It's not that unreasonable to think that someone looked around and realized that the market had already priced in the taper.  It isn't unreasonable to make a bet against something if you think that something has already been priced by the market.  So... right before the announcement is made public, you place a bet that the announcement is going to be not what everyone expects.  If you're wrong, there's not much to lose.  If you're right, though, the gains can be big.  There is asymmetry between potential gains and losses.

So, some big player places their bet a fraction of a second before the announcement is made.  And the high frequency traders are all over it, since their program may assume that somebody knows something and an increase in buying means there was a leak.  They jump on the bandwagon, and they're all winners in this case, because one person (or more) decided to the potential reward outweighed the risk.

But then again, maybe it was a high frequency trader that decided to place a bet a little bit early, thinking that other high frequency traders would jump in on their buying.  Then, if the announcement was against them, their program could close their position and still make a gain.  For the first trader, the only risk is that others won't follow suit.  They know that they traded without inside knowledge, but they're the only ones that know that.

The point here is really that investors shouldn't pay an awful lot of attention to headlines.  This particular headline says that some traders got the news early.  But in order to make this trade work, all that a trader needed to do was to make it look like they had inside information.  And in a way they did.  The inside information was that they didn't really have inside information.  Or, maybe they did.

A rocky fall? Perhaps.

Stocks are about to plunge, Wells Fargo warns

The Wells Fargo strategist has been bearish on stocks all year, even as she watched the S&P 500 (^GSPC) add 21 percent.

And so long as she doesn't change her mind, eventually she'll be right.  It's an old story, I know.  But wait.  It gets better.

First of all, Adams is highly skeptical about the rally that the market has enjoyed thus far. 

I've always wondered about people who are skeptical about something that is actually happening, or has actually happened.  What does that mean, exactly?  I can see being skeptical about the reasoning behind the rally, but to actually be skeptical of the rally that has already happened doesn't make much sense.  Of course, it could be that we are all experiencing some kind of collective hallucination, in which case, we would be right to be skeptical of what we see.  But then again, if that were the case, we would probably be better off accepting what we perceive to be truth as truth and act accordingly.  Kind of like if you're crossing a street and hallucinate a car about to run you over, you're probably better off trying to get out of the way of that car, even if it isn't there.  Unless, of course, in doing so you run right in front of the freight train you didn't see.

"It's all about emotion at this point. The entirety of the S&P 500's increase this year has come via the multiple," Adams said. "It's been simply through the amount that investors are willing to bid up the value of the future earnings stream."

Yeah, I don't think it's much about emotion, unless that emotion is that you'd rather make a higher return than the negative real returns otherwise available.  Still, as I've said a few times this year, or at least I think I did, stocks appear to be a bit overvalued, and after this rally, are even more so.  And, as interest rates rise, it's almost a sure thing that stocks will fall.  Of course, it could be that the market will fall before interest rates rise because of anticipation of the rise, but that doesn't appear to have happened given the current S&P 500 PE of nearly 20.

As it happens, I think the call the the S&P will revert back to about the same level as it was at the beginning of the year might be a bit conservative.  Much of what I've seen implies that stock investors are relatively highly leveraged, which will likely contribute to a much larger decline in stocks.  The good news is, from what I've seen, is that there is also a lot of cash on the sidelines which may somewhat limit the downside.  But, I think that the S&P 500 with a PE of 17 won't be enough to draw this cash in, and expect that when the "crash" does happen, it will be further than 1,440.  After all, that 17 PE wasn't enough to draw in the cash at the beginning of the year, and 17 is still relatively high, especially given the global risks we're seeing these days.

Couple the rise in rates with slow earnings growth, and Adams believes the market is in for a very tricky fall.

I agree, but I think this is an oversimplification.  Investors already expect higher interest rates, so I don't think the Fed tapering will have a significant impact in the short-run, other than, of course, the relief rally that happened immediately after the Fed announcement.  Slow earnings growth is, I think, expected despite the high PE multiple for stocks.  The high PE is the result of low returns available elsewhere.

Well, whatever happens with the Fed and earnings, I expect this autumn to be volatile at the least.  Will the S&P hit 1,440 by year end?  It's a possibility, but it does depend on interest rates rising higher than they are currently, and I'm not convinced that will happen right away even if the Fed does begin to taper its purchases.  I think interest rates already reflect the expectation of tapering, and actual tapering shouldn't lead to much change.

The coming orderly panic

5 years after Lehman, how safe is your bank?

... and the next panic will be more orderly.

 I want to know who actually thinks that.  Let's look at the definition of panic.

sudden uncontrollable fear or anxiety, often causing wildly unthinking behavior.

So, yeah, people will be experiencing uncontrollable fear or anxiety, but they'll be more orderly about it without thinking about it.  This statement alone tells me we better start thinking about the whole "next panic" thing now, because we won't be thinking about it when it happens.  It's probably better to try to avoid the next panic altogether, but I doubt that's possible.  And when people start saying there won't be another panic, that will be the time I start to panic.  Only, of course, my panic will be well-controlled.

All of that aside, way down the page, the article makes mention of what, to me, was a major contributing factor to the last panic, and will most certainly result in yet another panic:

Two other areas of criticism are worth noting. The first is the critique that the real problem had little to do with banking excesses or the lack of regulation but with government policies, both from the Fed, Congress and successive administrations. These policies, such as those that promoted home ownership, distorted private sector decisions and led to asset bubbles and busts.

We can see this happening again in real estate, as well as higher education, and probably other areas as well.  This is what happens when the government adopts the "everybody gets one" philosophy.  This is why I expect the next panic to come much sooner and be much worse than anybody expects.  But, I'm not quite ready to panic yet, and who knows, maybe there never will be another panic, cuz, you know, we're that much smarter than we were before.  Just look at how many people are graduating from college these days.  We MUST be smarter.  And being smarter means our unthinking panic will just naturally be more orderly.

BNCC Update

A while back, I started covering BNCCorp as a result of some "whispering" I heard regarding the company's mortgage banking operations.  My opinion was, basically, that this was a fairly risky investment based on the low volume of shares traded and that a valuation of the shares would likely show that the stock would not provide a high enough return given the liquidity risk.  I didn't publish that article because over the last couple of days, the volume is up significantly at about 10 times the average and it at least looks like someone is accumulating shares.  I don't really know why that would be happening now, since the latest quarter wasn't terribly impressive in my opinion.  For the time being, I'm keeping an eye on this stock.

Incompetence compensation

Ballmer’s Pending Departure Only Makes His Mistakes More Obvious

In regular early trading, Microsoft shares were up 7% in to $34.68. Since Ballmer owns some 333 million shares, news of his retirement actually boosted his own net worth by about $1 billion.

Yeah, it's a crazy world we live in where incompetence is rewarded with extreme compensation.  But worse, when the incompetent quit, they get rewarded for that as well.  So, here's proof of my own genius: "I quit."  See?  I didn't get rich.

But this article is about Ballmer's mistakes, which included "his failure to develop a successor, or even a strong cadre of possible successors."  Um, given his own ineptitude, wouldn't that actually be something he did right?  Do stockholders really want an incompetent CEO grooming their own successor?  Why?  So they can have more of the same?  So now we can fully understand why Microsoft (MSFT) is up so much today: Ballmer "screwed up in reverse," as Hawkeye Pierce would have put it.  This kind of thing makes me truly wish people would recognize that I'm quite capable of making mistakes, as much or more so than others, even Ballmer.

Keep your fingers crossed

Nasdaq trading halted due to technical issue

"If I was back in the days of 10 years ago managing 300 traders I'd put the directive out to every one of them 'we don't put any orders in at the open' ... no one trades for 60 minutes," said Joe Terranova, chief market strategist for Virtus Investment Partners and a CNBC contributor.

Yeah, I love being dependent on technology.  I was having a pretty good day.  Now, who know?  At least I don't have any trades outstanding.  The frequency of technical "glitches" seems to be getting out of hand.  Which reminds me.  I dislike the term "glitch."  It's a word people use when they don't really know what happened, as is the case here.  I think the folks that run the exchanges should know what happened.  I certainly hope they don't just reboot and keep their fingers crossed.  Finger crossing never works for me.

The uneven playing field

How many 'busted' trades? They don't know!

It seems like they should, but it's not surprising that they don't.

Many of the trades that Goldman Sachs erroneously placed through the New York Stock Exchange, the CBOE and Nasdaq have been or are in the process of being cancelled by the exchanges.

I'm pretty sure that if I made a bad trade then just told these folks that it was all just a big mistake, I'd just be out of luck.  After all, if I go bankrupt, it won't cause a financial meltdown.  But I think I deserve the same consideration as Goldman Sachs (GS) does.

It seems odd, to say the least, that this kind of information is unavailable. It means that we can't answer some basic questions about the frequency and fairness of trade cancellation.

The fairness question is important. Smaller market players are very suspicious that big traders-Wall Street banks and larger hedge funds-are granted cancellations regularly, while others just get ignored. One trader told me he had tried to have trades cancelled a few times but never received satisfaction.

So, I guess I'm not alone.

"Anyone but Goldman would have just had to eat the loss," another trader said.

Well, I suspect there may be a few other select players that get special treatment.  The market is rigged, end of story.  The best a small investor can do is to avoid making the same mistakes that the big traders can make and get away with, and to be aware that the playing field is, in fact, uneven.

Let's make stock trading more personal

Goldman Sachs technical error causes erroneous U.S. option trades

Goldman Sachs said in a statement the firm does not face material loss or risk from the issue.

But then, later in the article:

Potential losses could range in the millions of dollars, the source said, but it was unclear just how many transactions were involved and what any final cost would be.

Yeah, our markets work just fine.  So, somebody makes a mistake, or in this some software malfunctions, and apparently, somebody else ends up the loser.  Either that or millions of dollars in losses are immaterial to Goldman Sachs (GS).  Regardless, I do wish the exchanges would ban automated trading, or at least put a requirement to actually hold a position for more than a fraction of a second.  Or even better, just return to the old days when traders stood on a street corner shouting out buy and sell orders.  It would make the whole stock trading business a whole lot more personal.  And, the exchanges could sell tickets to spectators.  I'll bet that business would be great, especially if the exchanges allowed disagreements to be resolved through physical means, as opposed to the current "my computer is closer to the exchange than your computer so I win" nonsense.  So, in case I haven't been clear, I don't like automated trading.  I don't like reading that some people lose money because other people failed to control their own software.  And yes, I realize that this article never directly said that any of that happened and I'm reading between the lines some.  But if I didn't do that then I wouldn't have anything to say about anything.

Comment Comments

Ben Bernanke’s Huge Gift to Taxpayers

This article is mostly about the fact that the Fed has to turn over the majority of its profits to the Treasury and how this fact has actually helped reduce the deficit.  Nothing really surprising or earth-shattering if you have any idea how the Fed works.

And apparently, there are plenty of people who don't understand how the Fed works.  Just take a look at the comments.  Of course, we could hypothesize that at least some of these people don't really believe what they have commented, but are trolling.  I personally don't like trolling because: 1) People say they are trolling to cover for their own lack of knowledge, and 2) Trolling contributes to the spread of a whole lot of B.S. since at least some people won't know any better and proceed to repeat what they read elsewhere.  So, here are my responses to some of the comments.

What a bunch of lies.
The government creates the assets and creates the money to buy the created assets. It controls price of the assets it buy and it controls the interest it pays itself. Then, it calls all of it profit. It is like Enron with no accounting rules.

I'm not sure what "lies" this author is talking about.  It may very well be similar to Enron, except that Enron didn't have the ability to print its own currency.  Now, I'm not taking the stance that everything the Fed has done is beyond question; as long as those assets remain on the Fed balance sheet, we don't know what the final outcome will be.  The Fed may have to take a loss on some of those assets, but to my knowledge, there is no reason to assume that the Fed will ever have to sell any of its assets.  But there are certainly scenarios under which the Fed might need to sell assets at a loss.  This doesn't make anything a lie though.

How many Fed Bucks to date? $4 trillion? How many jobs? Follow the money....it sure looks like it gets pumped into the giant siphon of Wall Street. It's nice to know that the very richest on the planet will continue to be set for life. It's not so nice to know that the rest of the country isn't getting the same benefit.

Yeah, it may look that way, but that's not Fed money getting pumped into Wall Street.  The interesting thing is that the Fed money is for the most part, sitting in bank reserves, earning interest at 0.25%.  This is why we don't have hyperinflation, at least not right now.  Could we?  Yes.  The rally in stocks is from investors pumping more money into the stock market.  Some of that money is going there because there are no real returns anywhere else.  And for the record, "the very richest on the planet" will continue to be set for life regardless of what the Fed does, pretty much.

I just don't understand why people want to blame the Fed for the increasing disparity in incomes here in the U.S.  Fed policy has also helped contribute to the rebound in home prices, which has benefited the middle-class as well as anyone else, and perhaps more so.

Jerry- Bernanke missed the biggest economic event of his lifetime (housing bubble) with all those credentials while Ron Paul, with no formal training in economics, called the bursing of the housing bubble exactly as it would happen way back in 2003, yet Congress refused to listen.

This type of argument always makes me laugh because there's always someone who "calls" the future, like Ron Paul apparently did, "way back in 2003."  Say a bad thing is going to happen long enough, and sooner or later you'll be right.  Worse, then lots of people will think you're a genius.  I'm not convinced that anyone "missed" the housing bubble.  The Fed was raising interest rates, but mortgage rates stayed stubbornly low, fueling the housing bubble.  Talking from experience, I can say that there were a lot of people that said the Fed needed to LOWER interest rates, and that would fix everything.  I find it doubtful that Ron Paul called the bursting of the housing bubble "exactly as it would happen" either.  I'm not sure Ron Paul can explain exactly what happened now.  And I'll bet that Ron Paul wasn't speaking his own mind when he "called" the housing bubble; I suspect he heard it from someone else, but of course, it's Ron Paul that's a genius.  Nothing against Ron Paul - I'm not sure there's a single person who can explain exactly what happened, although there are plenty of people who probably think they know exactly what happened.

So, let me take this opportunity to make a place in history for myself: There's going to be a recession, and it's going to be bad.  Now, I've just got to sit back and wait.  Sooner or later, I'll be right.

I love coming here daily to hear the arm chair macro experts say where Ben is getting it wrong. Ben is brighter than 99.5% of the population and is an expert in his field.

Me too (referring to the coming here daily part, not the brighter than 99.5% part).  But economics is so simple, even a caveman can do it, so everyone is clearly an expert because they took economics in high school.  Just like that high school financial literacy class makes everyone a financial genius.  Just ask people and most will tell you that they're more knowledgeable about economics, finance, and likely whatever other subject they took a class in than the average person is.  Oh yeah.  And they're better drivers than average too.  Which makes us humans, as a species, pretty damn special.  Way better than your average species.

Well, this has been fun, but I've really got to get to work.  Have a great day everyone, and leave a comment so I know there are some real people reading this stuff.

Disaster or buying opportunity?

Walmart Earnings Disaster Exposes a Collapsing Economy: Davidowitz

"I don't think we're in a recession right now, but I think there's a 50 percent chance we'll be in one next year," Davidowitz shouts, and there's nothing the government is going to be able to do about it. "We've spent all the money, we've borrowed all the money, and we're in the tank."

 Yeah, I don't know.  I think we've really been in a recession for about a decade now, but my definition of a recession is a bit broader than the government's.  Otherwise, this is true, and we're probably headed for disaster.  We have spent all the money.  We have borrowed all the money.  But, we're not in the tank yet.  We've still got a long way that we can fall.

But, you know, I was really hoping that Walmart's results really were because Walmart (WMT) did suddenly get stupid, at least relative to Walmart shoppers.  Not so much because it might mean the economy was better than it really is, but that consumers were finally wising up to what Walmart and others are doing: they're making profits from government (for lack of a better term) welfare.  These companies can pay lower wages because the government will subsidize those wages, and then those subsidies get spent at, you guessed it, Walmart.  In case you haven't guessed, this isn't my favorite business model, and one that I think will ultimately ruin the U.S. economy, if nothing else does that first.

Unfortunately, it appears that sinking retail sales isn't just an affliction of the Walmarts of the world; Macys (M) also announced disappointing results indicating, perhaps, that more-affluent shoppers are cutting back as well.

As I'm writing this, the Dow is down 200+ points on the day.  Is it a buying opportunity?  It could be, but I think the market has a way to go down before I'd jump in with both feet.  Rising interest rates are making stocks more expensive, and for a while, at least, I expect to see more of the same.  I could, though, change my mind tomorrow, or even later today, so make sure and follow me on Twitter, or Google+, or subscribe to my RSS feed.  I'm going to add a Facebook page soon, so be on the lookout for that as well.

Is Paul Krugman right?

Okay, so I'm taking a clue from Yahoo Finance and putting a Nobel prize winner name in the headline to attract attention.  I truly am sorry.

Paul Krugman is Right, It Turns Out, About ‘Uncertainty’

I suppose that depends on your perspective.  The so-called "experts" of the world thrive on twisting ideas to make them fit reality, gaining fame and wealth for themselves in the process.  So, with that in mind, let's take a look at this article, piece by piece.

New York Times columnist and Nobel-prize winning economist Paul Krugman is taking on the role of mythbuster: in his latest column "Phony Fear Factor" -- he claims to have already blown up the following economic myths:

• Monetary expansion needn't cause hyperinflation.
• Budget deficits in a depressed economy don’t cause soaring interest rates.
• Slashing spending doesn't create jobs.
• Economic growth doesn't collapse when debt exceeds 90% of G.D.P.

First, let me say this: The article has actually reversed the supposed myths.  For example, "Monetary expansion needn't cause hyperinflation" is not the myth.  It is the reality, while the myth, if there is one in there, is that monetary expansion always causes (hyper)inflation.  The others are similarly backwards, so I'll be referring to the myths as they should apparently have been worded.

The first myth is that monetary expansion causes hyperinflation.  Of course it doesn't always, and anyone who believes that monetary expansion always has some predictable result probably needs to go back to school, or, perhaps should just leave the thinking to someone else.  To use economic terminology, monetary expansion leads to inflation, ceteris paribus, or all other things equal.  But if the velocity of money slows down while the currency base expands... well, it depends on exactly how much of each change there is.  It isn't inconceivable that there would be deflation even with monetary expansion.  I'm not sure that this was ever a myth at all.  Did some people believe that the current Fed expansion of the monetary base might lead to hyperinflation?  Of course they did.  Look what happened to gold prices over the last few years.  This time, those people appear to have been wrong.  but to assume that they will always be wrong would be a huge mistake.

The second myth is that budget deficits in a depressed economy cause soaring interest rates.  In a true market economy, interest rates would have risen, maybe enough to be referred to as "soaring."  But this isn't a true market economy and interest rates are being held artificially low by the Fed.  The Federal Government is free to borrow as much as it wants because the Fed is willing to loan as much as the Federal Government wants to borrow.  But in a free market economy, the scarcity of loanable funds would force the government to pay ever higher interest rates.  With the Fed, there is no scarcity of loanable funds.  The Fed will just print more, and interest rates stay low.

The third myth is that slashing spending creates jobs.  No.  I don't know anyone that thinks this.  Slashing spending and cutting taxes proportionately could have the effect of spurring job creation.  But the idea that simply cutting spending will somehow create jobs is ludicrous.  So, if all consumers just decided to not spend any money, we're well on our way to 4% unemployment, I guess.  Of course not.  It isn't spending cuts that creates jobs; it's the tax cuts that should go along with those spending cuts that will give consumers more money to spend.  But if consumers don't spend that money, then even tax cuts won't do any good.  Another way to look at this is to realize that the best thing government can do to spur job growth is to butt out.

The final myth is that economic growth collapses when debt exceeds 90% of G.D.P.  Now, think about this for just a second.  Let's say I'm going to make $100,000 this year, so I go out and borrow $90,000 payable in 1 year at 0% interest that I can just roll over into new loans every year.  Is my economic standing doomed?  Not so long as my interest rate is 0%, and actually, I might be able to manage at as much as 10% or more.  I realize that this isn't exactly the case for the government.  Their interest rate isn't 0%.  I used that example to show that the collapse is not so much dependent on the dollar amount of debt as it is dependent on the interest rate.  As far as the dollar amount of debt compared to G.D.P. goes, it is dependent on whether anyone wants to loan the government money with a debt level that high.  Of course, in our artificial world, the Fed stands willing to loan however much the government wants to borrow, so even that isn't an issue, at least not at the moment.

But the article I'm addressing isn't really about Mr. Krugman.  I think maybe they put his name in the headline just to get attention.  Reference a Nobel prize winner and suddenly people are interested.  On the other hand, mention me and at best people will say, "Who?"  before moving on to the funny papers.

No, this article is about uncertainty.  More specifically, it is about something called the Economic Policy Index "which has plunged to levels not seen since 2008. 'Uncertainty has improved,' says Newman."  Um, no.  Regardless of how people feel about the uncertainty of the future, it is always uncertain.  The future is never more certain, or less certain.  It is always uncertain.  However, people may feel more, or less, certain, but in reality they are still just as uncertain as ever.  Nobody can know what the future holds, no matter how certain they are of the future.

Now, it might be useful to know how uncertain people feel about the future.  In fact, if people in general are more certain about what the future has in store for them, then they will act with increasing confidence, and that is a good thing, at least when the economy is recovering from a big, bad recession like the one we've just experienced.  Confident people spend more, and this in turn leads to increasing demand and job creation, which in turn make people even more confident.  Eventually, though, that confidence turns to overconfidence, and that's where it appears we are right now, at least that's the impression I get when I read this article even though that wasn't the impression I think I was supposed to get.

The part of the video that struck me the most was when the participants started talking about how "all the tail risks are behind us."  Um, no.  Only the ones we expected, which are really the risks to be least worried about.  It is the unexpected risks that can really wreak havoc.  Those risks are still there.  They didn't go away because we somehow muddled through our problems.

Krugman brings it full-circle: "The truth is that we understand perfectly well why the recovery has been slow, and confidence has nothing to do with it. What we’re looking at, instead, is the normal aftermath of a debt-fueled asset bubble..."

He's right, you know.  Unfortunately, he probably doesn't care much (and neither do many people) whether I agree or not.  The main thing, though, is I don't think we're out of the woods yet.  I don't think anything has been "proven" here.  We still don't know if the economy is going to finish the collapse that was started in the financial crisis.  There is still significant uncertainty in the world despite people thinking it's all behind us, and that thinking is what will make those unseen tail risks all the more destructive should they arise.

If we assume, then, that people in general really believe that those bad "tail risks" are all behind us, then it is likely time to head for the fallout shelter, in a metaphoric sense at least.  The time to be defensive is when everyone else believes "the worst is over."  Of course, it may be some time before the really bad, surprising tail risk hits us, so it probably isn't really time to move completely into that fallout shelter.  But I do think it's time to start building a defensive position, and at least open the door to that shelter.

BNCCorp: Some Background

Some people would say that history is already priced into a stock and is, therefore, irrelevant. I think, though, that a thorough understanding of how the stock got here is needed in order to understand where the stock might be going in the future. For that reason, I’m going to start including some short background research articles for the stocks that I’m following, or considering following, beginning with BNCCorp (BNCC), a regional bank holding company headquartered in Bismarck, North Dakota.

BNCC data by YCharts

On January 14, 2008 BNCC announced plans to voluntarily deregister its common stock with the SEC and deregister with the Nasdaq global market. The company listed several reasons, including low trading volume of the stock, small number of individual investors, and cost of compliance with SEC regulations. The company does still maintain quarterly and annual reports that are substantially similar to those required by the SEC on its website (Source: Press Release). At the time of the announcement, the stock was trading much the same as it is today, closing at $12.65 on volume of 3,800 shares.

BNCC’s 2008 annual report showed net income of $2.22 million, or $0.67 per diluted share, with the company stating:

The key factors contributing to our earnings from continuing operations were an increase in net interest income due to the growth in our balance sheet, higher non-interest income from mortgage banking revenues, and reduced non-interest expenses. These improvements were partly offset by a $4 million increase in the provision for loan losses resulting from the difficult credit environment.

The 2009 annual report reflected much different results. BNCC showed a net loss of $20 million ($6.14 per share), largely due to a $27 million provision for loan losses. Also in 2009, the company “elected to participate in the U.S. Treasury Capital Purchase program because other forms of capital were generally not accessible by community banks.” This shows up on the balance sheet as approximately $21 million in preferred shares.

2010 turned-out to be an even rougher year than 2009. On January 26, 2010, the Office of the Comptroller of Currency (OCC) issued a Formal Agreement with BNC National Bank in Phoenix, because “The Comptroller has found unsafe and unsound banking practices relating to loan and investment portfolio management at the Bank.” Basically, the Formal Agreement required the bank to “develop, implement, and thereafter ensure Bank adherence to a written program to improve the Bank’s identification and monitoring of credit and underwriting exceptions to the loan policy.”

Later in 2010, the company discovered fraud on the part of one of its mortgage origination partners, AMS. While BNCC was carrying fidelity insurance, the insurance company balked at payment, with the result that BNCC’s 2010 annual report was even worse than 2009’s, showing a net loss of $22 million, or $7.13 per share. By this time, BNCC’s book value per share had fallen to $5.09.

Despite the dismal 2010 results, things started turning around for BNCC in that year. In November 2010, the company announced an agreement to sell some of its deposits and assets to Alerus Financial Group, a deal which was consummated in the first quarter of 2011. In November of 2011, the OCC terminated its formal agreement with BNCC, indicating the bank had successfully derisked its operations, at least to the satisfaction of the OCC. However, the previous couple of years had left the bank with little tangible common equity, and BNCC announced plans for an equity offering to raise capital. In the end, BNCC’s earnings in 2011-2012 proved sufficient to eliminate the need to raise additional equity financing, and the stock issuance was canceled in August 2012.

2011 results (EPS of $0.86) benefited largely from a reduction in the provision for credit losses, indicating higher credit quality of loans in the bank’s portfolio. 2012 proved to be a banner year for BNCC as the company earned $7.52 per diluted share, benefiting largely from mortgage banking results, a reversal of the valuation allowance on deferred tax assets, and a $7.5 million settlement on the previously mentioned insurance claim.



Which brings us to 2013. BNCC still has a bit of a hangover from its past difficulties, but the real questions are whether those problems, as well as future prospects for the company, are properly reflected in the current stock price ($12.50 at the time of this writing).

Gold and Jobs

Gold rebounds above $1,300 after jobs miss

Yeah, sorry.  Nothing to get excited about here, although the headline is, well, almost bullish.

Gold futures turned a steep loss into a small gain Friday after July payrolls growth came in short of expectations, leading analysts to say plans for the Federal Reserve to taper its bond buying could be pushed further out.

In other words, "leading analysts" say the Fed may give smart investors more time to unload their holdings before the big decline.  Oh wait, we've already seen a pretty big decline.  I expect more to come though.

“I believe gold will remain supported as long as the market believes tapering is off the table,” said Douglas Borthwick, managing director at Chapdelaine Foreign Exchange, in emailed comments.

Why would anybody continue to hold gold knowing that the Fed will inevitably begin to taper?  I mean, it's "off the table" for what, another month?  Tapering is coming.  The expected accompanying inflation never happened.  Gold is set for a precipitous fall.  There's nothing magical about gold.  It is just another form of fiat money.  The only thing that ever gave gold any fundamental value was the gold standard.  Now, gold's value works just like the much aligned fiat dollar.  Gold's value only comes from the belief that someone else will give me the same value for an ounce of gold as I give someone else.  I can tell you right now, no matter how bad things get, I will likely not give anyone $1,300 value for an ounce of gold.  Unless I happen to know someone who would give me more than that, of course.  Consequently, I'm not buying gold at $1,300.

What you're looking for

This is a new feature I’m thinking about including on the blog.  Blogspot sometimes shows search keywords that are used to find my blog, and I figured that maybe some of my readers might like it if I were to post some more commentary on those subjects.  Of course, if readers are finding my blog using those keywords, then I must have posted something about those subjects in the past, but it may be that the subject could use some updating or in some cases it may be that I merely mentioned a subject and never really delved into it before.  At any rate, I hope you find this new feature informative as well as entertaining.

Most of the searches involved a couple of items: interest rates and QE.  Then there was also a search for “why war doesn’t help the economy.”  I think that war search is particularly interesting, so I’ll talk about that first.

War

The main reason I find the war question so interesting is that I rarely, if ever, make any kind of statements that are so deterministic.  In other words, in this case, I don’t believe I have ever said that war doesn’t help the economy; in fact, I think it sometimes does.  I just don’t think it always does.  And sometimes, it does more damage than good.  But then again, it depends on how one defines “help,” or “damage,” or “hurt,” or most any other term one might use to describe an effect on the economy.  And it also depends on whether we’re talking about the long run or the short run, and what our definition of those terms is.  Not to worry, though.  I’m not going to spend a lot of time defining those terms.

The way I see it, war, at least in the short run, is mostly negative.  It removes capital, both human and otherwise, from the economy.  The removal of capital from the economy lowers potential GDP, which of course means that the economy is actually capable of producing less.  In the case where the economy has a “recessionary gap,” this could actually be seen as a positive.  As potential GDP falls, unemployment declines.  Most people would agree, though, that war isn’t a really good solution to unemployment.  Then again, while I won’t go into it here, from an economic perspective it might actually be a great way to lower unemployment.  Economics rarely takes into account the extreme difficulties that might be put on a few to benefit the many.

Then again, in the short run, war could bring about some positive economic effects.  For example, it could lead to technological advances and greater efficiencies than would otherwise have occurred.  I think World War II is a good example of this, but other wars, not so much.  It depends on how much of a threat the entity that we’re at war with actually poses to our country.  And I don’t really think our economy would benefit so much from those things until after the war, perhaps making these benefits more of a long run consideration.  Regardless, in my opinion, most wars turn out to be a drag on our economy in the short run.

In the long run, if you’re on the winning team in a war, there can definitely be some economic benefits.  If the enemy is crushed, there will be less competition and industry should flourish.  Then again, if you’re on the losing team, war might bring about some positive changes that in the long run will give your team a competitive advantage.  Once the war is lost, and your economy is in shambles, the loser is forced to become better with less and that force can lead to increased competitiveness in the future.  The act of having to rebuild, of being forced into a situation where you have no choice but to do better can lead to tremendous advances.  I think that most of the time, people perform their absolute best when they aren’t given a choice; it’s do or die.

On a global basis, in my opinion, war is a net negative.  But economically speaking, it may be that war is net neutral.  For every gain that comes from war, there is also a loss.  Whether war does or doesn’t help the economy is really a subjective question and is simply a matter of opinion.  My opinion that it is a net negative comes from the idea that the suffering brought on by war is far worse than any economic benefit that may arise from war.

Risk free rate and QE

I’ve dealt with these subjects before and fairly recently, so I’m not going to go into a whole lot of detail here.

Some of the queries are just looking for what the risk free rate is in 2013.  For most applications, there is no single risk free rate.  Since this blog is mostly about individual investing, I’ll talk about the risk free rate from that perspective.  For this purpose, I don’t care about any theoretical rate.  The only rate that matters is the least risky rate of return I can actually achieve.  Here in the U.S., that rate is the rate on U.S. Treasuries.

For the purpose of valuing investments, I use the Treasury rate that matures at the same time as my holding period is, usually a year.  I use 1 year because I think investors should at least consider rebalancing their portfolios once a year.  If I were going to rebalance more frequently than that, I might use a shorter maturity, such as the 3 month T-bill.  These days, there isn’t much difference between the two anyway.  If I were dealing with corporate finance and looking at a 10 year project, I would use the 10 year Treasury rate.  While these rates may not be “correct” from a theoretical point of view, they represent reality and the best “least risky” return I can get for my money.

I’ve also had a couple of questions about what happens when QE ends.  The short answer is that nobody really knows.  But, considering that the Fed is committed to keeping short term rates down while decreasing their purchases of longer term treasuries and mortgages, the net effect should be a widening of the spread between short and long term bonds.  Strictly speaking, this should prove beneficial to banks, but the reality is it may be beneficial and it may not.  Long term assets held by banks, if they’re classified as “available for sale” or “trading” securities, will be devalued on the balance sheet.  Depending on the bank, this could lead to some capitalization problems, although I actually think that in general banks are much better capitalized than they have been in the past.  The widening spread, though, should lead to higher net interest margin for banks, which is a good thing.

At any rate, I hope that answers at least some of your questions.  If any of you have other questions or comments, please feel free to comment here, or email quasisaneATcomastDOTnet.

7/29/2013 Comments

Pending home sales pull back in June as rates rise

Contracts to purchase previously owned U.S. homes fell in June, retreating from a more than six-year high touched the prior month, suggesting rising mortgage rates were starting to dampen home sales.

While this sounds negative, as someone mentioned in the comments, the headline could read "Compared to last year contracts were up 10.9 percent, despite higher rates."  Then again, I might read that as being just a bit overly positive.  Yes, it's more than last year; but perhaps the more important fact is that it is down from the previous month.

Are Stocks Heading for a 1987-Style Crash?

Enjoy your summer.

Thanks, I will, although I think that ending line was meant to be somewhat ominous.  It might have been if the article had actually pointed out some reasons why we might be heading toward a 1987-style crash other than "the market went up a lot."  But, you know, these days it's all about quantity, which is why I'm not very successful.  I try to produce a quality product knowing that in the short run I could do better focusing on quantity.

I've fallen behind on my coverage, so here are some recent stories for stocks I'm covering.  I'll be working on getting more articles written on these and other stocks in the coming weeks.

Harley-Davidson Posts Second-Quarter 2013 Earnings, Revenue And Retail Motorcycle Sales Growth 


Arrow Reports $5.2 Million Profit, Solid Second Quarter Results


Finish Line Declares Quarterly Cash Dividend

Stanley Furniture Company Announces Second Quarter 2013 Operating Results 

That's the news

McDonald's finance guide 'insulting' to workers

Suggestion to McDonald's workers: Don't take financial advice from fast food franchises.
Suggestion to McDonald's (MCD) executives: Instead of spending money trying to show your workers how they can survive on extremely little, give them a raise.

I usually save that sort of commentary of my other blog, but there it is.

Millennials Will Carry Markets, Economy to Next Level: Don Hays

"It's going to be very similar to what happened way back in 1980 when you had another generation taking the controls," Hays says. "They are going to usher us into a new world, just like we ushered an older generation into a new world."

I'm not convinced that millennials will do any such thing.  There are too many issues with milennials.  For example, the article says that this generation has "spent nearly 15 years trying to get a good job, that's equivalent to what their talents are."  That can also mean that they've spent 15 years letting their skills become rusty and outdated.  Another example: "As a group [millennials] are much more globally oriented and comfortable with new technologies."  My observation is they are more dependent on new tech.  There seems to be a relative dearth of actual thought.  But, maybe someone will be able to develop "an app for that."


Wall Street gains after Fed chief cites flexible policy

Stocks rose modestly on Wednesday after Federal Reserve Chairman Ben Bernanke said the central bank's plan to start winding down its monetary stimulus later this year depended on the economy's performance.

Is there somebody out there that didn't already know that Fed policy depended on economic performance?  Of course, as of the time of this writing, I wouldn't even say that stock's were up "modestly."  Probably from a statistical point of view, the change is not significantly different from zero.  So, maybe everybody did already know this bit of "news."

Stanley Furniture Earnings Call

As you may know, Stanley Furniture (STLY) posted some fairly dismal earnings today.  Hopefully, the conference call, scheduled for about half an hour from now, will shed some light on what, if anything, went wrong.  That declining gross margin is a little more than worrying.

Harley Davidson Update

Harley-Davidson (HOG) slips 0.55% premarket after Wedbush downgrades the stock to Neutral from...

Harley-Davidson (HOG) slips 0.55% premarket after Wedbush downgrades the stock to Neutral from Market Perform citing mediocre channel checks as wet weather hit the motorcycle industry in Q2. FY13 EPS estimate is cut to $3.30 from $3.40.

I've been thinking that motorcycle sales have probably not been great this quarter for precisely this reason.  But then, I screw up and think "Well, that's just the weather here.  Could be different elsewhere."  Then I screw up and listen to the weatherman who insists we're having a drought.  Anyway, if my "gut instinct" means anything at all, I might expect an even worse EPS than $3.30 simply because a Harley is quite an investment, and given that the riding season is about half over, depending on where you live of course, I don't think sales will pick up much for the rest of the year.  I haven't actually figured any new price target, and I'm thinking that this won't result in any kind of significant change to my 1 year price target of $60.  Part of the reasoning for that is that next year, weather permitting and assuming that Harley sales have been slow this year because of rain, we might expect some pent-up demand for motorcycles.  However, given that the stock is now $2 over my previous fair value estimate, I wouldn't be jumping in to HOG just yet.

That's the news July 13, 2013

I decided to try posting this just once a week, but I'm not thrilled, so perhaps I'll go back to the occasional posting.

Monday, July 8, 2013

Bitcoin ATM Gets Ready for Roll Out

The device boasts the ability to change fiat currencies into the crypto-currency in just 15 seconds and accepts notes from over 200 countries around the world.

So now we have the ability to transform actual currency into play money at ATMs worldwide.  Of course, some people would call "actual currency" play money as well.  I'm just not sure why they accept actual currency in exchange for play money, if the play money is supposed to somehow be better.  Clearly, I'm missing something here, so anyone that wants to explain it, feel free to comment.

Stocks rise, dollar pulls back from 3-year high

A Reuters poll conducted after the release of Friday's government payrolls data -- which showed U.S. employers added 195,000 jobs in June -- found more than half of the major Wall Street bond firms surveyed expected the Fed would reduce its $85 billion monthly purchases of Treasuries and mortgage-backed securities in September.

At least the market is responding as if this is good news for once.  I'm not sure why bond yields would fall though.  Seems to me that would be the one place investors wouldn't want to have their money.  Well, one of the places.  Others are dollar denominated commodities like oil, probably gold, and bitcoins.

It’s Not Just Thomson Reuters – Elite Investors Get Tons of Unfair Advantages: Blodget

Blodget doesn’t expect the decision will do small investors any good. “The market will never, ever be safe for the little guy,” says Blodget. “So anything we do that makes it appear a little bit safer…is actually worse because then people think they are on the same playing field as the little guy.”

Finally, somebody says what has always been true.  But of course, it won't do any good.  People will still rush to put their money in whatever Warren Buffet already has his money in.  They won't get the same deal as Mr. Buffet.  It likely won't be a good investment for "the little guy."  The most important thing to remember is, the stock market isn't safe.  Higher returns result from higher risk

Wednesday, July 10, 2013

 'About half' of Fed officials expect QE3 to end this year

About half of Federal Reserve officials expect that economic conditions will be appropriate to not only taper, but end QE3 entirely this year, according to minutes from the central bank's June meeting, released Wednesday.

I'm not exactly sure when these guys decided that 6.5% unemployment was probably an unrealistic target, but it appears they have.  Unfortunately, I didn't see anything in this article that said why they thought it would be "appropriate" to end QE3 this year.  The only thing that comes to mind is that real estate has been looking, well, "bubbly" lately, although there are plenty of reasons to think there is no real estate bubble as well.  When I look at a chart of home prices, though, it certainly looks as if there is significant downside to real estate, as if the government and the Fed basically put a floor under the housing market.  I'm just not sure how secure that floor is.


MBA: Mortgage Refinance Applications Decline as Mortgage Rates Increase in Latest Weekly Survey

Note: This was for a holiday week with a large seasonal adjustment. I expect a large decline in refinance activity in the survey next week.

So, here's a little speculation about the Fed's coming actions.  With the market's reaction to the rumors about Fed tapering resulting in higher mortgage rates and falling mortgage applications, it will suddenly be "appropriate" to continue with QE.

The Housing Unrecovery: Mortgage Application Drought Continues

and as a reminder... this DOES impact affordability - no matter how much your friendly local realtor or mortgage broker tries to explain still-generational-low mortgage rates - it's simply all about the marginal move...

Which is right in line with what I've been thinking.  Unless, of course, people still remember that home prices are still quite high compared to where they "should" be.  We just need Mr. Bernanke to stay the course, so that people will forget about how high home prices are, and this will become the new normal.  But by then, ultra-low interest rates will also be the new normal and people will accept nothing higher.  Maybe.

Saturday, July 13, 2013

Are Banks and Housing About to Get Crushed by Rising Rates?

"In May, the banks had no idea where rates were going, and so they're going to tell us now where they think they're going to go in August," he says, before labeling the highly complex and qualified earnings reports from banks a ''best guess."

I don't actually care where banks think interest rates will be in August.  At least not 2013 anyway.  I want to know where they'll be in a year or two.

Yeah, that wasn't really a disappointment at all

FINL announced earnings that beat expectations so it looks like I was mistaken about the disappointing first half.  At this point, I don't know if I'm changing my outlook or not, so stay tuned.

Earnings and a buyback

Here's the latest news about 2 stocks I've started covering.

The Finish Line (FINL)

In my article on Seeking Alpha, I expressed the opinion that the first half of this year was likely to be a disappointment to investors.  The stock closed today at $21.20, roughly even with the price on the day I first wrote about it.  My expectation has been, and continues to be, that results will disappoint investors in the near term, but towards the end of the year, I think the Macy's (M) deal will begin to show positive results.  At this point, I'm not sure whether that disappointment is already priced into the stock, and it's true, there might even be a positive surprise when the company announces.  After all, Nike (NKE) posted strong results, which could bode well for FINL.  Until I see the results, I still have a 12 month price target of about $23.30.  That could change, depending on earnings.

Trans World Entertainment (TWMC)

When I wrote about TWMC, I estimated the shares to be worth about $7 and the stock was trading at around $4.70.  The company has a pile of cash, and I believe will likely generate more despite (or more correctly because of) declining sales, and I expected that the company would return some of that cash to investors.  Today, TWMC announced a tender offer for $25 million worth of common stock at a price between $4.50 and $5.10 in a modified dutch auction.  TWMC closed at $5, up about 6% since I first wrote about it.

That's the news

Don’t Look at Bernanke, China Is Driving This Meltdown

In a world of uncertainty cash is king.

Well, no.  In case nobody noticed, the world is always an uncertain place and if you kept your money in cash, your returns would be, well, 0.  The one thing that investors should always remember is that higher returns = higher risk.  Unfortunately, most investors don't seem to realize there's risk in stocks until it's too late.  Now that I've got the preaching out of the way, though, it's time to get optimistic.  Perhaps this is what those sidelined investors have been waiting for.  The only question is, "How far does the market have to drop?"  Okay, that's not the only question.  But, it's the one I'm asking right now.

Financial crises may call for easier monetary policies: Fed's Dudley

The Taylor Rule governs the relationship between economic slack and inflation, and assumes a 2.25-percent real interest rate when policy is neutral. But Dudley said that rate is likely "considerably lower" if financial instability is impairing the effectiveness of Fed policy.

So, as near as I can tell, this is saying that most of the "rules" are changeable depending on current conditions.  Unfortunately, most people don't see it that way.  A rule is a rule, well, unless it's a law and you're a congressman.  For what it's worth, I've never seen an economic rule that holds no matter what the conditions are.  So, nothing new here.

The Fed "needs to be willing to respond to limit financial market bubbles from developing in the first place," Dudley said.

I wonder how long it took for anybody to come to that realization.  Hmmm.  Limit financial bubbles from developing in the first place.  Nah, it's way more fun to wait and see what happens when they pop.

Analysts Weigh Nike’s Prospects Ahead Of Earnings
I wasn't so much interested in what this article had to say about Nike, but more about what the implications might be for The Finish Line (FINL).

On the positive, basketball continues to be a key growth driver, while running, after having decelerated, is showing improvement; however, higher price points (e.g. $160 Flyknit) seem to be pressing the limits of consumer demand. That said, growth in running is being helped by the increased distribution in run specialty stores as opposed to the mall.

Although FINL operates in mall-based specialty stores, the company is more focused on running, and does run some running specialty stores which are not mall-based.  I'm not sure that being "mall-based" is a key issue anyway.  At any rate, it appears this should be somewhat of a positive for FINL, although I don't expect anything particularly great from the next quarter's results.  

AROW Focus Article

Arrow Financial: Safety With A 4% Dividend Yield

My latest article on Seeking Alpha.  Don't wait too long to check it out, because it goes behind a pay wall in 30 days.

That's the news

Fed Will Taper Later This Year, But Not for Obvious Reasons: Bill Gross

Lower deficits in Washington mean the Treasury will issue less debt, which could create a shortage of Treasury securities if the Fed continues QE at its current pace.

There was a time when I thought this very thing, but then thought, "Nah, there's got to be something wrong with that idea."  And there clearly must be something wrong with that idea if Bill Gross thinks the same thing.  Seriously though, think about it.  The last I heard the deficit was going to come in at about $600 billion this year, which means the Treasury would be borrowing $600 billion.  But the Fed is buying about $1 trillion a year. But wait, it isn't as simple as that.  Yes, at the current deficit, Treasury needs to issue $600 billion annually in new debt.  But, according to this guy, the Treasury also rolls over half the outstanding debt every two years, or (on average) a quarter every year.  With the current debt level at about $16 trillion, the Treasury basically rolls over on average $4 trillion in debt a year.  Of course, the act of rolling over debt is not something that occurs evenly over the course of time, so at any time, the Fed might be buying more Treasuries than the government is issuing, but over the long run, counting roll overs, the Treasury will be issuing more debt than the Fed is buying, and will be for a long time, unless the Fed raises the amount of government debt it's buying.

By the time the Fed actually does reduce its bond purchases, the move might be anticlimactic.

I expect this to be true.  In fact, I would venture a guess and say that markets will over-react before the reduction, and then correct in an apparently illogical way as market participants rush to purchase Treasuries in a flight to safety, driving yields back down even as a BIG buyer leaves the market, and, most importantly, everyone knows they're leaving the market.  This is the same kind of behavior that happened when S&P lowered the U.S. government's credit rating.


Wall St. edges up after credit outlook raised

S&P raised its U.S. sovereign credit outlook to "stable" from "negative", and put the likelihood of a near-term downgrade of the rating at "less than one in three."

 And as I'm writing this, Yahoo Finance is reporting that the 10-year Treasury yield is up.  While this isn't exactly an upgrade, it implies that S&P is becoming more positive about the outlook for U.S. Treasuries.  This in itself should cause yields to fall.  A better credit profile = lower interest rates, except when you're talking about the U.S. government apparently.

'Almost Every Major Asset Class in the World Is Overpriced': Analyst

Negative real interest rates have helped boost corporate profit levels and made it difficult to determine proper price-to-earnings ratios.

It isn't difficult to determine "proper price-to-earnings ratios."  Unless you're dead set on investing now.  In the long-run, I think investors should just expect a reversion to the mean when it comes to valuation multiples.  Of course, investing based on the mean reversion thesis would result in very few, if any, investment opportunities.  The market is, and has been for the last decade or so, a trader's market.  Sometimes there have been long-term investment opportunities but for the most part, there hasn't been an overabundance of appreciation in stock prices.  However, I wouldn't really call this a bubble in the normal sense.  PE ratios are high, but not that high.  Valuations aren't really all that out of whack.  But, there are some "bubbly" statistics out there.  See the next news item for details.

Investors Rediscovering Margin Debt

As of the end of March, the most recent data available, investors had $379.5 billion of margin debt at New York Stock Exchange member firms, according to the Big Board.

That is just shy of the record $381.4 billion in margin debt set in July 2007.

 I think this is a pretty sure fire sign that stocks don't have much higher to go unless some new money comes into the market.  So, the real question is what happened to all the investors who were waiting on the sidelines for a better market entry point.  The next article addresses that question, at least in part.

Investors are back with a vengeance

Investors have been rushing off the sidelines this year and show no signs of letting up.

So, it looks like there is, perhaps, some more upside.

While some have moved off the sidelines amid fear of missing any further upside, a larger group is waiting for a pullback to "better time" their entrance into the stock market, he said. And that group is just getting increasingly frustrated as stocks continue to grind higher.

In the end, whether stocks continue to "grind higher" is largely dependent on the frustration level of investors who are still waiting on the sidelines.  So, given that the margin level is high, and given that there is still significant money on the sidelines, there is potential for extreme swings either up or down in the general market.  Or, markets may stay relatively flat while we play a kind of game of financial chicken; who's going to give in first?  People who have maxed out their margin accounts or those that are waiting for a better entry point?  I don't think anyone can answer that at the moment.

High returns = high risk

Madoff: Don’t let Wall Street scam you, like I did

If investment looks too good to be true, it is, says Ponzi scheme architect.

Unfortunately, too many people believe that that statement is only true for other people.  High returns involve high risk, period.  If you're getting high returns, you are, in fact, taking on high risk.  You just don't know it.

What really happens when QE ends?

Markets have apparently been speculating that the Fed will begin to taper quantitative easing (QE) sometime sooner than was previously anticipated. (See: Stocks plunge as Fed minutes hint at cutback for more detail.) What bothers me is that a lot of people don't really seem to understand what the result of Fed tapering will be. So, let's see if we can work this out.

When the Fed sets the Fed Funds Rate, it typically uses open market operations to manipulate short-term interest rates. Basically, when the Fed wants to lower interest rates, it buys treasury bills to lower the yield on short-term government borrowings. Because banks are limited in what they can do with excess cash, a lower yield on T-bills makes overnight loaning to other banks more attractive, and banks will be more willing to loan to other banks when the alternative (T-bills) offer a lower yield. In this case, the T-bill rate is the driver behind the Fed Funds Rate.

In theory, all other things equal, if the Fed lowers the yield on T-bills, the yield on longer-term government borrowings will follow, so the Fed doesn't normally get involved with those. But in the wake of the last recession, the Fed, for multiple reasons, decided that long-term rates (especially mortgage rates) weren't falling enough to spur growth. So, they decided to take a more direct approach, purchasing long-term treasury bonds, which have a more direct effect on mortgage rates. As near as I can tell, this isn't the official explanation for QE, but it's the one that I think explains the reason for QE best, and certainly does actually address the effect of QE. Forget about money supply; it's about interest rates.

Generally speaking, then, the effect of QE is to flatten the yield curve. Has it worked? You tell me. Here is a chart of showing the Treasury Yield Curve currently, as well as in November of 2008, before QE1. (Source)

Yes it has, because the green line isn't as steep as the blue line. And one effect is that we've seen historically low mortgage rates, rates that we'll likely not see again in any of our lifetimes. Low mortgage rates help to pave the way to stabilizing the real estate market, and, in my opinion, the latest QE has done that a little too well.

But the point of this post is not so much what's happening in the markets now, but what to expect when the inevitable end of QE comes. The recent market reaction to rumors about the Fed maybe tapering earlier than expected shows a high level of uncertainty. Pretty much, every asset class dropped, indicating there must have been a substantial move into cash. Why cash? Because the value of cash is not dependent on interest rates at all, but nearly every other investment in the world is. Even gold.

Now, I know there are some people thinking that what I just said about the value of cash not being dependent on interest rates is just plain wrong, and that the end of QE will make cash more valuable. All other things equal, it will, but not because of the interest rates; it will be because of the difference in the supply of money. Other countries have turned on their printing presses as well, and if one stops, it will likely see an increase in the value of its currency as the supply of other currencies relative to that one currency grows. At least in the short-run. Longer term, there are other factors that will affect the value of the currency, but interest rates just isn't one of them. As usual, that's my opinion, based on the current workings of the global monetary system. Things change, though, and I could change that opinion at any time.

Okay, back to the topic at hand: the effect of ending QE. The first thing we should see is a steepening of the yield curve, and we can check that out using the same graphing utility on the Treasury's web site.

This time, I figured the beginning of the year as being as good a starting point as any, and as we can see, this time the blue line (January) is less steep than the green line (Current). Why? Because of speculation that the end is nearer than investors thought it was in January. (Almost) Nobody wants to be holding those long bonds when the Fed stops buying. This chart also shows something which is vital to a discussion of the effect of ending QE: rates under 2 years hardly budged. So, here we've found evidence that when people say interest rates are going to sky rocket with the end of QE are misstating what will actually happen. Some interest rates will likely increase, but not all interest rates. In other words, the yield curve will get steeper.

So what. Right? It is a kind of big deal depending on what investments you have in your portfolio. If you are invested in companies with little or no debt, then the impact should be minimal. However, there will be some slight decline as the risk premium rises (and perhaps whatever proxy for the risk-free rate investors are using). But for most companies with little debt, there should be no major impact on that company's results. For companies with a lot of debt on their balance sheet, it could be another story though. It really depends on how each company's debt is structured. If a company has a lot of long-term fixed rate debt, then it shouldn't be impacted as much because it has a low rate locked in. Maybe. Sometimes companies issue "putable" bonds to get a lower rate. These, of course, are not safe against interest rate increases.

One of the things that makes me believe that people in general don't understand QE is the volume of articles, blog posts, and comments that QE is somehow a way of bailing banks out, or making life easier for banks. There may be ways for banks to "game" QE that I'm unaware of, but generally speaking, QE is actually makes life harder for banks. The reason is clear when you consider that banks generally borrow short-term funds and loan long term, pocketing the difference in rates. A steep yield curve benefits banks because the spread is bigger, similar to a store that can raise prices while their cost remains the same can increase gross margin.

But, and there's always a but isn't there, the end of QE might not be that great for all banks (or other financial institutions that make money in similar ways). It's possible that the loans (or investments) made by the bank will lose value, making their collateral worth less and forcing the bank to pay higher interest, or perhaps issue more stock, or... well, lots of bad stuff can happen. If the loans a bank makes are fixed rate, then the value of those loans will fall; but if the loans are variable, then the value should stay the same because the borrower will have to pay a higher interest rate. However, this may not be true; if the variable rate loan has a floor (minimum) rate, and the borrower is currently paying the "floor" rate, then even if rates go up, the borrower may not be required to make higher payments, and so, the value of that loan will still decline.

Hopefully, this gives you some kind of idea of the complexity surrounding QE and its end. Because of this complexity, I've decided to start writing a series of articles that I'll publish on Seeking Alpha covering a variety of types of financial institutions. In case anyone was wondering, this is what I've been working on lately and the reason I'm posting less frequently.