EVERYTHING YOU KNOW ABOUT FREE MARKET CAPITALISM IS WRONG
by ilene - April 21st, 2012 5:43 am
Courtesy of Richard Metzger of Dangerous Minds
One of the big “sacred cows” of libertarian “free market” Capitalism is the supposed “invisible hand” of the marketplace keeping supply and demand in line with the price of a particular commodity or service.
The problem is, it’s just a myth, albeit a persistent one.
Jonathan Schlefer writes at the Harvard Business Review, that there is no evidence for the invisible hand:
One of the best-kept secrets in economics is that there is no case for the invisible hand. After more than a century trying to prove the opposite, economic theorists investigating the matter finally concluded in the 1970s that there is no reason to believe markets are led, as if by an invisible hand, to an optimal equilibrium — or any equilibrium at all. But the message never got through to their supposedly practical colleagues who so eagerly push advice about almost anything. Most never even heard what the theorists said, or else resolutely ignored it.
Of course, the dynamic but turbulent history of capitalism belies any invisible hand. The financial crisis that erupted in 2008 and the debt crises threatening Europe are just the latest evidence. Having lived in Mexico in the wake of its 1994 crisis and studied its politics, I just saw the absence of any invisible hand as a practical fact. What shocked me, when I later delved into economic theory, was to discover that, at least on this matter, theory supports practical evidence.
Adam Smith suggested the invisible hand in an otherwise obscure passage in his Inquiry Into the Nature and Causes of the Wealth of Nations in 1776. He mentioned it only once in the book, while he repeatedly noted situations where “natural liberty” does not work. Let banks charge much more than 5% interest, and they will lend to “prodigals and projectors,” precipitating bubbles and crashes. Let “people of the same trade” meet, and their conversation turns to “some contrivance to raise prices.” Let market competition continue to drive the division of labor, and it produces workers as “stupid and ignorant as it is possible for a human creature to become.”
That’s Adam Smith talking there, about 75 years before Marx and Engels wrote The Communist Manifesto!
Just saying….
The search by classical economists for a concrete and mathematically verifiable theory of economic equilibrium continued throughout the decades, but apparently no one could ever really find…
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DiggSidoxia’s Investor Hall of Fame
by ilene - April 19th, 2012 8:52 pm
Sidoxia’s Investor Hall of Fame
Courtesy of Wade of Investing Caffeine
Investing Caffeine has profiled many great investors over the months and years, so I thought now would be a great time to compile a “Hall of Fame” summarizing some of the greatest of all-time. Nothing can replace experience, but learning from the greats can only improve your investing results – I’ve benefitted firsthand and so have Sidoxia’s clients. Here is a partial list from the Pantheon of investing greats along with links to the complete articles (special thanks to Kevin Weaver for helping compile):
Phillip Fisher – Author of the must-read classic Common Stocks and Uncommon Profits, he enrolled in college at age 15 and started graduate school at Stanford a few years later, before he dropped out and started his own investment firm in 1931. “If the job has been correctly done when a common stock is purchased, the time to sell it is – almost never.” Not every investment idea made the cut, however he is known to have bought Motorola (MOT) stock in 1955 and held it until his death in 2004 for a massive gain. (READ COMPLETE ARTICLE)
Peter Lynch – Lynch graduated from Boston College in 1965 and earned a Master of Business Administration from the Wharton School of the University of Pennsylvania in 1968. Lynch’s Magellan fund averaged +29% per year from 1977 – 1990 (almost doubling the return of the S&P 500). In 1977, the obscure Magellan Fund started with…
Stock World Weekly: Resting or Ready to Fall
by SWW - April 15th, 2012 6:12 am
NEW: Ilene is available to chat with Members regarding topics presented in SWW, comments are found below each post.
Click here for the new Stock World Weekly, Resting or Ready to Fall?
Pic by Banksy
Guest Post: Don’t Believe Every Energy Dividend Story You Hear
by ilene - April 15th, 2012 1:15 am
Don’t Believe Every Energy Dividend Story You Hear
By Marin Katusa, Casey Research
My most recent trip to Calgary gave me a welcome chance to catch up with friends and colleagues in Cow Town's oil and gas sector. I found out about new projects, investigated companies of interest, and came away with an improved feel for the current state of affairs – what's hot, what's not, and why.
I also came away reminded of one of the dangers that lurk within troubled markets – and today's markets are troubled. Since mid-March, North America's exchanges have struggled, with the Dow Jones losing all the momentum that had propelled a spectacular 17% gain over the previous five months while the Toronto Stock Exchange also sputtered and slid, turning downward to lose its slight gains from January and February. Fundamental economic problems remain unresolved in the United States and Europe, while uncertainty grows over China's ability to control inflation and maintain growth.
The outlook from here is not great. When markets turn bearish, investment strategies often turn toward income stocks, and rightly so: if market malaise is expected to keep share prices in check, dividends become a very good place to look for profits. But whenever a particular characteristic – such as a good dividend yield – becomes desirable, it also becomes dangerous. The sad truth is that scammers and profiteers jump aboard the bandwagon and start making offers that seem too good to refuse.
It was just such an offer that reminded me of this danger. In the question-and-answer period following my talk in Calgary at the Cambridge House Resource Conference, an audience member asked my opinion of a new, private company that was offering a 14.7% monthly dividend yield.
Yes, you read that right: a 14.7% monthly yield, from a new, private, natural gas company.
I had met with this company the previous day and in that meeting the slick individuals who promised such glorious dividends got stumped by some pretty simple questions. When asked what the company's twelve-month payout ratio was, the individual responded with, "Our working interest varies between 25% and 70%." Perhaps he didn't hear my question, I thought, so I tried again. This time he stated that they pay a 14.7% dividend monthly… again, not answering the question. An interaction like this should set your spider-senses tingling. A few questions later it was obvious that…
The War for Spain
by ilene - April 14th, 2012 5:36 pm
The War for Spain
By John Mauldin, Thoughts from the Frontline
I fully intended to ignore Spain this week. Really, truly I did. I had my letter all planned, but then a few notes drew my attention, and the more I reflected on them, the more I realized that the inflection point that I thought the ECB had pushed down the road for at least a year with their recent €1 trillion LTRO is now rushing toward us much faster than ECB President Draghi had in mind when he launched his massive funding operation.So, we simply must pay attention to what Spain has done this week – which, to my surprise, seems to have escaped the attention of the major media. What we will find may be considered a tipping point when the crisis is analyzed by some future historian. And then we'll get back to some additional details on the US employment situation, starting with a few rather shocking data points. What we'll see is that for most people in the US the employment level has not risen, even as overall employment is up by 2 million jobs since the end of the recession in 2009. And there are a few other interesting items. Are we really going to see 2 billion jobs disappear in the next 30 years?
But first, a personal note. My friend and fellow writer/economic blogger Mike "Mish" Shedlock's wife has ALS, better known as Lou Gehrig's disease. I have talked at length with him the past year as the disease progressed. It is a truly evil affliction. Mish has stayed the course, working with his wife, and now the options will soon be down to her communicating with a device that follows her eye movements to choose words on a computer screen. I cannot even imagine the pain of living with a loved one in the condition.
Mish is not asking for anything for his family, but he is sponsoring a raffle for ALS research. Please consider buying one or more tickets, or making a small donation to the Les Turner ALS Foundation. The money will go to research to find a cure, so that someday no one has to go through such pain. Thanks.
The War for Spain
In my book Endgame, co-author Jonathan Tepper and I wrote a chapter detailing the problems that Spain was facing. It was obvious to us as…
Income Portfolio – Still Selling in May and Going Away
by Phil - April 14th, 2012 5:27 am
Last month, we decided we were going to sell in May and go away in our special update (regular update was here).
We had turned bearish on the market by the 12th, perhaps a little early but it gave us plenty of time to make good exits and get our prices. Since our Income Portfolio was running 100% ahead of schedule and more like 250% counting the unrealized gains from our buy/writes as the market zoomed higher on us, we decided it would be good to go back to cash – especially as it would be fun to build a brand new Income Portfolio for 2012 that our newer Members will be able to benefit from following as well as it is, by far, our most popular virtual portfolio.
We're not cashing it all out as some positions still need to run their courses, but we won't be upset to be cashed out on some so we covered conservatively in anticipation of the pullback that just began last week. We had $97,716 in realized (albeit virtual) gains as of our March 10th update – not bad after 10 months with a $500K portfolio that was only looking to take out $4,000 a month!
This is the kind of set-up that my Mom and many of her friends need to do to supplement their not very generous Social Security checks but it's also using the same principle that applies to any long-term wealth-building strategy, utilizing our best long-term growth strategies combined with a concentration on generating an income collecting dividends and selling short-term options to create our own "dividend" stream on ordinary stocks. Please see previous posts in our Virtual Portfolio section for our main strategy discussions – this is just an update.
This month was unusual as we had quite a few action items, mostly per the Special Update, the following positions were closed:
- 10 GE Jan $17.50 puts sold for $2.10, closed at now $1.30 – up $800
- 20 RIMM 2014 $22 puts at net $3.52, closed at $10.10 – down $13,160
- 3,000 NLY .55 dividend paid on 3/28 – up $1,650
- 10 TITN March $22.50 puts sold for $4.50, expired worthless – up $4,500
- 1,500 NYB at net $8.70, out at $10 – up $1,950
- 10 TM Jan $62.50 calls bought for $6.50 ($6,500), out at $23.20 – up $16,700
- 1,000 CSCO .08
…
Just How Bad Is This Week’s Unemployment Claims Data? Not Bad At All
by ilene - April 12th, 2012 8:56 pm
Just How Bad Is This Week's Unemployment Claims Data? Not Bad At All
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Courtesy of Lee Adler of the Wall Street ExaminerThe mainstream media today reported an increase in initial jobless claims this week to 380,000, an increase of 13,000. This was another huge miss for the consensus of conomists, where the central tendency of expectations was for 359,000 initial claims. The conomic establishment continues to prove its worth week in and week out. The question is whether these people are just clueless or willing instruments of the Wall Street distribution machine. I'll leave that for you to decide. The issue today is whether the number of claims is anything unusual. Does it represent a sign that the economy is weakening?
The media and conomic pundits report claims on a seasonally adjusted basis. That is a fictional number designed to eliminate normal seasonal patterns in the data in order to represent an abstract impressionistic version of a smooth curve for consumption by the masses, which the conomic establishment assumes is too stupid to understand real data. It's a very strange device because it is a simple matter to compare the current performance of the actual number, in other words "reality" with the reality of the same week in past years.
The Labor Department (DOL) does publish the actual number. This is not a survey sample, but an actual compilation of the actual weekly claims, which each of the 50 states submits to the DOL. The DOL warns in the weekly release that the current number is an advance number. The fact that the number is revised up every week is simply a matter of the fact that the initial count is not complete. This is not a survey, and not a sample. It is the actual number reported by the 50 states. The number reported next week will be the final number for this week. The DOL is very clear about this. It reports in today's press release that, "The advance number of actual initial claims under state programs, unadjusted, totaled 381,875 in the week ending April 7, an increase of 62,530 from the previous week. There were 448,029 initial claims in the comparable week in 2011." Highlighting is mine.
Can it be any clearer? The DOL spoon feeds this data to the media and the conomic establishment, and they completely ignore the facts. Rupert the Hacker's Wall Street Urinal posts an article
…
Three conversations
by ilene - April 12th, 2012 7:36 pm
Three Conversations
Courtesy of Bruce Krasting
I’ve had some interesting conversations in the past few days with folks whose opinions I consider important. I'm passing them on:
I spoke with my Greek shipper friend from Athens about the upcoming May 6 election. This is an event that should be feared by the markets according to this person.
There are two large political groups that have been the basis of coalition governments in Greece. On the right is the New Democracy party; on the left is the Pan Hellenic Socialist Movement. Both of these parties are out of favor today. The most recent polls show that the two parties together would get less than 40% of the popular vote. If this is the result, it will be very difficult to put a new governing coalition together.
There are many other smaller political parties that will get the dissenting votes. At this point it is unclear who will end up with the bargaining chips post-election. The fear is that some of the smaller parties will have a big say in the outcome. My friend had this to say:
“The other parties are communists, radicals and crazies. If they have a hand in the new government, then on May 7 Greece will be forced to take dramatic steps. The whole idea that the country should suffer, so the bankers can get paid would have to change.”
“Remember the history. After WWII there were years of fighting in the streets of Athens with the Communists. British troops were forced to come in to end the fighting.” If the Communists make a comeback in this election, then instability will follow.
“Also on May 7, the attitude in Brussels and Bonn towards Athens will change as well!”
May 7th is sixteen trading days from today….
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II
I spoke with a guy I’ve know for a long time who lives in Paris. He is an ex-banker, turned technocrat.
Paris:
The bond market has been forcing every decision by Paris, Bonn and Brussels. Every step taken has been done to
…
It’s All About Jobs
by ilene - April 9th, 2012 4:30 pm
It’s All About Jobs
Courtesy of John Mauldin, Thoughts from the Frontline
Today's employment numbers were decidedly soft, but the unemployment rate went down anyway, and that is about the best you can say. And this being a holiday weekend, it provides us an opportunity to look deep into the employment numbers, while we put off thinking about Spain for at least a week. And who knew that being an unmarried Asian-American in the US was a risk for unemployment? Plus a few other interesting items will make for an interesting letter.
March saw "only" 120,000 jobs created. Expectations were for 200,000 new jobs. It wasn't all that long ago that any positive number would have been seen as good, but with the last six months averaging 200,000 jobs, this was disappointing. It gives force to the worry that once again we could see the employment numbers get soft during the spring and summer. And adding to interest in the topic, the employment numbers will take on a decidedly political tone this summer, as every poll shows that jobs and the economy is the #1 thing on voter's minds. This will be underscored only four days before the presidential election on Tuesday, November 6, as the jobs report for October is scheduled to be released on Friday, November 2. Think that one won't be analyzed more than usual? I keep writing that the current release is adjusted so often that it is hard to see more than a trend in the actual monthly releases, but that will not keep pundits from using the release to support their candidate with all the spin they can muster.
There is reason to believe that today's lower number was partially due to the weather being so good in the earlier part of the year, so that what is usually seasonal employment started earlier than is typical; so it might be better to average the last two months, which is still disappointing in that it barely stays ahead of population growth. At this rate it will be another three years before we get back to new employment highs, and that does not factor in any population growth. And it also assumes there is no recession in the meantime. Given that the US must start at some point to get its budget balanced, there is little hope that more government spending (aka stimulus) is on…
Stock World Weekly: Are the Screws Tightening?
by SWW - April 8th, 2012 7:11 am
NEW: Ilene is available to chat with Members regarding topics presented in SWW, comments are found below each post.
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Pic credit: Banksy
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Philip R. Davis is a founder Phil's Stock World, a stock and options trading site that teaches the art of options trading to newcomers and devises advanced strategies for expert traders...
Ilene is editor and affiliate program
coordinator for PSW. She manages the Favorites backup site
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