Monday, September 30, 2013

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.

Tuesday, September 24, 2013

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.

Friday, September 20, 2013

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.

Wednesday, September 11, 2013

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.