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Are Two Stimulus Packages Really Enough?
Plenty of talk of a 2nd stimulus adrenaline shot.
Am I the only one getting nauseated with all this debate regarding another potential stimulus package? Laura Tyson (Obama advisor), James Galbraith (collegiate professor), Paul Krugman (economist), and Warren Buffett, among other pundits, have recently suggested that the current multi-hundred billion plan doesn’t pack enough punch. I think I’m going to jump in front of all these experts and start screaming for a 3rd stimulus package. Why stop at two when we can just print some more money.
Isn’t the gargantuan $11 trillion in debt and massive projected $1.8 trillion budget deficit large enough? Call me crazy, but if we currently have only spent 10% of the current $787 billion package, then shouldn’t we focus on spending the other $700 billion first before we plan a 2nd stimulus and choke our children and grandchildren with $100s of billions in additional debt. Judging by the slow implementation of stimulus disbursements and spending, I guess we still need to buy all the shovels at The Home Depot before all the “shovel-ready” projects commence.
Click Here for Bloomberg Interview with James Galbraith
Here’s another thought – perhaps we can cut wasteful inefficient spending that has grown out of control and invest those dollars into innovative research and education. Investing into the brainpower of our country will create jobs now and even higher paying ones in the future. Of course cutting spending (and jobs) doesn’t get you more votes and lobbyists are quick to remind our elected officials of this fact. We live in a society that desires instant gratification, but before lurching into a panicked state let’s collectively take a deep breath and realize this economic mess took us a while to get into and therefore will take a while to get out.
Rather than spending more in additional stimulus, possibly the current spending programs can be more efficiently prioritized. Not all spending is created equally, and therefore temporarily stuffing our houses with more cars, TVs, and clothing probably is not going to sustainably grow our economy in a country dealing with harsh realities. For example, globalization, energy dependence, and escalating healthcare costs are just a few issues that our nation needs to address.
If none of these ideas seem to gain traction, then you can join me at the trough in a push for a 3rd economic stimulus.
Wade W. Slome, CFA, CFP® www.Sidoxia.com
DISCLOSURE: Sidoxia Capital Management and client accounts do not have direct positions in BRKA/B or HD at the time the article was published. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC “Contact” page.
Banking Pigs Back at the Trough
Sooey! With some of the TARP (Troubled Asset Relief Program) government loans paid back, it appears that the malnourished pigs of the banking sector are hungry again and back at the trough for loftier pay packages. A recent Wall Street Journal article pointed out Goldman Sachs is on track to pay its employees $20 billion in 2009, almost double the compensation of 2008, and forking out even a higher average ($700,000 per employee) than 2007.
Beyond gluttonous appetites, these banking execs are attempting to make pigs fly as well. Like a magician using the art of illusion to move an object from one shell to the next, or divert attention with smoke and mirrors, these large Wall Street banks are shuffling around their compensation plans. A recent Bloomberg article noted that Citigroup Inc. is moving to raise base salaries by as much as 50% to help counterbalance reductions in annual bonuses. Citigroup is particularly in hot water because the U.S. bank received $45 billion in government fund assistance. According to the Wall Street Journal, similar trends are bubbling up at Zurich-based UBS, where executives raised banker base pay by 50%. Bank of America also said in March 2009 it may boost salaries as a percentage of total compensation. The banks are hoping that reducing bonuses tied to risky behavior, while raising salaries, will appease the regulators.
The governments “pay czar,” Kenneth Feinberg, may have something to say about these inflating compensation trends. The WSJ points out:
Feinberg will have the authority to regulate compensation for 175 executives at seven companies, including Citigroup, that received “exceptional” government help.
As a rule of thumb, securities firms generally pay out approximately 50% of revenue in employee compensation. Bonuses have traditionally made up about two-thirds of bankers’ total compensation. Compensation consultant Alan Johnson in New York says salaries typically range from $80,000 to $300,000, with bonuses often adding millions of dollars. The article goes onto highlight the five biggest Wall Street firms awarded their employees a record $39 billion of bonuses in 2007. Sparking some of this heated debate stems from the eye-popping bonuses paid out to Merrill employees before the Bank of America merger. Merrill Lynch emptied $14.8 billion out of its wallet for pay and benefits last year before it was acquired by Bank of America – the New York Attorney General Andrew Cuomo is investigating $3.6 billion of the bonuses (tied mostly to payments made in December 2008).
To protect themselves, firms like Morgan Stanley and UBS have also added “clawback” provisions that allow portions of a worker’s bonus to be recouped under certain scenarios if the firms are harmed by an employee in the future. Perhaps this will create a disincentive for harmful behavior, but likely not enough to pacify the regulators
The pigs have regained their appetites and are eagerly awaiting for some more fixings at the trough. Time will tell if 2009 can produce squeals of swinish satisfaction or will regulators take the bankers to an unfortunate visit to the butchers?
Oil + Addiction = 50 Consecutive Day Price Hike in Gasoline
Gas Prices Rise for 50th Straight Day (CLICK HERE to read full article)
With 70% of our oil imported (much of it from countries with different human right beliefs), it is not very difficult to realize we are addicted to oil. Sure crude prices have declined dramatically from its peak of close to $150 per barrel to around $70 a barrel today, but nonetheless, gasoline prices have increased for 50 consecutive days (article above)! The amazing streak can be chalked up to the incredible rise in crude oil prices in recent months from the low $30s per barrel. This 50 day streak would even make Pete Rose proud in light of his 44 consecutive Major League Baseball League game hitting-streak achieved in 1978. Next up, Joe DiMaggio’s 56 game streak (we’re almost there!).
Time will tell if currently more cost prohibitive energy alternatives can be efficiently implemented. However, if current gasoline price trends continue skyrocketing, then the economics and probability of realization becomes much more compelling. At this rate you may even see my pending hydrogen-solar hybrid car passing you on the highway fast lane!
Chasing Profits – Can Fund Managers Beat the Game?
Achieving Long-Term Excess Returns is a Tough Race
How someone invests their money should fundamentally be based on their view of what’s the best way of playing the investment game. Before playing, the investor should answer the following key question: “Is the market efficient?” Efficient market followers believe active managers – professionals that periodically buy and sell with a profit motive – CANNOT consistently earn excess returns over longer periods of time, in part because market prices reflect all available information. If you fall into the efficiency camp, then you should dial 1-800-VANGUARD to simply buy some index funds. However, if you believe the market is inefficient, then invest in an exploitable strategy or hire an active investment manager you believe can outperform the market after fees and taxes.
For me personally, I fall somewhere in between both camps. I opportunistically invest my hedge fund in areas where I see superior return potential. However, in other areas of my investment practice (outside my main circle of expertise), I choose to side with the overwhelming body of evidence from academics that show passive/indexing slaughters about 75% of professionals.
Richard Roll, renowned economist and thought leader on the efficient market hypothesis, said this:
“I have personally tried to invest money, my client’s and my own, in every single anomaly and predictive result that academics have dreamed up. And I have yet to make a nickel on any of these supposed market inefficiencies. An inefficiency ought to be an exploitable opportunity. If there’s nothing investors can exploit in a systematic way, time in and time out, then it’s very hard to say that information is not being properly incorporated into stock prices. Real money investment strategies don’t produce the results that academic papers say they should.”
—(Wall Street Journal, 12/28/00)
The market gurus du jour blanket the media airwaves, but don’t hurt your back by hastily bowing. Having worked in the investment industry for a long time, you learn very quickly that many of the celebrated talking-heads on the TV today rotate quickly from the penthouse to the outhouse. Certainly, there are the well regarded professional money managers that survive the walk across the burning-coals and have performed great feats with their clients’ money over long periods of time. But even the legendary ones take their lumps and suffer droughts when their style or strategy falls out of favor.
The professional investing dynamics are no different than professional baseball. There are a relatively few hitters in the Major Leagues who can consistently achieve above a .300 batting average. In 2007, AssociatedContent.com did a study that showed there were only 12 active career .300 hitters in Major League Baseball. The same principle applies to investing – there is a narrow slice of managers that can consistently beat the market over longer periods of time.
There Are Only So Many .300 Hitters
Some statisticians point to the “law of large numbers” when describing long term investor success (a.k.a. “luck”) or ascribe the anomaly to statistical noise. Peter Lynch might have something to say about that. Peter Lynch managed the Fidelity Magellan Fund from 1977 – 1990, while he visited 200 companies per year and read about 700 company reports annually. Over that period Lynch averaged a 29% annual return for his investors vs. a 15% return for the S&P 500 index. Luck? How about Bill Miller from Legg Mason who outperformed the major industry benchmark for 15 consecutive years (1991-2005). Perhaps that too was good fortune? Or how about investor extraordinaire Warren Buffet who saw his stock price go from $33 per share in 1967 to $14,972 in 2007 – maybe that was just an accident too? An average schmuck off the street achieving Warren’s Buffett performance over a multi-decade period is equivalent to me batting .357 against Nolan Ryan and Randy Johnson…pure fantasy.
Academics also have difficulty with their efficiency arguments when it comes to explaining events like the “1987 Crash,” the technology bubble bursting in 2000, or the recent subprime derivative security meltdown. If all available information was already reflected in the market prices, then it would be unlikely the markets would experience such rapid and dramatic collapses.
What these bubbles show me is no matter how much academic research is conducted, the behavioral aspects of greed and fear will always create periods of inefficiency in the marketplace. These periods of inefficiency generate windows of profit opportunity that can be exploited by a subset of skillful managers. In the short-run, luck plays a great role; in the long-run sklill level determines ultimate performance. Benjamin Graham, summed it up best when he said, “In the short-term, the stock market is a voting machine; in the long-term a weighing machine.”
Wade W. Slome, CFA, CFP®
Plan. Invest. Prosper.
DISCLOSURE: Sidoxia Capital Management and client accounts do not have direct positions in LM or BRKA/B at the time the article was published.No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC “Contact” page.
Green Shoots or Spring Fever
Experts are debating whether the recent bounce experienced in the equity markets is a function of a fundamental turnaround in the economy, or is this more a function of wearing rose-colored glasses after extreme price declines. Irrespective of your view, the S&P 500 Index rose +9.4% in April; the Dow Jones Industrials +7.3%; and the NASDAQ Composite Index +12.4%. After wholesale panic began last September green shoots now appear to be budding through the ashes:
Healthier Than Anticipated Corporate Earnings: Company earnings reports are beating expectations. A +17% bounce in the KBW Bank Sector Index during April is one validating piece of evidence. “The earnings season in general has been better than expected, with 68% of the S&P 500 reporting upside surprises, and we’re three-quarters of the way done,” said Art Hogan, chief market strategist, Jefferies & Co.
Improving Consumer Spending: Despite significant job losses and weak economic activity, consumer spending, which accounts for about 2/3 of Gross Domestic Product (GDP), was up +1.5% in the first quarter of 2009.
Stabilization in Home Prices: Although housing prices continue to decline, existing home unit sales have stabilized over the last four to five months at around 4.5 million homes.
Merger Marriages On the Rise: Merger activity is perking up now that a market bottoming process appears to have commenced. Oracle/Sun Microsystems in technology; Merck/Schering Plough in healthcare; and Pulte Homes/Centex in homebuilding are just a few examples of recent merger marriages.
Capital-Raising on the Rise: Capital markets are functioning much better with bond spreads tightening and the cost of issuance declining for corporations. Beyond the hundreds of billions raised through new bond deals, we are seeing troubled areas like the REITS (Real Estate Investment Trusts) raising vital equity capital as well. Prologis (PLD), Chimera (CIM), Kimco (KIM), Vornado (VNO), AMB (AMB), and Simon Property Group (SPG) have raised over $4 billion in the last few months.
