Business ethics

CEO Barra calls GM's actions on deadly defect 'unacceptable'

Lawmakers are investigating why GM and regulators missed or ignored numerous red flags that faulty ignition switches could unexpectedly turn off engines during operation and leave airbags, power steering and power brakes inoperable.

 So, I wonder how long this investigation will go on.  It's simple, really.  It's the same thing that Ford (F) did with the Pinto years ago.  They did a cost/benefit analysis.  And not surprisingly, the cost of the fix, even if small, was more than the value put on human life.  Of course, it isn't really the value of human life, but rather the expected cost of not fixing the issue that is considered.

Under intense grilling by lawmakers, Barra said she found employee statements "disturbing" that cost considerations may have discouraged the prompt replacement of faulty ignition switches now linked to at least 13 fatalities and the recall of 2.6 million vehicles.

Bingo.  But is it really "disturbing?"  I don't think so.  This type of decision-making has been going on for as long as business has been done.  I'm not surprised, nor am I disturbed.  I suppose that this is why I'm not the CEO of a multi-billion dollar corporation.  I have too much trouble feigning surprise.

But, on the other side of the argument is this:

House Energy and Commerce Committee Chairman Fred Upton, a Republican, told Barra: "With a two-ton piece of high-velocity machinery, there is zero margin for error; product safety is a life or death issue. But sadly, vehicle safety has fallen short."

But drivers' recognition of vehicle safety has fallen short as well.  Or perhaps a better way to put it is that drivers don't tend to recognize how unsafe the very act of driving is.  Most people don't really think of driving a "two-ton piece of high-velocity machinery" as being anything like that.  Drivers these days seem to assume safety.  And when it isn't so, they are shocked and appalled.  Driving is dangerous, and no amount of effort on the part of automakers is going to change that.  The "safer" cars become, the faster everyone drives and the more aggressive drivers become.

Still, for this type of problem, GM (GM) should certainly be held accountable for their action, or inaction as it were.  But I'm pretty sure this was already considered in the cost/benefit analysis, and in the end, the result will be more of the same in the future.  Because, consumers will do their own cost/benefit analysis, even if subconsciously, and decide that the perfectly safe vehicle is not worth the cost.  Just like they made the same decision with seat belts when seat belts were a new thing.

While I usually reserve this type of commentary for my other blog, I chose to comment here because it is directly relevant to the ethics of business and finance, of which, despite what professional associations would lead us to believe, there are none.  Well, except for my ethics, of course.

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.

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.

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."

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.

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.  

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.

That's the news

Bernanke offers wisdom but no hint of Fed moves

"I wrote recently to inquire about the status of my leave from the university," Bernanke said. "The letter I got back began, 'Regrettably, Princeton receives many more qualified applicants for faculty positions than we can accommodate.' "

Bernanke felt the need to add in a footnote to the printed copy of his speech that this remark was a joke, since his leave from Princeton expired in 2005.

I think Mr. Bernanke should just always put footnotes telling us when whatever it is he's saying is just a joke.  I mean, how are we supposed to know if he was being serious when he said anything?  Even worse, how do we know that the footnote wasn't a joke?  I don't know, but I think this whole footnote thing was a bad idea.  It casts doubt on everything Ben ever said that wasn't subsequently footnoted to let us know what he meant by that.

Sprint says Dish offer for Clearwire "not actionable"

Some provisions violate Clearwire's certificate of incorporation or the rights of the parties to the existing Clearwire shareholders' agreement that includes Sprint, Sprint said in a letter to Clearwire on Monday.

Sprint owns just over 50 percent of Clearwire and has offered to buy the rest of the company for $3.40 per share, valuing the wireless services provider at $10.7 billion.

Dish recently raised its offer for Clearwire to $4.40 per share.

So, let me see if I can guess here.  The fact that Sprint owns just over 50 percent of Clearwire means that they have a majority stake in the company, so, if they want to buy the Clearwire for $3.40 a share, then nobody else should be allowed to buy the company for a higher price.  Sounds good!  Of course, if Sprint thinks Clearwire is only worth $3.40 a share, then why not sell to Dish at $4.40 a share?  Unless Sprint thinks Clearwire is worth even more than $4.40...  Hmm.

Manufacturing sector contracts in May: ISM
This should really be bad news, but of course, the stock market is rallying today because the news makes it less likely that the Fed will begin tapering on QE.

That's the news

Thousands of French Households Taxed 100%

I knew things were bad in France, but I couldn't believe this headline.  I thought there had to be a gimmick.  But no, it's for real.  The only "gimmick" is that it's supposed to be a one-time thing.  I'm not sure why there are any rich people left in France, or any business for that matter.  Why would anyone want to stay and be taxed at even 75%?

France Still Business Friendly, Foreign Minister Argue

"France remains the fifth economic power in the world, the fourth in terms of foreign investment. It's one of the best places for technology, for trade," Fabius said, answering a question about whether France remains a friendly place for business.

It seems to me that if you have to say your country is business friendly, then maybe you need to reevaluate your definition of friendly.  To be fair, though, it appears that France has been backtracking on some of its tax increases on wealthy individuals and business.  But that doesn't make them business friendly exactly.  It seems kind of like kids, who will do just enough to keep their parents from getting mad and saying no when the kids want to do something, but nothing more.  I don't call that friendly.  But then, maybe this is the future of the world.  No real incentive to take the risk of starting a business, no incentive to innovate.  So, no matter how much you love business, it just won't be there.

German Memo Labels France Europe’s Problem Child

The memo attacks France's increasing labor costs and minimal investment in research and development. It notes that France has the "second-shortest working year" in the European Union and its tax load is "the highest within the euro zone."

 This makes me wonder just how long France will remain the "fifth economic power in the world," etc. as was stated in the previous article.

Amateur investors tap 401(k)s to buy homes

Galaris said amateur investors sometimes spend all their free cash on their purchases and then have to scramble to pay the fees. If real estate turns south again, that could leave a lot of investors in dire financial condition for their golden years.

Nah.  This time it's different.  Perhaps one of the most troubling lines in this article is this one:

"Our average client has retirement accounts of about $150,000 and is looking to buy one or two properties," he said. "After 2008, they didn't trust Wall Street. They wanted hard assets."

They didn't trust Wall Street?  Okay, they never should trust Wall Street.  Everyone there is out to get as much of your money as they can.  But, seriously, didn't these people hear about the collapse in real estate?

Record Powerball jackpot inspires office pools

"People don't realize that this is serious business," said New Jersey attorney Rubin Sinins.

Yeah, there's nothing serious about a few hundred million bucks.  It's all just for fun.

That's the news

JPMorgan Goes All-In on Rally, Sees Surge Growing

This is the kind of thing that should really send investors running.  Analysts are raising forecasts for the stock market, and it has nothing to do with how the companies themselves are doing.  Instead, it's more like this: "It went up more than we thought it would this whole year, so we think it will go up a lot more."  And that's what they'll think right up until it goes down.  I'm not saying everyone should bail out; I'm saying don't get overly complacent.  I don't know how long the bull market will last... could be a day, or it could be five years, like I read yesterday.  I think the risk is getting higher, both on the plus and minus side.  There is still lots of money on the sidelines, which could push stocks a lot higher.  On the other hand, I've been reading that investors that are in the market are somewhat leveraged, and leverage makes for some pretty volatile markets.  In the end, as I've been saying, the longer this market continues, the worse the end is going to be.  Well, probably.  A bad ending isn't inevitable, but it is likely.

Gold’s Tumble To Continue: Hays

Yay!  Of course, nobody knows this, or remembers this I'm sure, but I actually said that gold at $1,500 was about the top.  It took a few months to get up to $1,800, which is still a 20 percent rise, so perhaps I wasn't as prescient as all that.  But now, with gold under $1,500, I feel somewhat vindicated, even though I'm sure nobody remembers my comments at the time.

May consumer sentiment highest in nearly six years 

It was the highest level since July 2007.

It sounds good, but take a look at this chart of the S&P 500.  See those three big peaks near the end?  See that middle peak?  That's July 2007.  Whee!

That's the news

What's the Link Between Housing and Harleys? 

Now you can see why it's so hard to just ignore those big shot stock analysts at, in this case, Morgan Stanley.  I guess HOG isn't going up fast enough for those guys, so they need to pump the stock with interviews, and showing statistics that show that there's correlations between housing and Harley-Davidson stock.  I'm not going to bother researching this, but I'll bet that there is a similar correlation between just about any consumer durable product and housing starts and home prices.  And, I'm pretty sure there's also a correlation between home prices and housing starts, because if home prices are going up, homebuilders want to have more homes to sell.  Okay, so I'm just a little bit jealous because I can't go on Bloomberg TV and tell people why my price target on Harley-Davidson is so great, thus helping ensure that the outcome is what I say it will be, and making myself look more like a genius than I already do.

Wall Street jumps as banks lead S&P 500 to new high

"We're riding a self-fulfilling prophecy of momentum. There's no fundamental reason for today's move, other than the continued easing by the Fed and momentum," said Paul Radeke, vice president at Minneapolis-based KDV Wealth Management.

Yep.  And, just so everyone knows, this is exactly how bubbles start.  No, I don't think the stock market is exactly in a bubble per se,  just a bit overvalued.  I do think there is the potential for the stock market to turn into a bubble.  And I do think there is the potential for a significant reversal.  But to in order for the stock market to be a "bubble" I'd have to see some higher valuations than what I'm seeing.  Sure, there are some stocks that probably are in bubble status (AMZN comes to mind), but overall, no.  Maybe a better way to put it is we are in the early stages of bubble formation.

With that out of the way, what really caught my attention in the above linked article was this:

Growth-orientated stocks were among the day's biggest advancers, with large-cap bank stocks leading the way.

"Growth-orientated?"  You know, I've had to force myself to at least try to be tolerant of bad grammar, but I have to draw the line when it comes to professions which require writing skills.  Try "growth-oriented."

NY Fed Study: Stocks Have Never Been Cheaper

Specifically, the analysis shows equity risk premium, or the excess return that investors expect to get from stocks versus a risk-free asset, has never been lower. Of course, part of this calculation is based upon the fact that interest rates are historically low, but Baker says there's more to it than that.

This article, and the associated Fed study, probably deserve way more than a mention on my news post, so be watching for it.  This is exactly the kind of reasoning that causes asset price bubbles.  On the surface, the reasoning sounds good, but it's backwards.  The equity risk premium being low actually means investors aren't recognizing the risk in stocks.  They believe, as I pointed out in another post, that "stock markets are becoming safer," when in fact, stock markets are just as risky as always.  And another way to see it is this: when the equity risk premium starts to rise, what do people suppose will happen to stock prices?  They will fall.  So, why is the Fed publishing such nonsense?

"Clearly the Fed's motive is to put money back into equities. 401(k)s will be higher, people will feel like they've got more assets and will be spending more money," he says. "I think it's interesting that the Fed is coming out and actually using some propaganda to try and get money into stocks."

 So, while investors have been putting more money into stocks, apparently (much like the Morgan Stanley analyst talking about Harley-Davidson above) they're not doing it fast enough for the Fed.  So, the Fed fabricates a ridiculous line of reasoning about risk premia capitalizing on most people's confusion over required return versus expected return and, voila, mission accomplished.  People feel richer, spend more money, and hopefully with all that extra money being spent, corporate profits increase and it turns out that there is no stock market crash; instead earnings rise quickly enough to meet the excessive expectations that are priced into the market.  Kind of like the federal government's apparent attempt to lower potential GDP in an attempt to close the recessionary gap, rather than raise GDP.  It will certainly be interesting to see how this all works out.

That's the news

Before I start with the news, I just want to offer an update to my report on Seeking Alpha about Harley-Davidson.  Not long after I published that article, a Morgan-Stanley analyst initiated coverage (I think it was rated a buy) with a $62 price target.  So, I started thinking that maybe my target of $60 was a little too conservative.  After all, the market is reacting pretty darn positively to the Q1 results, and that could push the stock much higher than I had forecast.  After some reflection, I didn't change my forecast, and here's why.

First, HOG makes money by shipping to independent retailers, and in Q1 the Company shipped more units than were sold at retail, meaning the results were in part due to "channel stuffing."  By saying that, I don't want to imply that management intentionally did something to make the results look better than they were; I'm just saying that those bikes still need to be sold at retail before you can really call them sold.  Dealer orders will be lower because of those excess bikes in inventory.  Of course, it could be that Q2 retail sales will surpass expectations, in which case, no harm done.

Then, I watched a video, which at first glance didn't have much to do with Harley-Davidson.  It was about beer sales, and how the weather, and expected weather for this summer are expected to affect those sales.  Here's the link: Big Breweries Face Threat Worse Than Craft Beers.

The main takeaway from the article is this quote:

"If it's nice and warm out, there's more people that are outside mowing the lawn, having picnics, at ballparks, and what do they do? They drink beer," Walsh told “Big Data Download.” He said big brewers already saw lower beer sales in the first quarter of the year.

 Well, they drink beer and ride motorcycles, actually, although we hope they don't do those at the same time.  Anyway, although the article doesn't mention it, the video goes on to say that too hot temperatures can also negatively impact beer sales because people tend to stay indoors with air conditioning, and I guess air conditioning and beer don't go together.  I suspect, though, that extreme heat can also put people off from riding motorcycles since you could just get in your air conditioned car.  So, as I see it, moderate temperatures in the Spring are much better for beer and motorcycle sales, and at least locally, it looks like temperatures are going to go from cooler than normal to HOT.

Then I started thinking about how that might affect motorcycle sales for the whole year.  I mean, if I were going to invest that kind of money in a motorcycle, I would want to have as much riding time as possible that first year.  So, if bad weather delayed my purchase, I may just wait until next year, when I can get the maximum utility out of that bike right away, and spend my money this year on something else, like an air conditioner.

Of course, there is one other factor, and that is the by now over-reported end of the Social Security tax holiday, which gave most people a 2% haircut on their paycheck.  I suspect that at least some of the less than stellar retail sales for Harley-Davidson can be attributed to that.

At any rate, I'm still sticking to my guns with the $60 price target on HOG.  Anything over that at this point would just be speculation.


As Stocks Rise, Frustrated Investors Vent About Ben Bernanke

Some guys don't understand monetary policy and think he's doing wrong thing.

Others think it's immoral that markets aren't let to clear (meaning, collapse to a point where someone will swoop in and just buy). Others are pissed because they missed the rally so they blame Bernanke as the exogenous factor that made them wrong. Like "if not for this STUPID policy I'd be making money."

All three of these boil down to the same thing: "My investments are under-performing and it's the Fed's fault."  Cuz, you know, it can't be my own fault.  I'm that awesome.  Of course, then there are the guys that want to point out their own investment results and claim sole responsibility.  It's easy to be a genius in today's stock market.  In fact, all you have to do to be a genius in today's market is read Benjamin Graham's Intelligent Investor (or at least say you did and know a couple of stock valuation metrics), pick a stock with a decent dividend payout, say something like "I feel like it's gonna go up," (because these days investment analysis is kind of like channeling the spirits), and sit back and wait for the world to name you "stock guru of the month."  Make one great call, and suddenly you're a hero.  Make enough calls, and your hero status is virtually guaranteed since sooner or later one of those calls will be great.  And what that all means is that people either love or hate the Fed, but the people that love the Fed won't admit it.  Except for me.  I love the Fed.  Sometimes.

Bernanke says Fed increasing financial monitoring

Nothing really earth-shattering in that last link.  It's just kind of a slow news day.

That's the news

Analyst starts Harley-Davidson at 'Overweight'

A Morgan Stanley analyst started coverage of Harley-Davidson with an "Overweight" rating on Monday, saying that the motorcycle company has managed to transform its business so that its production matches demand better.

Perhaps, but I'm still not convinced, which is why I said Harley-Davidson was fairly valued, and I'm sticking to that assessment for now.

Buffett says economy on mend, bonds 'terrible' investment 

"Bonds, they're terrible investments now," Buffett said. "That will change at some point, and when it changes, people could lose a lot of money if they're in long-term bonds."

He said stocks, in contrast, are "reasonably priced," though he continues to shy away from sectors such as media, where he cannot reasonably predict who will thrive in the long run.

So, I've been saying this for a while... But, now that Mr. Buffett says it, it's news.  Hmph.  Of course, I'm not sure about the "stocks are reasonably priced" statement.  Some are, and some aren't, and overall, I think stocks are a bit overvalued.  Maybe we just have a difference of opinion over what constitutes "reasonably priced."

Clearwire says Sprint offer best option for minority stockholders

Sprint offered to buy Clearwire in December for $2.2 billion but satellite TV provider Dish Network Corp announced a counterbid of $2.3 billion in January.

I don't really follow any of these stocks, but this line is fascinating.  Apparently, an offer of $2.2 billion is BETTER than an offer of $2.3 billion.  Perhaps someone out there can explain that logic to me, and then cut me a check for the bad $100 million difference.

That's the news

Job growth beats expectations in April

Still, some details of the report remained consistent with a slowdown in economic activity. Construction employment fell for the first time since May, while manufacturing payrolls were flat.

So, where are the jobs?  I hear McDonald's needs some liberal arts grads to flip burgers.

Warren Buffett on Fed, IBM, His First Tweet
I don't see the big deal.  I had a first tweet years ago, and nobody cared.

In an interview that aired on " Squawk Box " Friday, the Berkshire Hathaway (BRK-A) chairman and CEO said, "Basically [the Fed] is buying the debt we're creating and to go beyond that is an awfully big number."

Yeah, it's a really super duper big number.  Now can I have a cookie?

Not surprisingly, he quickly attracted a big following. And as of Friday morning with only two tweets sent, he had over a quarter million followers.

Cuz, you know, he's probably gonna tweet about whatever his next investment will be, so that the people following him can get in first.

Okay, I admit it.  I'm following Warren.  In fact, I've been following since he only had one tweet, and a little over 5,000 followers.  Those were the days.  Yesterday.

Nestlé recalls CPK, DiGiorno frozen pizzas nationwide

“The reason for the recall is that the pizza may contain fragments of clear plastic," a statement from Nestlé USA reads. “A small number of consumers reported that they had found small fragments of plastic on the CPK Crispy Thin Crust White pizza.

And here I thought plastic was pretty much a regular ingredient in most processed food.

That's the news

Stocks briefly drop, recover, on fake bomb tweet

Nothing against Twitter, but this is exactly why I'm always asking people who say things I don't necessarily believe, "Where did you hear that?  Twitter?"  I think people put too much emphasis on sources like Twitter.  The volume of information available on Twitter is, well, it's a lot.  And having that much information right at your fingertips makes you feel well-informed.  And feeling well-informed makes you overconfident.  And overconfidence can lead to some really bad outcomes.  And yes, the market dropping like it did is a sign of overconfidence, even though it appears to be a sign of lack of confidence.  In this case, it is overconfidence in the information source.

What happened today, though, goes a little farther than regular overconfidence.  The drop and rebound happened so quickly that it is more likely that it was started by automated traders using news reading software to initiate trades.  This way, trades can happen far more quickly than with human readers because there is no judgment involved.  A headline is either good or bad, but there's apparently no test for whether the headline is true or false, or whether it's from a reliable source for that matter.  Here, we have overconfidence that our news sources are incapable of providing false information.

So, if an investor happened to be on top of the market when the drop occurred, they could, perhaps, have profited.  Then again, they could have lost.  But for those of us who were blissfully unaware until after the fact, we're no better and no worse than before.  Sometimes, especially in the case of information, less is more.

That's the news

Is Stanley Furniture Ready To Turn Around?

I believe STLY...

You'll have to follow the link to see the rest.  You know it's brilliant, though, because I wrote it.

Data Shift to Lift US Economy by 3%

The U.S. economy will officially become 3 percent bigger in July as part of a shake-up that will for the first time see government statistics take into account 21st century components such as film royalties and spending on research and development.

Yay!  They figured out a new way to juggle numbers to make our economy look bigger.  Those accountants are brilliant!

Existing Home Sales Fall as Prices Rise Most Since 2005

Nationwide, the median price for a home resale rose to $184,300 in March, up 11.8 percent from a year earlier, the biggest increase since November 2005.

Actually, I find the decline in sales a bit of a relief in light of the rise in prices.  It might be showing that buyers aren't just being stupid, afraid they're going to miss out.  Then again, I don't really want to give the American public too much credit for intelligence.

Bracing for Disaster: How Bad Will Apple’s Earnings Be? 

In other words, Tuesday's earnings report is expected to be a disaster. That's one reason the stock has tanked over the last several weeks: No one wants to be the sucker left holding the bag.

I've never been a big fan of Apple, so this is kind of a "feel good" story for me.  Unfortunately, there is already a lot of negativity priced into the stock, so even if the earnings report is bad, it might be good for the stock.  Often, uncertainty about how bad something will be is worse than finding out how bad it really is.

That's the news

Advisers’ Senior Credentials Rules Urged by U.S. Consumer Bureau

State regulators may want to establish minimum standards for acquiring a senior designation and codes of conduct for those who hold them, the CFPB said in the report.

 Yeah, we need more of the nanny state.  Unfortunately, this kind of regulation ends up costing the people it is meant to protect, and likely will result in lower returns since advisers will only recommend safe investments for seniors to avoid litigation.  It's unfortunate that people who commit fraud end up controlling the whole regulatory environment.  The end result is that it will hurt the very same people that the fraudsters are trying to take advantage of.

The Sweetheart Deal Toyota Got To Build An American Lexus

All I have to say about this is that it's somewhat of an embarrassment that the big news is foreign companies are investing in American production, while companies like Apple won't even bring their cash back to the U.S. in order to avoid taxes.

Germany, IMF used atomic bomb to shoot pigeon, says Cyprus negotiator

Cyprus, which had modelled itself as an offshore financial services centre for lack of any other resources, now faces a grim future with its reputation in tatters and its economy deep in recession.

Not only that, Cyprus will likely find it difficult to offer financial services to seniors here in the U.S.

Antibiotic-Resistant 'Superbugs' Creep Into Food

Those who promote antibiotic use in food animals argue that keep consumers safe.

Here we go again with the "keeping consumers safe" angle.  Safe from what?  Safety depends on your perspective, I think.  Not just in this case of food safety, but also investing.  The first linked article above will result in seniors being invested in financial products that offer low returns.  Things like Treasuries, which are supposed to be relatively riskless, but in fact guarantee a return that is below the current rate of inflation.  This antibiotic story, points out another safety issue.  In an effort to "keep consumers safe," food producers use antibiotics, which are then consumed by humans, which then results in human immunity weaknesses, thus requiring more antibiotics in food animals, thus producing more antibiotic resistant strains... Well, you get the idea.  This sort of thing makes me wonder just how long our species will survive.  And I wonder just how long it will take humans to realize that we actually can't improve on nature; we can't win against nature; and we need to learn to live inside nature.

That's the news

Post-Recession Americans Saving More, Risking Less

If the retail investor is not stoking the Dow, where is the boom coming from? As CNBC's Jeff Cox has noted, the market's recent surge has come as cash-rich companies have plowed nearly $1.2 trillion into stock buybacks since mid-2009 as individual investors have largely stayed pat in the cash, bonds, and other instruments built to weather another storm.

So, retail investors are set to "weather another storm."  But how's that going to work out if things don't turn south any time soon?  Not so good.  All of those things will not perform well, or even badly, if the economy actually does pick up steam.  And then what?  Well, those people will suffer again.  This is why we diversify.


Home prices up in February by most in 7 years

Home prices rose 10.2% in February compared with a year earlier, CoreLogic, a real estate data provider, said Wednesday.

Nothing disturbing about a 10.2% year over year increase in home prices, is there?

Prices have now increased on an annual basis for 12 straight months, underscoring the recovery's steady momentum.

You know, up until a short time ago, a lot of people looked at the chart for home prices and asked, "Why didn't anyone see the real estate bubble?"  Now, we're calling the same kind of price appreciation a "recovery," and claiming that there is "steady momentum."  I think it won't be long until we're asking why nobody saw another crash coming.

Slowing Service Industries Point to Cooler U.S. Growth 

This article covers a lot of data, mostly saying it's good, but not great, but it's still okay, and might be right about where we want to be.  But, slowing growth is the theme these days.  Better than I had expected, but then, I don't think we're still seeing the effects of tax increases and spending cuts just yet.