Finance Matters

Archive for March 27th, 2010

The maestro managed to run away from the old folks’ bent on monetary destruction home just long enough to carry this amusing interview with Bloomberg TV’s Al Hunt.

Tomes (will) have been written about Greenspan’s dementia, just as books will be available on the Kindle one day analyzing his successor’s massive mistakes which are slowly but surely leading to an American day of reckoning.  So we won’t comment much, suffice to point out some of the key highlights in Greenspan’s presentation.

Most amusingly, note the escalating battle between Greenie and the Fed’s new vice-chairman Janet Yellen, who blatantly contradicted Greenspan’s that higher interest rates would have prevented a housing bubble.

Continue reading at Zero Hedge »

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See Also:

• Greenspan: I Had Absolutely Nothing To Do With The Financial Crisis
• Greenspan Finally Admits He Blew It
• KABOOM! The Person Economists Blame Most For Blowing Up The Global Economy Is Alan Greenspan

Apparently, day trading is back.  The New York Times says so.  So it must be.

And that’s fine for those who understand that day trading is a nearly sure-fire way to do worse in the market than you would if you owned a low-cost tax-efficient index fund.

Because the vast majority of day traders will do worse than index funds.  Even though they’re spending all day trading.

Of course, a big chunk of those day traders won’t know they’re doing worse than index funds.  Because they’ll look only at their gross trading returns.  In so doing, they will ignore:

• Brokerage commissions
• Taxes (~50% on short-term gains)
• Research costs
• The opportunity cost of the hours and hours they spend trading (which could be spent doing something else).

But stocks are going up again, which means lots of day traders are making money (because that’s what happens when stocks go up–traders make money).  And so day trading is fun and cool again.

Consider the fun one day trader was having the other morning, as described by the New York Times:

[A]nyone hoping to join the day-trade caravan had better wear a seat belt, as Mr. Lindloff’s experience on this Wednesday morning demonstrates. Before lunch, he will buy and sell about 44,000 shares, in 17 trades. He starts off poorly, losing about $500. But a timely bet on a company called Rackspace Hosting (“I don’t know what they do,” he says), as well as quick investments in Applied Materials, Eagle Bulk Shipping and a few others, have turned things around.

“Up $210,” he says, removing his headset. Factoring in commissions, he’s made $60.

Which means that, after factoring in taxes, he’s up $30.  Which, pro-rated, is about $8 an hour.  But it was fun.

Academics like Brad Barber and Terrance Odean have studied the investment performance of day traders in detail.  Not surprisingly, it’s ghastly.  Here’s more from the NYT:

The great mass of studies point to the same conclusion: trading is hazardous to your wealth…. The losers far outnumber the winners…

 The authors sifted through tens of millions of trades, from 1992 to 2006, and found that 80 percent of active traders lost money.

“More importantly, we found that if you were to look at the past performance of these traders, only 1 percent of them could be called predictably profitable,” says a co-author, Brad M. Barber, a finance professor at the University of California, Davis. Everyone else, it seems, was on a short-term winning streak. Even those who did modestly well found their that profits were wiped out, and then some, by transaction fees like commissions and taxes.

“It’s not impossible to make money actively trading,” Mr. Barber continues. “There are slivers of people out there who are quite good. And everyone thinks they will be in that group of 1 percent.”

Those are some powerful numbers, so let’s review them again:

• 80% of day traders in the study lost money (something that is very hard to do in a bull market)
• Only 1% of day traders in the study were “predictably profitable.”

Put differently, far from this being an enriching line of work, 4 out of 5 people engaged in it pay to do it.  Only 1 in 100, meanwhile, make enough to be worth writing home about.

The folks who predictably make money from day trading, of course, are the folks who sell traders tools for their day trading: Information courses, “how-to” advice, data streams, stock charts, technical analysis, trading clubs, investment advice, stock picks, you name it.  Those folks do quite well from day-trading.  Unless they’re dumb enough to actually trade.

But day trading is fun.  Right?  And it’s cool again.  So, by all means, have at it.

See Also: Here’s What Day Traders Don’t Get

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See Also:

• Equity Fund Flows Aim For The Moon

OK, I finally got around to reading Douglas Holtz-Eakin’s op-ed on health care reform. It’s much worse than I thought; time to scratch Holtz-Eakin off my shrinking list of reasonable, reasonably honest conservatives.

How bad is it? Holtz-Eakin declares that

Gimmick No. 1 is the way the bill front-loads revenues and backloads spending. That is, the taxes and fees it calls for are set to begin immediately, but its new subsidies would be deferred so that the first 10 years of revenue would be used to pay for only 6 years of spending.

I think that’s what is technically known as a “lie”.

Continue reading at the NYT »

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See Also:

• AT&T: Obamacare Will Cost Us $1 Billion
• ObamaCare Already Jacking Up Health-Insurance Costs For Businesses — So They’re Cutting Benefits
• 10 Groups Of People That Still Won’t Have Healthcare Coverage Under Obamacare

Here’s at least one part of China that could use some additional liquidity…

In south-western China, drought is threatening to reduce crop yield and thus cause food price inflation.

Coupled with an especially cold winter in Northern China at the same time, this has caused the government to be concerned that its 2010 goal of producing 500 million metric tons of grain could be missed, according to Xinhua.

The situation so far remains contained, but if water shortages were to hit other parts of China, then food prices could be in for a jump:

China Daily:

China was hit by drought every year and history proved regional drought would only result in an imbalance between supply and demand and the temporary price fluctuation in that particular region, said Huang Dejun, chief analyst for Beijing Orient Agribusiness Consultant Ltd, a consulting firm specializing in agribusiness.

“I don’t expect the drought to have much impact on rice prices,” he added.

“But if the drought spreads into the major grain producing areas including the provinces of Hubei, Hunan and Jiangxi, it will create upward pressures on prices and push up inflation expectations,” Huang remarked.

Read more here >

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See Also:

• Niall Ferguson Repeats The Line About China Not Revaluing Its Currency Because Its Leaders Have Big Egos
• Stephen Roach Examines China’s Massive Consumption Gap, And Concludes They Need A New 5-Year Plan
• How To Search Google Uncensored In China

Here’s some nice perspective on the market’s perception of value vs. actual underlying business performance. Today’s market thinks that the S&P 500 is worth the same amount as it was in 1998, even though S&P 500 profits have doubled:

Calafia Beach Pundit (CBP):

Note that profits doubled from 1998 to 2009, yet the S&P 500 index today is still lower than it was at the end of 1998. The second chart shows profits as a percent of GDP; note that profits by this measure have almost recovered all the losses that occurred in late 2008. By any standard, the corporate profits picture is very bright.

Basically, the Price to Earnings (PE) ratio has halved over the period.

CBP even creates his own measure of PE with the following chart, which basically shows a form of stock market capitalization vs. national income if we understand correctly:

The chart [below] uses the normalized value of the S&P 500 index as the “P” and after-tax corporate profits from the National Income and Products Accounts as the “E”, in order to calculate a PE ratio… Note that this very simple model of equity valuation correctly identified how cheap stocks were throughout the 1980-1998 period, and correctly flagged the grievous overvaluation of stocks in 2000.

Add my twitter for more like this: @vincefernando

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See Also:

• Barton Biggs: Greedy Investors Will Lift This Market Another 10%
• Deutsche Bank Survey: Investors Dying To Take Risk This Year
• Dear Evil Speculators