Video of the Day: Mac v PC

Revenge of the PC! For full disclaimer, I use both, and while I think there are some cool features in a Mac, but the Mac World is a bit too full of hype!

Quotes of the Day: Gas Prices

National Review Editor Rich Lowrie on the Newshour with Jim Lehrer on PBS:

There are also some doubts about how much [higher fuel efficiency standards] will actually do to reduce greenhouse emissions, because there are all sorts of strange incentives where you -- if you make cars -- if you basically make it more efficient to drive cars, people will drive more. And the horn of dilemma of energy politics is what really drives concern about this energy in this country, at the gut level for most people, is high gas prices. And if you really want to fight global warming and try to reduce our carbon emissions, the cleanest, easiest, most rational way to do it would to make the price of gas even higher through very stiff gas prices. And, of course, that's what no one is willing to contemplate or talk about.

David Frum of the American Enterprise Institute, with a great op-ed piece on American Public Media's Marketplace program (listen to the piece)

[Presidential candidates Clinton, Obama, Romney are] all echoing President Bush. At the start of the year, the president told a Delaware audience that he thinks it appropriate to spend taxpayers' money on new energy technologies. Does anybody remember that we've been here before? In the 1970s, the Carter administration spent — sorry, invested — tens of billions of dollars to develop alternatives to imported oil. The results? The Synfuels Corporation — one of the most flagrant boondoggles in American economic history. A market-flunking exercise that made even the farm program look like sound public policy. Why would anyone want to go down that road again? ...
There's only one way to bring oil alternatives to market: keep energy prices high, with tax increases if necessary. Under that price umbrella, entrepreneurs, firms, and consumers will develop their own next-best solutions — cutting back on consumption, devising substitutes and so on. ... But no politician wants to tell voters that they have to pay more for fuel to achieve energy independence. Instead, they offer delusions that government investors can somehow do what trillions of dollars in private capital cannot: discover a cheap and abundant alternative to oil that will deliver cleaner fuel at lower prices.

A Potrait of Lee

Interesting article on how the Confederate general, Robert E. Lee wasn't quite what he's made out to be. He did believe in slavery and was quite harsh with his slaves. Hmm, add one to list of books to read.

Incidentally, a very good historical piece is Setting the World Ablaze, John Ferlig's bio of the real George Washington, Thomas Jefferson and John Adamns.

I'll Pass On the IPhone

Ok, so that wouldn't have been a huge surprise for those who know me. I'm cheap, and tend to hate overpaying for brand name. I bought a much-cheaper Sandisk MP3 player rather than an iPod (hmm, I was meaning to write a review about Sandisk's FANTASTIC customer service). I often buy clothes from Walmart or other discount stores, and don't mind a gloomy grocery store if it can save me bucks.

But now the first review is out - Glenn Fleishman provides some persuasive reasons for waiting for a later version for the iPhone. I'd like to add another - sweat and scratches! Yep, you read that right. Anyone who's regularly used a touchscreen will now the wear-and-tear from sweaty fingers and nails. I'd suspect for a real user (i.e. one who doesn't treat their phone like their baby) an iPhone just wouldn't last that long.

Speaking of which, do people really use their phones to surf the web all that much? I mean, I can see checking directions or looking up a number, but reading the NY Times? Come on, people, get a life!

Reader Question: Leave the Stock Market?

In response to a previous post on 401k allocations, one of my readers, Jason asked if the author of a website I mentioned was suggesting avoiding stock allocation altogether. I do not know if that was Rob Bennett's point - in my reading, I didn't necessarily get that impression. But I do know a few things I'd consider.

The first is Benjamin Graham's counsel. Graham is the father of value investing, whose followers include a laundry list of super-investors including Warren Buffett (the world's third richest man), the Schlosses, the folks and Tweedy Browne, Seth Klarman and many others. Graham, in his book The Intelligent Investor, a classic investing text, ranted against paying too much for stocks and poor performance that ensued. And yet, Graham acknowledged that there was a significant element of performance that may not be captured purely by valuations, and that because of market action, it might not be desirable for an investor to stay out of markets until the next bear market. His preference was instead to reflect those inflated prices in an adjustment in equity allocation, with a 50-50 stock-bond mix in normal times, and going down as low as 25% in either asset when it was inflated.

This is precisely the tactical asset allocation many institutional investors pursue. The best, in my mind, is Jeremy Grantham of GMO. Grantham's commentaries, available for free with registration, are a must-read. In his latest piece, he points to a global bubble in every kind of asset, and GMO's own 7-year forecasts predict that based on average conditions, we can expect poor returns from our stocks, bonds, real estate, whatever. And yet there's enough variability that you wouldn't want to sit on cash. While that risk profile would justify increasing allocations to near-cash instruments, (i.e. money-market funds) yielding over 5%, a 100% allocation would be a mistake!

Also, even within the stock market, there might be reasonable investments. The one promising asset Grantham finds is "high quality" stocks. This is consistent with the opinion of others like John Hussman, who points out that quality stocks are cheap relative to garbage. He points out that the median P/E of the largest 50 stocks in the S&P 500 is 17, down from 35 in 2000, while that of the smallest 50 stocks in that index is 20, up from 10 in 2000. So people are paying more for riskiest assets than stable giants. By the way, the median P/E on the small cap universe is somewhere around 35, if I remember correctly (source forgotten).

So what's an investor to do? Well, if you're an active investor, you could reduce your stock allocation, keep your bond durations relatively short (the US bond market is going to see some blood), and focus on a bottoms-up stock picking. If you're a passive investor, focus on cutting your stock allocations, increase your short-term allocations, and hoard some cash. Sprinkle in TIPS or I-bonds. Rebalance if you haven't been doing it!

Oh, and either way, maybe pay off your debt - that can give you a guaranteed "rate of return" of anywhere from 6-9% for your mortgage, to 10-20% for credit card debt.

UPDATE: COMMENTING CLOSED This is a first for me, but as I've followed this debate, and glanced at other forums where this debate has continued, I've decided that most of the quality information has been revealed in the post and comments so far, and we're getting a combination of regurgitation of the same facts and personal attacks. So I've decided to close comments on this post. This isn't intended as censorship or bias - simply a decision to prevent this blog from getting hijacked by a rather vitriolic battle I've seen at other forums. Thank you all for your participation - heaven knows I haven't had 11 comments on too many other posts before!

Defrauding the Public

Add this to your list of requirements for the next President - a financial savvy. Then again, scratch that. Our politicians get big bucks from these firms precisely not to look too hard at what they do. So the next time someone complains about oil and gas companies getting rich, hit them in the head and ask them to stop fighting yesterday's villians. You thought the Enron mess cleaned up Wall Street - think again!



Bloomberg reported on the ridiculous defrauding of public authorities by collusion among investment banks, insurance companies, underwriters and attorneys. Municipal agencies pay through their nose in fees to float a bond issue to build low-income housing or improve schools, then the companies collude to make sure the money is never spent, instead using the money to invest and generating fat fees for the investment banks, minimizing risk for the insurers. And in the end, little, or often no, money goes into schools or housing, the municipal authority just buys back all the bonds and ends up poorer for the experience.

If this doesn't make your blood boil, you must be dead or an investment banker! I'm all for capitalism and even greed, but this isn't that - it's FRAUD!

Enough, Cheney ... enough!

Mr Dick Cheney's claims that the Vice-President's office is not an entity within the executive branch just makes you sit up. Seriously, Mr Cheney and his clones have been running roughshod with the rules for a while now. But while it's permissible in my mind to have a few temporary exceptions soon after 9/11, I always thought the administration needed to quickly evolve a framework of checks and balances that would fix the issue of oversight, while still respecting security considerations. But it increasingly appears Mr Cheney is rather intent on creating a super-executive branch, out of bounds of the framework developed in our constitution.

Which is something to keep in mind when you think about the next president. I think this poses a problem especially for Mr Rudy Guiliani, who's tempermentally pre-disposed to a humungous power-grab like the present administration. I think it emphasizes the need to vote for someone with congressional experience and hence respect for the body - so that rules out Mr Guiliani and Mr Romney, among the front-runners. (Of course, I also think you need experience in politics, so I would think Mr Thompson, Mr Edwards and Mr Obama are gonners!)

Your 401k is All Wrong!

Sorry I haven't blogged in a while. I've been swamped, between family visits and working on a journal article. Hopefully I'll find more mental energy to blog - that's the key, not time, but just the ability to sit and pen my thoughts.

Meanwhile, I'm quite excited to report about a website that has captured some of my concerns about average Joes and Janes and their saving for retirement. I haven't read the entire Passion Saving website, but have liked a lot of what I read. The website talks about valuations and how they affect future investment returns.

What do I mean? Ok, so if you have a 401k or ever read a financial advice column, they would advice you to follow a certain asset allocation. Maybe you're 30 years old. Maybe you are told to do 80% stocks, 20% bonds (Nowadays, there are more exotic choices than the two, but let's stick with those two) Why? Well, stocks return more than bonds, so as a younger person, you should be willing to load up on riskier stocks.

But wait, that tells you nothing about the value. Think about it this way. Tom Brady is a great football player, but you wouldn't be betting the club on him. An investment is only good when the price is right - buy low, sell high.

"But stocks are cheap" comes the chorus. According to data from Standard and Poor's, the P/E on the S&P is 17 - that's down from over 46 in 2001, just when the market crashed. Two problems with that. One - why look at 2001 as the base year? The median P/E of the S&P since 1936 has been 15.4, so stocks certainly don't look cheap on that basis. But that's only the beginning ...

Unfortunately, the P/E doesn't correct for the cyclical nature of earnings. I have previously pointed to the work of John Hussman, manager of the Hussman Funds (my fav fund) talk about this issue. What's nice about the Passion Saving website is that it uses a much simpler way to bring the valuation issue to focus. By using a 10-year moving average of earnings for the P/E, Prof Robert Shiller of Yale, of "Irrational Exuberance" fame, shows that the P/E10 of the stock market is close to 30, the highest level with the exception of during the dot-com boom. The median value historically has been closer to 14. The value in 1982 at the start of the great bull market in stocks was under 6.

Click on the return predictor, and you'll see that based on historical valuation models, the expected real (i.e. adjusted for inflattion) return over the next 10 years is about 0.5%, which is much less than available on government bonds and inflation securities. What if the P/E10 was at its historical median. Then we could expect a 10-year return of over 6%, a pretty handsome return.

Valuations matter, and in an environment where real estate and stocks and longer-term bonds have been pushed up, the best an investor can do is to select a flexible bond fund or keep money in a short-term bond fund yielding about 5% until better options emerge.

Be a Banker to the Poor

The website of the day is Kiva (thanks to Nicholas Kristof at the New York Times!). No flashy graphics or cool gizmos - just a real cool concept. Kiva allows you to make loans to poor farmers and entrepreneurs in Third World countries to help get their businesses going. Studies have repeatedly shown that micro-credit is far more successful than foreign aid in uplifting these communities, and now Kiva provides a platform for you to participate with loans as small as $25. The default rate for most of the Field Partners - the agencies that actually disperse the money and audit the businessmen is ... take it slow ...zero, zilch, nada. At the end of the term of the loan, you get your money back and retain the option of either taking the money or rolling it into another loan. Great stuff!

The CDO Mess Waiting to Happen

If you haven't heard of CDOs, you haven't been paying attention to what might be one of the great financial crisis of our times. A CDO, or a collaterized debt obligation, is essentially a collection of poor quality mortgage loans that have been packaged together by the rating agencies like Moody's and blessed with a credit rating like a bond. I have blogged before about this topic. Bloomberg had a fantastic article that deals with the issue. Here's something that stunned me:

Corporate bonds rated Baa, the lowest Moody's investment rating, had an average 2.2 percent default rate over five-year periods from 1983 to 2005, according to Moody's. From 1993 to 2005, CDOs with the same Baa grade suffered five-year default rates of 24 percent, Moody's found.