Thursday, January 22, 2015

Crude shutdown price - lower than you think

When the Saudis allowed the price of their crude oil to fall, it was reported that the Saudis expected the price to fall no lower than $60 per barrel. The Saudis assumed that the average cost of production in the US shale oil fields was somewhere around $70 and that producers there would not operate for long at a loss. Insiders have said that the Saudis want to reduce competition from high cost US producers and retain their share of the US market, which came to 13% of imports in 2013, the latest figures from the US Energy Information Agency.

Friday, January 9, 2015

Gross shocks conventional wisdom

Bill Gross told investors this week to
Beware the Ides of March, or the Ides of any month in 2015 for that matter. When the year is done, there will be minus signs in front of returns for many asset classes. The good times are over.
Gross is the legendary bond fund manager who left the company he founded, PIMCO, for a job as a portfolio manager at Janus Global Unconstrained Bond Fund, so most people pay attention when he writes. The prediction came inside the January Investment Outlook for investors. But for the mainstream financial media, he might was well have expelled foul smelling gas at a crowded party. The media quickly pointed out how contrarian his forecast is. For example, the Bloomberg reporter wrote: 

Saturday, January 3, 2015

No Rate Increase in 2015

Mainstream economists and financial experts warned us early in 2014 to stay way from bonds because the Fed would raise interest rates and as everyone knows rising interest rates shoot buckshot-sized holes in bond portfolios. So most people avoided bonds and piled into stocks. Now we can look back and see that conventional wisdom was wrong; the Fed did not raise interest rates; inflation remained tame; and bonds returned about twice the money as stocks.

Now the mainstream has dusted off its forecast of rising rates and is trying again. Surely this is the year the Fed will raise rates and kill bonds. After all, the Fed has always raised rates at some point in an expansion. How can it not raise them in this one?

Saturday, December 27, 2014

2015 Q1 Forecast


The latest forecast from my model of the S&P 500 index for the first quarter of 2015 indicates that the market continues to outrun corporate profits. The pattern is similar to that of the late 1990s. When the market turns, it will fall below the level that profits would indicate as investors become pessimistic and afraid. It's likely that any January effect this next quarter will be small as the market corrects for profits.

When the market gets ahead of the forecast it means that the P/E ratio is expanding because investors are willing to pay more for the same level of profits. Some of that optimism comes from chasing yields as more bond holders grow weary of earning about one percent in real terms on bonds. Other buying comes from speculation about what the Fed will do.


Sunday, December 21, 2014

Abe Channels Hoover

Japanese Prime Minister Shinzo Abe recently vowed to press companies to raise wages. His vow should have set off alarms among economists. Instead it elicited applause. The irony is thick but only economic historians and Austrian economists can appreciate it. Even the financial press missed it.

The irony lies in the fact that the first thing US President Herbert Hoover did when he discerned the approaching disaster of the Great Depression was to employ the persuasive power of his office to convince employers to refrain from cutting wages and attempt to raise them. The Wall Street Journal of December 16, page A11, quoted Mr. Abe saying,

As I toured the nation during the election,  I heard the opinions of ordinary citizens who are suffering from price increases and small-business owners in difficulties due to price hikes in raw materials.”

Friday, December 12, 2014

Plucked Chickens, MMT and Investing

Plato once defined man to his followers as a featherless biped. Diogenes heard it, caught a chicken and plucked it then brought it to Plato saying, “Here is your man.”  I got that story from Jack Sparrow at the Mercenary Trader.
Was Plato wrong? No. Most men walk on two legs and most of us don’t have feathers, but that is a very simplistic model of what constitutes mankind and as a result has very limited application. The humor in the story comes from Diogenes stretching the model beyond its ability to describe the real world and drawing wrong conclusions.
Plucked chicken modeling happens in economics on a regular basis. Economics is about modeling complex events. If the model is too complex it becomes unwieldy and few can understand it. The trend in economics over the past century has been to create extremely simple models. The assumption of equilibrium that forms the foundation of mainstream economics is the most egregious example.

Wednesday, December 3, 2014

Tyranny of benchmarks

There has been a lot of press lately about institutional investors abandoning hedge funds. Conventional wisdom in finance tells us to compare fund performance with a benchmark, usually the S&P 500 index. That’s always a good idea, but the measure you use makes a lot of difference. The standard for decades has been rate of return. For example, the total return for the index in a given year might be 30% including price appreciation for the year plus dividends. Using that measure, few funds or investing strategies can beat benchmarks. That’s why conventional wisdom teaches us to buy a broad index and never sell until we retire. The assumption behind the philosophy is that earning a higher percentage means investors will have more money at the end of their investing life cycle.