Sunday, February 28, 2010

How Do You Describe Risk Today?

In an article for the Financial Times in June of 2009, George Soros described his Three Steps To Financial Reform. No matter what your opinion of Mr Soros may be, he has some well educated opinions of what should be included in reforms. The first two are directed at regulators having responsibility for bubbles on their watch and second, credit has to be less freely available. These reflect his friendliness to both regulators and investment banks, and he does say change is necessary. The third point is more important to investing today. I think he has done a good job of describing today's markets and why investors have to understand what systemic risk looks like if they are to be able to design a suitable risk profile. Inquiring minds might also want to read my earlier article on risk with insight from mutual fund manager, John Hussman, titled Risk Receptive or Risk Averse? What is Risk?.

Saturday, February 27, 2010

Warren Buffett's 2009 Annual Shareholder Message

The Berkshire Hathaway 2009 Annual Report is in most ways just like any other. However, the biggest distinction from others is the candid, 17 page Chairman's Letter. It is a report on their businesses, and anything else financial, from the co-CEO, Warren Buffett. The whole thing is worth a glance. I took a glance and found these gems I want to remember.

On their property and casualty insurance businesses:
Insurers receive premiums upfront and pay claims later. In extreme cases, such as those arising from certain workers’ compensation accidents, payments can stretch over decades. This collect-now, pay-later model leaves us holding large sums – money we call “float” – that will eventually go to others. Meanwhile, we get to invest this float for Berkshire’s benefit. Though individual policies and claims come and go, the amount of float we hold remains remarkably stable in relation to premium volume. Consequently, as our business grows, so does our float.

BEA News: GDP, 4th Qtr 2009 (second estimate)

The U.S. Bureau of Economic Analysis (BEA) has issued the following news release:
Real gross domestic product -- the output of goods and services produced by labor and property located in the United States -- increased at an annual rate of 5.9 percent in the fourth quarter of 2009 (that is, from the third quarter to the fourth quarter) according to the "second" estimate released by the Bureau of Economic Analysis.

U.S. Bureau of Economic Analysis · 1441 L Street NW · Washington DC 20230 · 202-606-9900

Wednesday, February 24, 2010

US Treasury 5 Yr Auction Results, 2010-02

Peter Bookvar posts the follwing description of todays Treasury Bond auction. This periodic auction is important because it the earliest sign of a game change in the global economy. As long as there are buyers for the debt, the Keynseian game is still in play. When it is game over, we better have our plans set for action. There are only guesses about when that will occur, from months to years. It's not even certain that it will, though it does appear to be good bet by most observations.

The 5 year note auction was mixed as the yield was slightly above the when issued but the bid to cover at 2.75 is the 3rd highest dating back to Sept ‘07 and is above the average over the past year of 2.38. Indirect bidders took 40.3% of the auction which is the lowest since July but direct bidders bought 12.8% of it which is on the very high side. The dealer community is thus being put a bit more in the dark over what the true demand is and where its coming from. Today’s auction follows an excellent 2 yr note auction yesterday and the maturity of 5 years falls somewhat in no man’s land this week ahead of tomorrow’s 7 year auction and this past Monday’s 30 yr TIPS auction. Therefore, not much can be gleaned today in terms of what the bond market sentiment is with respect to growth, inflation and risk appetite.

Sunday, February 21, 2010

Individual Currency Charts Replace the DXY Chart

The DXY index represents a bucket of six currencies weighted as follows... the Euro 57.6%, Yen 13.6%, Sterling 11.9%, Canadian Dollar 9.1%, Swedish Krona 4.2%, and Swiss Franc 3.6%. This design was created by J.P. Morgan in 1973.

Saturday, February 20, 2010

Mutual Fund Flows For January

Here is the January summary of mutual fund flows from Strategic Insight...

Bond fund flows continued at a robust pace in January ($30 billion), driven by continued strong demand for income in a near-zero cash yield environment. The month also saw a slight pickup in demand for actively managed equity funds, which came in the face of a fall in equity market indices—the average equity fund experienced an NAV decline of 3.8% (asset-weighted average) in January. Flows into active international/global equity funds neared $10 billion (the highest volume since May 2008), and active US equity/hybrid funds saw positive net inflows for the first time since June 2009. In total, equity funds, active and passive, garnered $15 billion in January.

Thursday, February 18, 2010

One Eye on The Fed, Raising the Discount Rate

The Federal Reserve Board on Thursday announced that in light of continued improvement in financial market conditions it had unanimously approved several modifications to the terms of its discount window lending programs.

Like the closure of a number of extraordinary credit programs earlier this month, these changes are intended as a further normalization of the Federal Reserve's lending facilities. The modifications are not expected to lead to tighter financial conditions for households and businesses and do not signal any change in the outlook for the economy or for monetary policy, which remains about as it was at the January meeting of the Federal Open Market Committee (FOMC). At that meeting, the Committee left its target range for the federal funds rate at 0 to 1/4 percent and said it anticipates that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period.

Tuesday, February 16, 2010

China Watch, One Eye on China

China watch, from Bloomberg... Andy Xie, an independent economist I have read for over a year, is saying China needs to use a big stick instead of whispers.

"China’s efforts to slow inflation by raising bank reserve requirements for the second time in a month won’t work and the central bank needs to increase interest rates by the end of March, independent economist Andy Xie said."

Are the Equity Tides Rising?

Bloomberg reports today that CEO's are more optimistic in their outlooks than at anytime in the past eight years, based on the number of companies raising their outlook compared with the number reducing their outlook. Bloomberg reports that in the current quarter, the number of CEO's increasing their outlooks was 10% compared to 4.1% who lowered. I don't think I can can conclude anything except that there seems to be an optimistic message coming from CEO's. And I guess there had better be considering the number of jobs they hacked off to improve shareholder value!

Saturday, February 13, 2010

University of Michigan Consumer Sentiment Survey

From Bloomberg...

Consumer sentiment edged back in the mid-February reading, down 7 tenths to 73.7 and failing to extend mild momentum that appeared in late January. The assessment of current conditions actually rose in the period but was offset by a dip in expectations which is the leading component for the report. The expectations index, at 66.9, is back to where it was in November. One-year inflation expectations edged back slightly to 2.7 percent. It's simple enough: Weakness in the jobs market will continue to contain consumer spirits. The news isn't helping the markets which are sinking in reaction to continued bank tightening in China.

Consumer sentiment is mainly affected by inflation and employment conditions. However, consumers are also impacted by current events such as bear & bull markets, geopolitical events such as war and terrorist attacks. Investors monitor consumer sentiment because it tends to have an impact on consumer spending over the long run (although not necessarily on a monthly basis.)

Doug Noland is Still a Bear, Feeling Bullish

Last week in his market summary and outlook, portfolio manager, Doug Noland, wrote of his concerns over the news we heard last week. It was news of Greece's debt problem with no EU solution known and that China was yet again raising the reserve requirement of its national banks to slow growth of both loan issuance and their internal inflation. (I wrote about China, including the reserve requirement policy of the People's Bank of China, last month in China Economy Clocked at 107mph in an 80 mph Zone.) These had the combined effect of causing investors to pull back on the amount of risk they wanted in their holdings. As a result the S&P finished this week up 0.9% and down 3.6% YTD. I have been looking forward to Noland's article this week expecting he would offer a little expansion of his analysis and outlook, which he did in the Global Reflation Update.

Wednesday, February 10, 2010

The Fed's Exit Strategy is Shaping Up

Bernanke was scheduled to deliver testimony today before the Committee on Financial Services, U.S. House of Representatives. It was cancelled due to snow but the press release is available. Here is much of the planned testimony as it relates to the exit strategy and tools in their warchest. When we have more time to study this, there will be more fuel for the discussion on inflation and deflation. Perhaps we can better describe what the Fed policy implications could be.

The Federal Reserve has a number of tools that will enable it to firm the stance of policy at the appropriate time.

Most importantly, in October 2008 the Congress gave the Federal Reserve statutory authority to pay interest on banks' holdings of reserve balances. By increasing the interest rate on reserves, the Federal Reserve will be able to put significant upward pressure on all short-term interest rates, as banks will not supply short-term funds to the money markets at rates significantly below what they can earn by holding reserves at the Federal Reserve Banks. Actual and prospective increases in short-term interest rates will be reflected in turn in longer-term interest rates and in financial conditions more generally.

The Federal Reserve has also been developing a number of additional tools it will be able to use to reduce the large quantity of reserves held by the banking system. Reducing the quantity of reserves will lower the net supply of funds to the money markets, which will improve the Federal Reserve's control of financial conditions by leading to a tighter relationship between the interest rate on reserves and other short-term interest rates.

Tuesday, February 9, 2010

Western Freedom of the Press, Seen From China

This is a little off the beaten path. A recent conversation with a new friend included concern about the possibility of censorship/media spin everyday in the US. It seems to both of us that it is not only possible, but it is in fact practiced. I have observed censorship in China. There is the example of Andy Xie, an economist who wrote for Caijing until he and the editor-in-chief quit over censorship issues. This was reported in another China news outlet. I have conversations at my office with people visiting from China who are obvious in the difficulty of talking candidly with me about conditions in China, or the need for caution when corresponding by eMail to people in China.

Monday, February 8, 2010

The Case for Deflation: Discussion 2, the Case for Inflation!

Curious George has provided another informative post for inquiring minds...

“In economics, inflation is a rise in the general level of prices of goods and services in an economy over a period of time. When the price level rises, each unit of currency buys fewer goods and services; consequently, inflation is also an erosion in the purchasing power of money – a loss of real value in the internal medium of exchange and unit of account in the economy. A chief measure of price inflation is the inflation rate, the annualized percentage change in a general price index (normally the Consumer Price Index) over time.” From Wikipedia

Sunday, February 7, 2010

Do You Own Gold?

The ownership of precious metals is an important, not-correlated to the stock market, alternate investment category. I say it is an alternate category because we do not see the category included in modern portfolio theory (MPT) allocations. We usually see it as a highly volatile and corrupt business sector and I have historically avoided exposure to it. During 2008 and 2009 I used SPDR Gold Bullion Trust (GLD) until I grew concerned about owners rights and other issues that I could not disprove. I miss it. In the current crisis conditions, gold and silver are taking on importance as a currency hedge and as a store of value. Some might use it as a hedge for inflation. Owning the metals is very desirable in a deflation economy, as a hedge against currency devaluation. Metals do not provide business risk and do not have common stockholders who demand certain behavior from management.

Thursday, February 4, 2010

Keynesiasm Is not Popular With Everyone

Keynesiasm is taking a hit in the article Caroline Baum wrote on Bloomberg yesterday, "Obama’s Pyramid Schemes Would Make Keynes Happy". She writes about her belief that government created jobs are temporary jobs that do not add permanent jobs into the economy. Complete reliance on government policies is a Keynesian prescription, and she is not in agreement. Read her short article for more depth of the argument that is about why we use Keynes' theory when there are others.

Bill Gross Makes It Clear

The monthly Investment Outlook from Bill Gross has been on my reading list for a long time. He is insightful and I think his letters are sometimes candid enough to be helpful. He walks the line of a politician too and so at other times that creates a dense fog in his writing. This month is called "The Ring of Fire" and I highly recommend it. I also recommend skimming quickly over the first couple of paragraphs to get past the monthly self-adulation.

Tuesday, February 2, 2010

Keynesian Economics - a Simple Description

Now I want to look into Keynesian economic theory since it has had the most influence in shaping the plan for dealing with the great recession in the US and the UK. Keynesian economics is highlighted by its emphasis on measuring, monitoring and policy responses by the public sector, including monetary policy actions by the central bank and fiscal policy actions by the government to stabilize output over the business cycle. It discounts the possibility that the private sector will make decisions that support the greater good of the economy. The theories forming the basis of Keynesian economics were first presented in The General Theory of Employment, Interest and Money, published in 1936. Richard Posner has written a good summary of the book in the New Republic. His article is titled "How I Became a Keynesian" and it is recommended for inquiring minds seeking more knowledge of the man whose economic theory is leading us somewhere, fast.

Monday, February 1, 2010

Monetarism, a Simple Description

Monetarism is an economic theory that is relatively new. It is a theory that sprung up in the 1970's as a new way to fight inflation. It is widely attributed to Milton Friedman who modified Keynesian theory into something different, Monetary theory. There are several popular economic beliefs that can be identified with monetarism. One is the belief that excess money is the definition of inflation.