Wednesday, December 26, 2012

More Good News About Housing

The economy continues to struggle in many respects, but housing has been one bright spot in recent months. The S&P/Case-Shiller numbers for October were announced today and they provided more evidence that demand for existing homes is strengthening. The 20-City Composite Index showed only a slight rise in prices from September to October, but prices were up a robust 4.3% on a year-over-year basis. They are up 5.4% from the low set in January 2012.

Of course, much of the demand is coming from investors who see an opportunity to buy homes at rock-bottom prices. However, a good portion of the demand is coming from genuine would-be residents. After all, there is a lot of pent-up demand. Furthermore, housing is closely tied to employment. People don't rush out and buy homes if they think they might get laid off in the near future. Keep in mind that the numbers released today are lagged by two months so we don't really know how good (or bad) the housing market was in November and December. Yet I can't help but get a bit enthusiastic about the employment market and the overall economy based on these latest results. Now if we could just get our fiscal house in order, 2013 could turn out to be a pretty good year.

Monday, December 24, 2012

Political Dysfunction Remains Primary Risk

With 2012 drawing to a close, it is really difficult to believe that American politicians have yet to resolve the fiscal cliff. Just a few years ago my good friend Ian Bremmer of the Eurasia Group identified political risk as his greatest concern. Unfortunately, that's even truer today.

Washington has become completely dysfunctional. In addition to the fiscal cliff, the country is once again coming close to the debt ceiling. A failure to resolve both issues could result in another round of credit rating downgrades. As bad as that sounds, it's not clear what the consequences will be. The last time our credit rating was reduced, Treasury interest rates went even lower.

No doubt the dysfunction in Washington will cause increased volatility in stocks. To a large extent, retail investors have reduced their holdings of equities. The financial crisis of 2008 was so traumatic that many of them got out and stayed out. However, another round of heavy selling, if it occurs, should be viewed as an opportunity for long term investors to get back into the market.

Finally, as the year draws to a close, I'd like to wish all my blog subscribers a happy holiday season and a prosperous 2013. And keep your eyes open for some changes to this blog. I am planning a revamp that should be ready to roll out in another month or so.

Friday, December 21, 2012

Nice mention in MarketWatch article on changing demographics and companies that could thrive and falter as the population ages. Click here to read.

Saturday, December 15, 2012

Fox Interview Overshadowed by Tragedy

I went to the Fox studios in New York City yesterday to do an interview about how lower trading costs have driven small investors out of the market. On the way, I received a news alert on my phone about a shooting at a school in Connecticut. When my interview with Lauren Simonetti was about to begin, there were still no reports of any deaths.

After the interview, I had to rush off to a two-hour meeting. Then I jumped on the subway for another meeting at the Forbes building on lower Fifth Avenue. That's when I learned about the full scope of the tragedy. There are many heinous crimes, but I can't imagine anything worse than this. I hope there is a special place reserved in Hell for those who intentionally harm children.

Compared to what happened in Sandy Hook, our discussion was all but meaningless. Nonetheless, anyone interested in watching can click here.

Tuesday, December 11, 2012

Workers' Rights

The "right-to-work" debate going on in Michigan struck a nerve with me. If you haven't been following the story, Republican Governor Rick Snyder plans to sign legislation that would prevent workers from having to join a union or pay dues to a union even if they do not join. In other words, he is in favor of giving workers choice. The unions, however, oppose choice.

I have never been a union member, but I was twice asked to join. The first time was when I was in college (a long, long time ago). I financed my senior year in part by driving a school bus on a part-time basis. I woke up at 5:30 in the morning, rode my bike to the school bus parking lot, and clocked in by 6:30. I drove kids from kindergarten to high school until 9 am. I then rode home, ate something, got in the car, and drove to Villanova University where I had arranged my classes so I could return to work by 3 pm for the afternoon shift. I drove the school bus a total of five hours a day and I earned just over $4 per hour (almost twice the minimum wage at the time).

I was eventually approached by a union representative. I was told (not asked) that I had to join the union. I was told that the union would negotiate for better wages and benefits on my behalf, and in return, I had to pay dues, which would eat up a good portion of my part-time wages. I quickly realized that my arm was being figuratively, yet vigorously, twisted. I managed to avoid joining the union by explaining that I was going to quit the job in a few months as soon as I finished college.

The second "invitation" to join a union came seven years later when I became a university professor. Once again, I was approached by a union representative, but this time the pressure was much more subtle. I again refused to join. I reasoned that if ever I was unhappy with my compensation, I could ask for a raise. If that didn't work, I could seek employment elsewhere. And if I could not find a better paying job, well then I must have overestimated my worth.

It's not that I am so opposed to unions. I actually think they played a critical role in the development of workers' rights, and even today, they sometimes provide a useful service. I am opposed, however, to the concept of forced membership. If someone wants to join a union then by all means let them; but if they don't want to join, leave them alone. No one should be denied employment or harassed on the job because they refused to join a union. This is what the debate in Michigan is all about. Unions want to be able to force membership, or at the very least, to force even non-members to pay union dues. This is akin to extortion and it simply does not pass the smell test.

Thursday, December 06, 2012

Another Reason Why Small Investors Are Staying Away From Stocks

I am in Pittsburgh on business but I saw an interesting article in today's WSJ by Jason Zweig and Tom McGinty about fund managers manipulating stock prices at the end of each quarter by putting in orders to buy stocks they already own. It's an extreme form of window dressing that is illegal. Investor confidence in the integrity of the markets is already low. This doesn't help.

Monday, December 03, 2012

Introducing MM Indicators

Today's Manufacturing ISM report was extremely disappointing, falling below the critical level of 50. Any number below 50 signals contraction in the manufacturing sector of the economy. Today's number (which measures November activity) came in at 49.5, its lowest level since July 2009.

Some time ago, I began tracking a number of economic indicators, including the ISM Index, that I believe provide a good signal of future economic activity. These indicators focus on employment, housing, manufacturing, services, and the stock market. I have been aggregating and quantifying the numbers on a short-term (i.e., month-over-month) basis and long-term (i.e., year-over-year) basis as shown in the table above. Dubbed the MM Indicators, a positive figure indicates improvement in the economy while a negative number indicates deterioration. As the table above shows, in the aggregate, economic indicators are much healthier today than they were a year ago, yet slightly worse than they were in the recent past. The danger, of course, is that prolonged short-term deterioration can turn into a serious long-term problem.