Among the many stocks we watch perhaps 80% to 90% are deep in correction territory, price-wise. This contradicts fairly firmly our previous attempt at prognostication regarding general equity market movements. In case I have not it before, let me get this notice out and on the record: We do not believe that we can correctly call the direction of the stock market as a whole.
Where will the market be at the end of July 2010? We don't know.
What will happen to stocks for the rest of year? They will fluctuate.
What will happen to stocks next year? They will fluctuate.
Is this a good time to make an equity investment? Yes, if you are putting money into a venture you already control and other people are trying to make you sell them your stock. No, if you got a tip from someone in the last few days. Maybe, if you don't need the money back for the next 24 months.
Any more questions?
Friday, June 25, 2010
Wednesday, June 23, 2010
Are Healthcare and Capitalism Incompatible?
Results like this lend credence to the theory that the target price for any healthcare transaction in a market economy is "everything you have; hand it over!"
U.S. scores dead last again in healthcare study
U.S. scores dead last again in healthcare study
Apple is as Big Brother Does
Reported today in Slashdot and elsewhere: Apple's iTunes, iPhone, iPad, iPod terms of service require that you grant your location data to Apple for unlimited sales to third parties thereafter.
Does this grant Apple the right to collect the location data of specific political candidates and their staff for use by the opposing side(s)?
Does this grant Apple the right to collect the location data of specific political candidates and their staff for use by the opposing side(s)?
Savers vs Alcoholics
Paul Krugman has been reported as being against austerity. The current economy is too fragile to avoid further stimulatory public spending, he says. The time to save money and trim spending is well into the future. That's his plan, to find the extra bucks to fill in debts when times are flush.
It won't work. The problem with stimulus spending is that it tends to be strongly captured or directed to those who can express, show, or prove the deepest human-felt need. Typically, the best "alcoholic," meaning the people with the most abject addiction, will make the best guilt-inducing case for the extra stimulus. The funds then are spent badly, without return on investment, and the government goes deeper in debt.
Really, the battle is titanic. It is the savers versus the alcoholics. Savers are responsible, putting money away against future adversity, denying themselves near-term pleasures, suffering, striving, working, doing the hard work of protecting their piece of humanity, whether themselves, their family, their team, their business, their company, their church, from the wild and wanton forces of nature. The alcoholics, typically addicting and loving their addiction, fill the need any way they can, indulging in short-term pleasures, spending, consuming, failing to plan, and carving bits of time, attention, money, and sanity from the people and institutions around them.
To the alcoholics, it is a game. "How much can I get away with?" is what they think. It is highly amusing to them to carve off a piece for themselves and have their community fail to notice, to excuse it, to let them get away with it. There is nothing more pleasurable to the alcoholic than getting away with stealing "juice," whether is genuine alcohol, cash, crime, overspending, or any other vice from which they derive pleasure at the expense of the future.
It takes a special person to be a "great" alcoholic. They strive to out-do themselves. They may feel guilty, but it is very brief, and then they have the pleasure of the successful crime, of getting away with it.
For the saver, encounters with alcoholics can be deadly. The ethic of self-denial, investment, careful stewardship doesn't have sharp and pointy weapons like the alcoholic's powers of indulgent destruction. There is no saver's "power move" comparable in strength to the alcoholic's running up of a credit card on worthless consumer goods. A saver is alone, an individual. The alcoholic might have entire government agencies under his command to flush millions of dollars to no good effect, with no one that can organize to stop him.
So, Paul Krugman, the excuses you supply to the spending alcoholics may have a dramatic short term effect on pure dollar flow, but each time you milk the savers to pay for these stimuli, you come closer to inducing an accidental societal fatal overdose. There is no evidence that you know how much more juice the body politic can take before it becomes toxic. After all, the actions and movements of the "liver" of the body politic, the savers, that remove poisons from the organization and purify it through the mending metabolics of investment and frugal habits, are nearly invisible to the alcoholics, who would have no idea how to replace the societal "liver" of savers if it were lost, or even what doses are toxic.
When you live in a fog of pleasured spending indulgence, it is extremely hard to gauge the meanings of those who do not indulge.
It won't work. The problem with stimulus spending is that it tends to be strongly captured or directed to those who can express, show, or prove the deepest human-felt need. Typically, the best "alcoholic," meaning the people with the most abject addiction, will make the best guilt-inducing case for the extra stimulus. The funds then are spent badly, without return on investment, and the government goes deeper in debt.
Really, the battle is titanic. It is the savers versus the alcoholics. Savers are responsible, putting money away against future adversity, denying themselves near-term pleasures, suffering, striving, working, doing the hard work of protecting their piece of humanity, whether themselves, their family, their team, their business, their company, their church, from the wild and wanton forces of nature. The alcoholics, typically addicting and loving their addiction, fill the need any way they can, indulging in short-term pleasures, spending, consuming, failing to plan, and carving bits of time, attention, money, and sanity from the people and institutions around them.
To the alcoholics, it is a game. "How much can I get away with?" is what they think. It is highly amusing to them to carve off a piece for themselves and have their community fail to notice, to excuse it, to let them get away with it. There is nothing more pleasurable to the alcoholic than getting away with stealing "juice," whether is genuine alcohol, cash, crime, overspending, or any other vice from which they derive pleasure at the expense of the future.
It takes a special person to be a "great" alcoholic. They strive to out-do themselves. They may feel guilty, but it is very brief, and then they have the pleasure of the successful crime, of getting away with it.
For the saver, encounters with alcoholics can be deadly. The ethic of self-denial, investment, careful stewardship doesn't have sharp and pointy weapons like the alcoholic's powers of indulgent destruction. There is no saver's "power move" comparable in strength to the alcoholic's running up of a credit card on worthless consumer goods. A saver is alone, an individual. The alcoholic might have entire government agencies under his command to flush millions of dollars to no good effect, with no one that can organize to stop him.
So, Paul Krugman, the excuses you supply to the spending alcoholics may have a dramatic short term effect on pure dollar flow, but each time you milk the savers to pay for these stimuli, you come closer to inducing an accidental societal fatal overdose. There is no evidence that you know how much more juice the body politic can take before it becomes toxic. After all, the actions and movements of the "liver" of the body politic, the savers, that remove poisons from the organization and purify it through the mending metabolics of investment and frugal habits, are nearly invisible to the alcoholics, who would have no idea how to replace the societal "liver" of savers if it were lost, or even what doses are toxic.
When you live in a fog of pleasured spending indulgence, it is extremely hard to gauge the meanings of those who do not indulge.
Saturday, June 12, 2010
Consumer Spending Will Not Save You
Government stimulus programs depend on macroeconomic theory that was established many decades ago by folks like Keynes. When the government spends money, or gives it to needy individuals, the theory says that the economy as a whole will expand, creating economic growth.
At the microeconomic level, the theory doesn't hold. An individual's choice about where to put dollars they have been given has an enormous effect on the downstream growth prospects for the economy. As I've written here before, the individual could choose to spend the money on inefficiently-produced goods and services, in which case they have extended the misallocation of resources that will tend to extend the recession, and does not provide a foundation for future growth.
In addition, the character of the individual's acquisitions with the stimulus dollars can have an important effect on growth. Again, the choice can create growth or destroy it, depending on how it is spent.
Let us image Joe Smith, lucky recipient of $100 of stimulus spending. He doesn't have to pay it back, and he can spend it any way he wants. Some of his choices:
∙ 8 bottles of Jack Daniels whiskey
∙ 40 gallons of gasoline
∙ new air filter, oil filter, oil change, and other engine maintenance on his car
∙ repay loan to his brother, who is an accountant
∙ change or add working fluid in his home HVAC system
What is the rate of return on these options? There is a personal component, and a societal component. In some cases, Joe himself will make money, in others society makes money. What I would suggest to Joe is that, assuming that his HVAC system is a bit older or hasn't serviced in a while, is that an investment in bringing the HVAC system up to full working order could repay him as much as 20% per month on his $100 investment. The whiskey might have a negative return (showing up drunk to work would be bad...), repaying his brother might not earn anything but goodwill or it might restore a great relationship, and the gasoline is just another living expense.
From the Keynesian perspective, the $100 has the same effect on the national economy regardless what Joe does with it. Obviously, this shorthand theory is incorrect. It matters a great deal where stimulus money is spent, and individual choices count heavily in the return on spending.
Hence the title of this article: Consumer spending from stimulus money, alone, is unlikely to generate economic growth, because decisions will be made to put some of the money in places that don't generate a return. Stimulus money carefully applied to areas where investments are made with high rates of return will generate economic growth.
From the investor's perspective, what should influence your perception of the future GDP growth rate is whether stimulus money is aligned with sharper investment sense. Money given freely to unemployed will be spent in ways that provide no return on capital. Money given to decrease energy spending will provide a return on capital. Money given in ways that boost the interest that individuals have in making good investments will also provide a return on capital.
At the microeconomic level, the theory doesn't hold. An individual's choice about where to put dollars they have been given has an enormous effect on the downstream growth prospects for the economy. As I've written here before, the individual could choose to spend the money on inefficiently-produced goods and services, in which case they have extended the misallocation of resources that will tend to extend the recession, and does not provide a foundation for future growth.
In addition, the character of the individual's acquisitions with the stimulus dollars can have an important effect on growth. Again, the choice can create growth or destroy it, depending on how it is spent.
Let us image Joe Smith, lucky recipient of $100 of stimulus spending. He doesn't have to pay it back, and he can spend it any way he wants. Some of his choices:
∙ 8 bottles of Jack Daniels whiskey
∙ 40 gallons of gasoline
∙ new air filter, oil filter, oil change, and other engine maintenance on his car
∙ repay loan to his brother, who is an accountant
∙ change or add working fluid in his home HVAC system
What is the rate of return on these options? There is a personal component, and a societal component. In some cases, Joe himself will make money, in others society makes money. What I would suggest to Joe is that, assuming that his HVAC system is a bit older or hasn't serviced in a while, is that an investment in bringing the HVAC system up to full working order could repay him as much as 20% per month on his $100 investment. The whiskey might have a negative return (showing up drunk to work would be bad...), repaying his brother might not earn anything but goodwill or it might restore a great relationship, and the gasoline is just another living expense.
From the Keynesian perspective, the $100 has the same effect on the national economy regardless what Joe does with it. Obviously, this shorthand theory is incorrect. It matters a great deal where stimulus money is spent, and individual choices count heavily in the return on spending.
Hence the title of this article: Consumer spending from stimulus money, alone, is unlikely to generate economic growth, because decisions will be made to put some of the money in places that don't generate a return. Stimulus money carefully applied to areas where investments are made with high rates of return will generate economic growth.
From the investor's perspective, what should influence your perception of the future GDP growth rate is whether stimulus money is aligned with sharper investment sense. Money given freely to unemployed will be spent in ways that provide no return on capital. Money given to decrease energy spending will provide a return on capital. Money given in ways that boost the interest that individuals have in making good investments will also provide a return on capital.
Friday, June 11, 2010
American Leadership to BP: Now Look at What You Made Me Do
The Obama administration suggested that BP should be financially responsible for paying the lost wages of oil industry worked idled by the administration's moratorium on off-shore drilling, the Wall Street Journal reported yesterday.
As a legal principle, it is very unlikely that this has any precedent in common law. Assigning liability to a defendant for the plaintiff's self-chosen actions is rarely credible, and is against common sense.
If the effort succeeds, expect an avalanche of similar "they made me decide this way, I couldn't help it" legal actions, including an expanded tort system. The judicial system will need to expand significantly to handle the increased case load.
Example: A teenager hangs herself because of a bully at school. The parents of the teenager could be tried for murder because they failed to raise the bully properly to be respectful of others.
For more, see the outstanding article at the Daily Mail:
Cameron at odds with Tories as he refuses to publicly back BP after Tebbit and Boris attack Obama's 'anti-British' rhetoric
You could also see the U.S. reaction partly in Tech Ticker's comment on the Daily Mail article:
England Is Now Freaking Out About The U.S. Reaction To BP
Although the British reaction is overdone (there is nothing anti-British about U.S. anger over the oil spill, especially among those in displaced industries), the administration's redneck mentality about seizure of corporate assets is guaranteed to be perceived as threatening to the British. Deliberately destroying goodwill with alliance partners is against American interests.
As a legal principle, it is very unlikely that this has any precedent in common law. Assigning liability to a defendant for the plaintiff's self-chosen actions is rarely credible, and is against common sense.
If the effort succeeds, expect an avalanche of similar "they made me decide this way, I couldn't help it" legal actions, including an expanded tort system. The judicial system will need to expand significantly to handle the increased case load.
Example: A teenager hangs herself because of a bully at school. The parents of the teenager could be tried for murder because they failed to raise the bully properly to be respectful of others.
For more, see the outstanding article at the Daily Mail:
Cameron at odds with Tories as he refuses to publicly back BP after Tebbit and Boris attack Obama's 'anti-British' rhetoric
You could also see the U.S. reaction partly in Tech Ticker's comment on the Daily Mail article:
England Is Now Freaking Out About The U.S. Reaction To BP
Although the British reaction is overdone (there is nothing anti-British about U.S. anger over the oil spill, especially among those in displaced industries), the administration's redneck mentality about seizure of corporate assets is guaranteed to be perceived as threatening to the British. Deliberately destroying goodwill with alliance partners is against American interests.
Thursday, June 3, 2010
Everything is an investment
The principal cause of recessions and depressions is lack of capital. Reduced capital stocks induce businesses and consumers to curtail their expenditures, in order to conserve their scarce stock of money.
What causes lack of capital? Poor return on investment is the primary culprit. During the preceding boom, consumers and business, and probably government as well, make what turn out to be poor investments. When capital and revenues are plentiful, people are less concerned with making the highest quality choices.
When I use the word "investment" here, I mean the allocation of any resource to any activity. We all think of stocks, bonds, money market funds, and real estate as investments, but what about time, purchases of durable goods, selections of educational topics, development of new skills? Home budgeting wisdom separates expenses from savings, but both come from the same income pool, and both have the capacity to return future gains.
Most expenses don't return cash, but they may return convenience, time, life satisfaction, and help you avoid costs. If you buy a reliable car instead of a flashy car, you may save thousands of dollars in maintenance over the life of the vehicle and spend dozens to hundreds of hours less time. Then again, if flashiness is supremely important, then buying a flashy car may return life satisfaction well in excess of any additional maintenance expense, or could induce you to extend your car maintenance skills, resulting in personal satisfaction and lower car repair bills.
If you don't think about which corn flakes to buy, you might buy the more expensive box, or the one with less quality per dollar. By not thinking, you lose money. When you don't pay attention, your resources go to the wrong place, and reinforce the wrong behavior in others.
These decisions get less consideration in boom times. If real estate is booming, people may worry less about what would happen if future prices fall than they otherwise would. The idea is that during bubbles the quality of many decisions about where to put capital may be reduced in quality. The result is a mis-allocation of resources, followed by substandard returns on those investments, further resulting in a reduced capital stock.
Hence, it isn't the lack of "animal spirits" that causes recessions, it the presence of "animal thinking" during the booms that causes capital to be allocated badly.
With this insight, the way out of a recession is clearer. Any policy or inducement for people to shortcut their thinking will make the capital deficit worse. Allowing people to sharpen the quality of their investments, to be frugal, insist on quality, and so on, directly adds to capital and immediately rewards those who are making the best efforts to allocate their capital.
Suppose burger chain A and burger chain B sell roughly equivalent value meals. Chain A sells theirs for $5.50. Chain B sells theirs for $4.00. If we assume that the psychological satisfaction of the two meals is roughly the same, the food has the same number of calories, the same quality, and same taste, then which chain is the better investment vehicle? Shareholders of Chain A might be better rewarded in the short term, but let's analyze what happens to society as a whole.
Say that Chain A "gets away with" selling its meals for $5.50. Over time, its employees might come to feel entitled to that $5.50. Or the price may reflect their higher costs, they may let costs rise because the price gives the company less impetus to cut their costs. In the long term, society gets fewer meals from Chain A for the same number of dollars.
Chain B, on the other hand, is generating more meals per dollar. Its customers have money left over, and their employees have succeeded at running the business on a leaner and meaner basis, which makes it more robust to economic shocks. In the long term, society gets more meals from Chain B for the same number of dollars.
In an economic boom, customers flush with extra cash may feel that they are able to show off their wealth by deliberating indulging in a meal from Chain A. Members of the opposite sex will be impressed: "Oh, he can afford the expensive burger! I want him to ask me out! Not that cheap Chain B guy!" Customers are then rewarding the less-efficient business, and making poor investment decisions because they get less for their dollars.
Society benefits from nurturing organizations that can produce and achieve more with fewer resources. Boom thinking, with conspicuous consumption, anti-frugality tendencies, and the success of even inefficient companies, is bad for the long term economy.
I hope that the point of the title of this posting is now clear. Even though a hamburger purchase may not feel like an investment, thousands of decisions to buy off the dollar menu are nevertheless the kind of capital allocation that sets the stage for long-term national economic growth.
What causes lack of capital? Poor return on investment is the primary culprit. During the preceding boom, consumers and business, and probably government as well, make what turn out to be poor investments. When capital and revenues are plentiful, people are less concerned with making the highest quality choices.
When I use the word "investment" here, I mean the allocation of any resource to any activity. We all think of stocks, bonds, money market funds, and real estate as investments, but what about time, purchases of durable goods, selections of educational topics, development of new skills? Home budgeting wisdom separates expenses from savings, but both come from the same income pool, and both have the capacity to return future gains.
Most expenses don't return cash, but they may return convenience, time, life satisfaction, and help you avoid costs. If you buy a reliable car instead of a flashy car, you may save thousands of dollars in maintenance over the life of the vehicle and spend dozens to hundreds of hours less time. Then again, if flashiness is supremely important, then buying a flashy car may return life satisfaction well in excess of any additional maintenance expense, or could induce you to extend your car maintenance skills, resulting in personal satisfaction and lower car repair bills.
If you don't think about which corn flakes to buy, you might buy the more expensive box, or the one with less quality per dollar. By not thinking, you lose money. When you don't pay attention, your resources go to the wrong place, and reinforce the wrong behavior in others.
These decisions get less consideration in boom times. If real estate is booming, people may worry less about what would happen if future prices fall than they otherwise would. The idea is that during bubbles the quality of many decisions about where to put capital may be reduced in quality. The result is a mis-allocation of resources, followed by substandard returns on those investments, further resulting in a reduced capital stock.
Hence, it isn't the lack of "animal spirits" that causes recessions, it the presence of "animal thinking" during the booms that causes capital to be allocated badly.
With this insight, the way out of a recession is clearer. Any policy or inducement for people to shortcut their thinking will make the capital deficit worse. Allowing people to sharpen the quality of their investments, to be frugal, insist on quality, and so on, directly adds to capital and immediately rewards those who are making the best efforts to allocate their capital.
Suppose burger chain A and burger chain B sell roughly equivalent value meals. Chain A sells theirs for $5.50. Chain B sells theirs for $4.00. If we assume that the psychological satisfaction of the two meals is roughly the same, the food has the same number of calories, the same quality, and same taste, then which chain is the better investment vehicle? Shareholders of Chain A might be better rewarded in the short term, but let's analyze what happens to society as a whole.
Say that Chain A "gets away with" selling its meals for $5.50. Over time, its employees might come to feel entitled to that $5.50. Or the price may reflect their higher costs, they may let costs rise because the price gives the company less impetus to cut their costs. In the long term, society gets fewer meals from Chain A for the same number of dollars.
Chain B, on the other hand, is generating more meals per dollar. Its customers have money left over, and their employees have succeeded at running the business on a leaner and meaner basis, which makes it more robust to economic shocks. In the long term, society gets more meals from Chain B for the same number of dollars.
In an economic boom, customers flush with extra cash may feel that they are able to show off their wealth by deliberating indulging in a meal from Chain A. Members of the opposite sex will be impressed: "Oh, he can afford the expensive burger! I want him to ask me out! Not that cheap Chain B guy!" Customers are then rewarding the less-efficient business, and making poor investment decisions because they get less for their dollars.
Society benefits from nurturing organizations that can produce and achieve more with fewer resources. Boom thinking, with conspicuous consumption, anti-frugality tendencies, and the success of even inefficient companies, is bad for the long term economy.
I hope that the point of the title of this posting is now clear. Even though a hamburger purchase may not feel like an investment, thousands of decisions to buy off the dollar menu are nevertheless the kind of capital allocation that sets the stage for long-term national economic growth.
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