Wednesday, July 31, 2013

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.


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.

Monday, July 29, 2013

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 

Wednesday, July 17, 2013

That's the news

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."

Tuesday, July 16, 2013

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.

Monday, July 15, 2013

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.

Saturday, July 13, 2013

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.