by ilene - August 18th, 2016 9:20 pm
The simple chart below from the American Enterprise Institute beautifully illustrates the absurd inflation of college tuition and textbooks over the past 20 years. In real terms, the cost of college has effectively doubled over that time period. Now what would cause such massive inflation? Could it be our government tripping over itself to provide cheap student loans for children to spend on vacations, iPads and kegs (i.e. "college"; see "What Student Loans Are Used For: Vacations, iPads, Kegs, Entertainment"). Or, per the Daily Caller, perhaps the issue is administrative bloat at our institutions of higher education:
The exact reason prices have increased so much has been hotly debated, but one critical factor at most schools is administrative bloat. While student to faculty ratios have remained relatively steady over time, the number of administrators and other non-teaching staff has exploded at schools across the country.
But we don't want to stress out our young Millennials too much. We're quite sure the debt burden associated with your $200,000 anthro degree will be socialized very soon.
by ilene - August 17th, 2016 10:40 pm
While the pending subprime auto loan bubble pop is nothing new for our readers, it may be a shocking revelation for the average American who would fall victim of these scams. British comedian John Oliver has prepared a video that places in evidence the rampant fraud that currently takes place in the auto lending sector. The similarities between this industry and the mortgage industry pre-2007 are striking.
The video compiles some of the current TV ads for the segment, including one from Viers Auto Sales, that should strike fear down your spine. Even a clown can get approved.
While the Obama administration has created the Consumer Financial Protection Bureau, we have yet to see any action from them or other social justice warriors like Elizabeth Warren on cracking down on these predatory practices.
Some of the video highlights include:
- A woman asking for a maximum $3,000 car loan ends up on the hook for a $13,000 loan (paying ~30% interest).
- A [woman] who leaves her baby in the car, and then gets her car repossessed with said baby inside.
- A 2003 Kia Optima car that gets loaned and repossessed at least 8 times, each times valued at 2-3x its previous estimate.
- Approximately 31% of subprime auto loans are currently non-performing
Evidently, we have learned nothing from the 2008 crisis.
by ilene - August 17th, 2016 3:39 am
Summary: Since February, US equities have risen more than 20%. Equities outside the US have risen 16%. A tailwind for this rally has been the bearish positioning of investors, with fund managers' cash in February at the highest level since 2001. Similarly, their equity allocations in February had only been lower in mid-2011 and mid-2012, periods which were notable lows for equity prices during this bull market.
Remarkably, allocations to cash in July were even higher than in February, and fund managers became underweight equities for the first time in 4 years. Investors dove into the safety of bonds, with allocations rising to a 3 1/2 year high in June and July.
Now in August, cash allocations are only slightly lower than in February and allocations to equities only slightly higher. Both are about one standard deviation away from their long term mean. Overall, fund managers' defensive positioning supports higher equity prices in the month(s) ahead.
Allocations to US equities had been near 8-year lows over the past year and half, during which the US has outperformed most of the world. That has now changed: exposure to the US is at a 20-month high. There is room for exposure to move higher, but the tailwind for the US due to excessive bearish sentiment has mostly passed. That's also the case for emerging markets which have been the best performing equity region so far in 2016. European equity markets, which have been the consensus overweight and also the world's worst performing region, are now the contrarian long trade within equities.
* * *
Among the various ways of measuring investor sentiment, the BAML survey of global fund managers is one of the better as the results reflect how managers are allocated in various asset classes. These managers oversee a combined $600b in assets.
The data should be viewed mostly from a contrarian perspective; that is, when equities fall in price, allocations to cash go higher and allocations to equities go lower as investors become bearish, setting up a buy signal. When prices rise, the opposite occurs, setting up a sell signal. We did a recap of this pattern in December 2014 (post).…
by ilene - August 16th, 2016 2:02 am
Courtesy of Michael Batnick
This weekend on Masters In Business Barry had on (for the second time) one of my favorite thinkers, Michael Mauboussin. Early on in the interview, while they were discussing quantitative models, Mauboussin brought up an interesting point – what happens when you combine the power of a machine with the power of the human brain?
Kasparov loses to deep blue in 1997 and so machine beats man, fine. But shortly thereafter what emerges is something called free-style chess. That means you and I are playing a match but we can avail ourselves of whatever aides we want. So we can run computer programs, you can call your lifeline, your grand master buddy or whatever it is. And it turns out these free-style teams are better than the programs by themselves or of course any man or person. So man plus machine beats man or machine…..This to me is a very intriguing model to say are there cases, where most of the time you default to the quantitative approach or the program, but every now and then if you have a good feel for the game you can step in and do something a little bit different that adds value. Now that’s an open question, whether that’s true in investing but to me that’s a really intriguing model for thinking about where humans and quantitative techniques may emerge in the future.
The idea of combining man and model was tested a few years ago by Joel Greenblatt. Here’s Tobias Carlisle and Wesley Gray From Quantitative Value (emphasis mine):
In 2012, Greenblatt conducted a study into the performance of retail investors using the Magic Formula over the period May 1, 2009, to April 30, 2011. Greenblatt’s firm offers two choices for retail investors wishing to use the Magic Formula, a “self-managed” account, and a “professionally managed” account….What happened? The self-managed accounts, where clients could choose their own stocks from the preapproved list and then exercise discretion about the timing of the trades, slightly underperformed the market….The aggregated professionally managed accounts returned 84.1 percent after all expenses over the same
by ilene - August 15th, 2016 8:09 pm
Courtesy of Wade of Investing Caffeine
Before the Brexit, 28 countries joined the European Union since its inception in 1957, without a single country leaving. The story is similar if you look at the World Trade Organization (WTO), which has witnessed more than 160 countries unite, without one country exiting since it began in 1948. Are the leaders of these countries idiots and blind to the benefits of trade and globalization? I think not.
For centuries, the advantages of free trade and globalization have lifted the standards of living for billions of people. However, pinpointing the timing or attributing the precise actions leading to these tremendous economic advantages is difficult to do because most trade benefits are often invisible to the naked eye.
Today, populist sentiment on both sides of the political aisle has demonized trade, whether referring to TPP (Trans-Pacific Partnership), NAFTA (North America Free Trade Agreement), trade with China, or announcements by corporations to manufacture goods internationally.
Although it would be naïve to adopt a stance that there are no negative consequences to globalization (e.g., lost American jobs due to offshoring), myopically focusing on job displacement is only half the equation.
While I can attempt to articulate the economic costs and benefits of free trade, and I’ve tried (see Productivity & Trade), Dan Ikenson of the Cato Institute explains it much better than I can. Here is a more eloquent synopsis of free trade (hat-tip: Scott Grannis):
“The case for free trade is not obvious. The benefits of trade are dispersed and accrue over time, while the adjustment costs tend to be concentrated and immediate. To synthesize Schumpeter and Bastiat, the “destruction” caused by trade is “seen,” while the “creation” of its benefits goes “unseen.” We note and lament the effects of the clothing factory that shutters because it couldn’t compete with lower-priced imports. The lost factory jobs, the nearby businesses on Main Street that fail, and the blighted landscape are all obvious. What is not so easily noticed is the increased spending power of the divorced mother who has to feed and clothe her three children. Not only can she buy cheaper clothing, but she has more
by ilene - August 13th, 2016 2:14 pm
Courtesy of John Mauldin at Mauldin Economics
“The growth model China has relied on for the last 30 years – one predicated on low-cost exports to the rest of the world and investment in resource-intensive heavy manufacturing – is unlikely to serve it well in the next 30 years.”
– Gary Locke
“In this 21st century world, some of our country’s most significant exports extend beyond goods and services. They also include innovation, knowledge, discovery, and healing.”
– Kathleen Sebelius
John here. This Friday, writing day finds me in Grand Lake Stream, Maine; but fortunately for me, this week’s letter has been written by my associate Patrick Watson, giving me a week off. Patrick takes up where I left off last week, when we discussed the uneven distribution of the benefits of globalization. That globalization has in fact been positive for humanity and for our country is incontestable – you would have to ignore mountains of data to dispute that fact – but there is no doubt that the benefits have not accrued equally to everyone, leaving large swathes of the US population (and many in the rest of the world) feeling like they weren’t invited to the party, but have been forced instead to watch through the windows at all the other participants enjoying themselves.
This week Patrick discusses another aspect of globalization, one that has a direct bearing on questions of equity. He explores the technologies that allowed globalization to take hold and the new technologies that are actually allowing production to “re-shore.” I mentioned that topic in passing last week, and it turned out that one of my readers heads an organization that is focused on assisting companies in re-shoring their production back to the US. He tells me that 250,000 jobs have already returned to the US. Patrick tells us an interesting story about how this trend will continue to unfold.
By way of introduction, Patrick first came to work for me in 1988 and has worked for me at various companies off and on over the years since then. He probably has the dubious distinction of having read more of my writing than any other person.…
by ilene - August 12th, 2016 9:51 pm
Courtesy of Cullen Roche, Pragmatic Capitalism
Fantastic note here by Michael Mauboussin of Credit Suisse. Mauboussin is the rare fundamental analyst who is both a good analyst and a good communicator. That is, he can break big complex matters down in such a way that they don’t just sound like a bunch of numbers thrown at a wall.
In his latest research piece he breaks down the key aspects of great fundamental investors. Of course, a fundamental analyst like myself loves this sort of stuff. While I am not a proper quant (whatever that is!) I do adhere to the idea that there are very fundamental reasons for the market’s movements. I am, at heart, a rigorous empiricist. Although the market’s movements can never be explained precisely (due mainly to behavioral irrationality) they can be explained approximately so as to help someone implement a probabilistic framework for investing success.
My rigorous empirical approach is a bit different than Mauboussin (who is more of a true stock picking value investor), but the same basic lessons apply to both a top down (macro approach like mine) and a bottom up micro approach (like Mauboussin’s). I prefer the top down approach because it helps me better digest how the economic and market machine works. And yes, it is very much like a machine. That is, there are institutional and contractual components to the financial world that dictate how certain things operate at a fundamental level. Much like a car has a structural framework which dictates what it can and cannot do, the economy and the financial markets adhere to a certain set of fundamental rules that dictate how certain things operate.
Of course, the trouble is the human element. A car is designed to do certain things, however, when you put a person inside that car it can do very unpredictable things just like the markets and the economy. Understanding the structure of the markets and the economy is an approximate way of understanding these boundaries, limitations and potential directions.
Anyhow, go have a read and feel free to follow up with me in the forum if you have any questions. And once you have a read of the…
by ilene - August 11th, 2016 10:48 pm
Watch a replay of Phil's weekly trading webinar, recorded yesterday, right here. For LIVE access, join us at Phil's Stock World – click here!
00:01:54 Checking on the Markets: NG, CL, RB, DX, YG, SI, AAPL, BZ
00:05:15 Trade Ideas: RB, CL, BZ, DX
00:06:21 Technical Bounce
00:10:30 Low Trading Volume
00:11:40 Money Psychology
00:15:10 NG Trade Idea
00:22:00 Checking on the Markets
00:24:38 S&P 500 Chart, 5% rule, Trade ideas
00:35:48 Premium Selling Idea
00:47:46 Futures, the use of Stops on Futures
00:53:36 5% Portfolio
00:54:32 SPWR Chart
00:55:05 GAAP Earnings
00:57:55 SPWR's Earnings
01:05:20 Thoughts on DFS
01:10:40 SKX Butterfly Trade Ideas
01:14:38 Events that can move the markets
01:16:32 NG Inventory
01:20:49 UNG Trade
01:22:31 Checking on Trades
01:25:01 Checking on the Markets: DX
01:27:05 More Trade Ideas…
Phil's Weekly Trading Webinars provide a great opportunity to learn what we do at PSW. You can subscribe to our YouTube channel and view past webinars, here. For LIVE access to PSW's Weekly Webinars – demonstrating trading strategies in real time – join us at PSW — click here!
by ilene - August 10th, 2016 7:20 pm
The stock of infamous pharma rollup Valeant peaked almost exactly one year ago. Since then it has been one relentless, first slow then precipitous drop, which wiped out more than 90% of the company's market cap, forced the CEO to resign, led to various Congressional hearings and civil lawsuits after it became a symbol of what is wrong with corporate America, and brought the company to the verge of a technical default. That was the good news.
Now the bad – Valeant is now under criminal investigation.
The WSJ reports that the Feds are investigating whether Valeant also defrauded insurers by shrouding its ties to the infamous mail-order-pharmacy, Philidor, whose emergence on the scene from obscurity one year ago, catalyzed the early days of the stock crash.
The WSJ writes that the lawyers, in the U.S. attorney’s office in Manhattan, "are pursuing an unusual legal theory, previously unreported, that Valeant and a closely linked mail-order-pharmacy, Philidor Rx Services LLC, allegedly defrauded insurers by hiding their close relationship."
The U.S. attorney’s office in Manhattan, headed by Preet Bharara, is investigating possible mail and wire fraud violations, one of people familiar with the matter said. The wide-ranging mail and wire-fraud statutes make it illegal to use interstate communications as part of a scheme to defraud another out of money.
In a statement emailed by a Valeant spokeswoman, the company said Wednesday: “Valeant has been cooperating and continues to cooperate with the ongoing Southern District of New York investigation.” A spokeswoman for the U.S. attorney’s office declined to comment.
The probe is expected to be the most serious Valeant currently faces, and could lead to criminal charges against former Philidor executives and Valeant as a company, one of the people said. The investigation could conclude as soon as this year, the person said, adding that the timetable could also slip.
Ultimately the issue at hand is price, and whether Valeant's management defrauded clients by not disclosing its Philidor relationship.
Prosecutors are investigating whether Philidor, now defunct, made false statements to insurers about its ties to Valeant, something the company has been widely accused of in the
by ilene - August 9th, 2016 9:05 pm
Courtesy of Joshua M Brown, The Reformed Broker
Here’s the latest – Faber says the S&P 500 is set to crash 50%. Okay, it’s happened a handful of times before over the last century, I suppose it’s possible. Is it probable?
I wrote a book about the history of market calls and outrageous stock market punditry. In the course of my research (which encompassed 300 years of market history back to the South Seas Bubble), I came away with a few important takeaways:
– No one who called any of the big ones was able to also call the recoveries, or even the next crash
– Lots of people have historically gotten credit for major crash calls, because all of their previous and subsequent calls were forgotten about
– It’s pretty easy to get on a soapbox and say that horrible things “could” happen
– The uber-bulls are just as bad – notably outlandish upside targets for the Dow Jones have all occurred at major tops
– It’s harder to admit that the future is unknowable – and it’s much less marketable
– It is irrational to be constantly worried about low-probability events – and a long-term money loser of a strategy
– The best investors in history focused their time and energy away from attention-grabbing predictions
With that preamble in mind, I direct you to today’s chart, which comes to us from my friend Jon Boorman. You may click on it to embiggen the image:
Maybe, instead of making repeated pronouncements based on nonsense, it would be better to just STFU for a little while. Professionals laugh at this stuff but mom & pop investors normally don’t have as much context and are more susceptible to crash calls and being scared out of their portfolios.
And now, my prediction: Average annual returns somewhere between 5 and 10% for the S&P 500 over the next 30 years, punctuated by drastic sell-offs and brutal bear markets here and there, which serve to reward the best investors and punish the emotional ones. After all, the stock market must go down from time to time. Otherwise, there would be no premium return available for those who choose to persevere.
My book, Clash of the Financial Pundits, available here if you haven’t read it yet.