Why the Market is Rallying

This article first appeared at National Review.

Some sectors have fared better than others. The general market thrust was greatly assisted by the trillions of dollars of stimulus.

A shrewd market participant, and one whom we know as a fine fellow, recently quipped that he would stop researching companies and instead start investing by acting on signals from the cover stories of prominent magazines. He would sell when the cover was exuberantly bullish and buy when it was all doom and gloom.

There is a whimsical theory that by the time the media gets sufficiently excited about a stock or investment theme to place it on a cover, such stock or such theme has already played itself out in the market and is therefore on the verge of reversing itself. The examples abound.

In February 2000, weeks before the beginning of the three-year bear market, a BusinessWeek cover screamed “The Boom”, cheering on the stratospheric dotcom bubble. In June 2013, Barron’s chose to worry on its cover about “Trouble Ahead at Tesla” — but the stock nearly doubled that summer. In September 2009, Fast Company celebrated “Nokia’s Plan to Rule the World,” adding, combatively, a subtitle on its “bold plan to trounce Apple.” Kindness compels us not to dwell on what happened next.

So the financial media is not the best guide to identifying major turning points in the markets, although it can be a useful reverse indicator. Read the rest at National Review >>>

Talking About Cities, with Aaron Renn

“You go to some of these places [Midwestern cities], the question they ask when they meet you is ‘where did you go to high school’?… The fact that where you went to high school is a social marker places you in a community. You go to Washington DC and nobody cares where you went to high school… In New York, they ask ‘where are you from?’ because it is assumed that you are not from here. Some of these places in the Midwest… need more outsiders to come in because outsiders are the natural constituency of the new.” _____Aaron Renn

AaronRennAaron Renn, a Senior Fellow at the Manhattan Institute, speaks to Sami J. Karam about US cities. What makes the large coastal cities so successful? What are the prospects for mid-sized and smaller cities in the Rust Belt? What is the current state of play for mass transit? What role does immigration play in the development of cities?

Among the cities discussed, New York, Los Angeles, Chicago, Boston, Washington DC, Seattle, Houston, Dallas, Austin, San Francisco, Charlotte, Minneapolis-St Paul, Nashville, Columbus, Cincinnati, Pittsburgh, St Louis, Cleveland, Detroit, Madison, Iowa City, Rochester (MN), Singapore, Paris.

Topics include:

  • 0:00 Introduction of Aaron Renn
  • 1:15 What makes the large coastal cities so successful at creating wealth?
  • 8:30 Can a large city become dominant in a new sector? (e.g., New York in tech)
  • 13:00 How would you categorize non-coastal cities in terms of their prospects?
  • 16:30 Why some cities are struggling while others are restructuring successfully
  • 20:55 Will some smaller cities turn into ghost towns within twenty years?
  • 26:35 What is going on with Detroit’s recovery?
  • 30:40 The role of new immigrants in the development of a city
  • 36:50 Immigration policy in Canada and Australia compared to the US and UK
  • 43:50 What is the future for mass transit?
  • 48:00 The lack of city to city benchmarking in infrastructure costing and execution
  • 53:40 Is there anything going on in high-speed rail, other than in California?
  • 59:40 The decline of trust in institutions and the problem of cronyism.

TO HEAR THE PODCAST, CLICK HERE OR ON THE TIMELINE BELOW:

Why Buffett Won His Bet Against Hedge Funds

QE had a lot to do with it.

Active fund manager billionaires Warren Buffett and Charlie Munger have been critical of active fund manager millionaires for their very high fees and chronic underperformance. It is not unusual for the ultra wealthy to trash the merely wealthy for their avarice. After all, ultra wealth is so rare that it can be seen as an act of God, whereas mere wealth is the product of human toil and vanity, arduous and earthly.

Buffett and Munger are all-in on their recommendation that investors should dump active strategies and instead invest in passive indexed mutual funds or ETFs that simply mimic the S&P 500. Although this is a popular line among many seasoned investors, it has been getting long in the tooth and has turned what was once a good idea into a crowded trade, with hundreds of billions of dollars shifting from active to passive.

In our view, Buffett’s advice represents last year’s thinking. This year’s thinking, we argued previously, should be that passive funds are merely free-riding active funds and that past a certain market share, passive strategies will bite investors as badly or worse than active ones. Continue reading at Seeking Alpha >>>

To Save or Ruin Twitter

A decision that could fix Twitter or hasten its demise.

This is not the first article to suggest that Twitter can generate some revenues by charging its users, but perhaps we can offer some new angles to the discussion. To begin, it is helpful to differentiate between the different types of Twitter users. These seem to be:

  • Media firms publishing their stories and videos, for example CNN, the New York Times, etc.
  • Corporations marketing their products or making announcements.
  • Non-profit organizations and NGOs raising awareness on various issues.
  • Government institutions, agencies or individuals trying to inform the public.
  • Famous individuals looking to communicate with their fans, for example celebrity entertainers, politicians or opinion leaders.
  • Public or semi-public individuals looking to raise their visibility and to build their personal brand, for example journalists, consultants and academics.
  • Small or mid-sized businesses promoting their services and products.
  • Private individuals seeking a mode of expressing their thoughts and feelings, often anonymously through a pseudonym.
  • Private individuals who rarely or never tweet but visit Twitter frequently to read the news or other people’s tweets. Continue reading at Seeking Alpha >>>

Passive Funds Are Just Free-Riding Active Funds

If you and your neighbor have the same income and expenses except that he rides the bus for free every day while you pay a fare, he will be richer than you. Until recently, this was obvious: the neighbor is a free rider while you pay your way.

But now, the obvious is presented as a novelty. Plenty of people are extolling the benefits of free-riding without naming it as such and encouraging a large exodus from active to passive (or indexed) funds. The only problem is that proponents of this form of free-riding neglect to also mention the following corollary sub-plot.

Now your neighbor makes you feel like a fool and convinces you to also ride for free. Soon, your whole town has caught on to the idea and fewer and fewer people are willing to pay for the bus. After a while, the number of people supporting bus service with their dollars becomes so small that buses go out of business or fall into a state of disrepairContinue reading at Seeking Alpha >>>

On White Collar Prosecutions, with Jesse Eisinger

“The government no longer has the will and ability to prosecute top corporate executives across a wide variety of major industries.”______ Jesse Eisinger

photo_7887Jesse Eisinger is a senior reporter at ProPublica and a former reporter at the Wall Street Journal. He has studied, investigated and written extensively on the 2008 financial crisis, its causes and consequences. In 2011, he and a colleague won a Pulitzer Prize for National Reporting. In addition, he has won the 2015 Gerald Loeb Award for commentary.

Eisinger is the author of a forthcoming book on white collar prosecutions, to be published next year by Simon & Schuster. He speaks to populyst’s Sami J. Karam about the reasons why there have been few such prosecutions in recent years. Among these reasons, Eisinger identifies ‘elite affinity’, a revolving door between government and business, and a resource shift that took place at the FBI after 9/11. The conversation closes with Eisinger’s discussion of current anti-trust issues and some comments on the 2016 US presidential race.

TO HEAR THE PODCAST, CLICK HERE OR ON THE TIMELINE BELOW:

New York, Two States of Mind

Is New York City helping or holding back Upstate New York?

Towards the end of times, when all of mankind congregates in a final purgatory to draw the main lessons of this grand adventure called Life, there will be special attention paid to the centuries’ long efforts at harmonizing individual happiness with the needs of the collective. There will be seminars on leadership and war. There will be a thick chapter on the blessings and dangers of science. There will be a long section, co-written by poets and undertakers, on the success of freedom and the failure of tyranny. There will be wonder and consternation about religion and the nature of the universe. And there will be, inevitably, extensive reporting on economic ideology.

Here, a slim primer on laissez-faire will easily outshine ponderous encyclopedic tomes on communism, socialism and other failed -isms. Capitalism, the word and the theory, will be presented as a zealous and perhaps unnecessary attempt at creating a code for laissez-faire, something that occurs naturally. Cronyism will be understood as the corruption and distortion of laissez-faire and the phrase crony capitalism will be dismissed as an oxymoron and an unwarranted amalgamation. Read more

The Bridge from Laissez-Faire to Socialism

Cronyism remains unchecked in the world’s largest economy.

We might object to the phrase crony capitalism for two reasons:

First, because cronyism is in some ways the antithesis of capitalism. The freedom to compete and the freedom to fail that are central tenets of capitalism are severely compromised by cronyism when in the former case powerful politicians intervene to shield their friends in business and finance from competition, and in the latter intervene again to save them from bankruptcy or occasionally from criminal prosecution. Of course, these friends in turn are no disloyal slouches and they later show themselves to be supremely appreciative by underwriting, financially and otherwise, those same politicians who had all but guaranteed their continued dominance in normal times and their survival against bad odds in times of distress. Read more

The Way Forward for Hedge Funds – 2

In the first installment, I made a case that hedge funds can regain their popularity by reverting to their initial mandate which was to be hedged. I examine here how such a model hedge fund would have performed in the past 50 years if it had returned:

  • 0% in all years when the market was down.
  • 75% of the market gain in all years when the market was up.

In essence, this fund only has a chance of outperforming the S&P 500 in the long run if the market has a big down year (say 10%+) every few years.

So what do the past 50 years tell us? Read more

The Way Forward for Hedge Funds – 1

Hedge funds should go back to hedging and also consider lower fees.

Equity hedge funds are under tremendous pressure, having underperformed their benchmark in nearly every year since 2008. But can it really be true that the average equity hedge fund is no better over the long run than granny’s passive indexed ETF or mutual fund that tracks the S&P 500?

On one side, hedge funds employ full-time cohorts of smart ambitious highly credentialed people who spend long hours and a lot of money visiting and analyzing companies to find the best opportunities. They sit in beautiful new offices and use the latest in real-time data feeds and state of the art technologies. Read more