"Deliberately euphemistic, ambiguous, or obscure language." That's how the dictionary defines the word doublespeak. I came across a good example of it today. Boston Scientific embarked upon a restructuring program in 2011. In the corporate world restructuring is a nice way of saying there will be layoffs. The point of restructuring is to cut expenses usually by consolidating operations, shutting down or selling underperforming businesses, and laying off people--sometimes a lot of people. That in itself is a euphemistic use of the word "restructuring."
But Boston Scientific outdid itself today when it announced plans to expand this restructuring program. It said, "The company anticipates the reduction of 900 to 1,000 positions worldwide through a combination of employee attrition and targeted headcount reductions." So, if you are a corporate PR specialist and you want to come up with a nice and friendly word to describe this initiative, what would you choose? Well someone at Boston Scientific decided to call it an "Expansion." That's right. Even though the only thing being expanded are layoffs and cost cutting, Boston Scientific has officially dubbed this new initiative the Expansion, perhaps hoping that investors will conclude that business is booming.
Don't get me wrong. If management is convinced that this kind of restructuring is necessary for the well being of the corporation and its shareholders then I'm all for it. After all, I am a Boston Scientific shareholder. But I really do not appreciate this thinly veiled attempt to fool investors. By trying to make something bad sound good, the company is simply insulting the intelligence of the investment public. If a restructuring involves cutting costs by eliminating employees and underperforming businesses, even if there are plans to eventually invest the resulting savings into growth initiatives, it is hardly fair to call it an Expansion. This may be what the corporate PR people are paid to do, yet I wonder if the executives at Boston Scientific can actually say Expansion with a straight face.
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Tuesday, January 29, 2013
Wednesday, January 23, 2013
The Can Gets Kicked Again
Every investor knows that the U.S. has some serious economic problems. The government has way too much debt, the budget deficit is huge, economic growth is anemic, and it has been 30 years since the employment participation rate was as low it is now. Yet the stock market is on fire with the S&P 500 and Dow Jones Industrial Average closing in on all-time highs.
The rally in stocks is partly being fueled by the Federal Reserve, which is doing everything it can to provide liquidity and keep interest rates low. Perhaps that's putting it too mildly. The truth is that the economy is drowning in liquidity, yet the Fed continues to buy up bonds as quickly as the Treasury can issue them. The Fed is also buying mortgage-backed securities. These actions, in addition to the the low fed funds rate, are keeping just about all interest rates low, which is exactly what the Fed wants. Low rates make safer investments undesirable. They force investors to consider riskier investments such as stocks. They also make current dividend yields extremely attractive.
The other factor driving stocks higher is Washington. Unfortunately, politicians have learned that they don't actually have to do anything. In fact, they have learned that they can simply push off important decisions. They did it again today by raising the debt ceiling for another four months. Whenever politicians delay an important decision, investors breathe a sigh of relief and stocks move higher. The fiscal cliff, after all, turned out to be a joke. Nothing meaningful was resolved.
While it is true that some companies, such as IBM and Google, are announcing encouraging results, most companies are not really doing very well. Yes, they are beating expectations; but for the most part year-over-year revenue and earnings growth is not strong.
I can't help but worry that such government actions (or inactions to be more exact) are setting us up for another sell-off. While I am not yet ready to take all my money off the table, I do believe it makes sense to use these rallies to pare back on certain positions.
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The rally in stocks is partly being fueled by the Federal Reserve, which is doing everything it can to provide liquidity and keep interest rates low. Perhaps that's putting it too mildly. The truth is that the economy is drowning in liquidity, yet the Fed continues to buy up bonds as quickly as the Treasury can issue them. The Fed is also buying mortgage-backed securities. These actions, in addition to the the low fed funds rate, are keeping just about all interest rates low, which is exactly what the Fed wants. Low rates make safer investments undesirable. They force investors to consider riskier investments such as stocks. They also make current dividend yields extremely attractive.
The other factor driving stocks higher is Washington. Unfortunately, politicians have learned that they don't actually have to do anything. In fact, they have learned that they can simply push off important decisions. They did it again today by raising the debt ceiling for another four months. Whenever politicians delay an important decision, investors breathe a sigh of relief and stocks move higher. The fiscal cliff, after all, turned out to be a joke. Nothing meaningful was resolved.
While it is true that some companies, such as IBM and Google, are announcing encouraging results, most companies are not really doing very well. Yes, they are beating expectations; but for the most part year-over-year revenue and earnings growth is not strong.
I can't help but worry that such government actions (or inactions to be more exact) are setting us up for another sell-off. While I am not yet ready to take all my money off the table, I do believe it makes sense to use these rallies to pare back on certain positions.
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Friday, January 18, 2013
Investors Flock Back to Stocks
Some professionals believe that retail investors are an excellent contrary indicator. They claim it's a good time to buy when the man on the street throws in the towel and vows to stay away from stocks; and it's a good time to sell when retail investors come flocking back into the market. Well, it seems the flocking has begun.
Retail investors have pretty much avoided stocks ever since the financial crisis of 2008. What scared them was the 38.5% decline in the S&P 500 that year. Diversification provided no protection as correlations jumped and everything sold off. But by getting out of the market, they missed the 23.5% rally in 2009 and the 12.8% gain in 2010. The market finished flat in 2011, but there was tremendous volatility. The S&P 500 moved up or down by at least 1% on 69 trading days during the second half of the year alone. Investors, of course, don't like losing money; and they dislike volatility almost as much.
The markets really settled down in 2012 and the S&P 500 climbed 13.4%. It seems that the reduced volatility and the double-digit gain were enough to entice many investors back. U.S. equity funds pulled in $18.3 billion during the first full week of trading this year. That is the fourth largest amount of weekly inflows ever. BlackRock, the world's largest asset manager, saw huge inflows of money into its passively managed equity funds during the fourth quarter of 2012. The pace of inflows has continued into 2013. Some of this is new money, but much of it came out of bond funds; and BlackRock said that at least some of the money came out of actively managed equity funds.
There have been many times in the past when investors got out of bonds and into stocks at the wrong time; but there is something a little different about this rotation. Although investors are flocking back to stocks, they are not interested in making their own picks. Instead, they are going into passively managed index funds, especially exchange-traded funds.
Several years ago I had the privilege of hosting Jack Bogle, founder of The Vanguard Group, for lunch. Mr. Bogle is a long-time advocate for passive investing. Although he isn't fond of ETFs (because he thinks they encourage trading), he must be very pleased with the growing interest in index investing. Let's just hope this rotation is not signalling another market top.
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Retail investors have pretty much avoided stocks ever since the financial crisis of 2008. What scared them was the 38.5% decline in the S&P 500 that year. Diversification provided no protection as correlations jumped and everything sold off. But by getting out of the market, they missed the 23.5% rally in 2009 and the 12.8% gain in 2010. The market finished flat in 2011, but there was tremendous volatility. The S&P 500 moved up or down by at least 1% on 69 trading days during the second half of the year alone. Investors, of course, don't like losing money; and they dislike volatility almost as much.
The markets really settled down in 2012 and the S&P 500 climbed 13.4%. It seems that the reduced volatility and the double-digit gain were enough to entice many investors back. U.S. equity funds pulled in $18.3 billion during the first full week of trading this year. That is the fourth largest amount of weekly inflows ever. BlackRock, the world's largest asset manager, saw huge inflows of money into its passively managed equity funds during the fourth quarter of 2012. The pace of inflows has continued into 2013. Some of this is new money, but much of it came out of bond funds; and BlackRock said that at least some of the money came out of actively managed equity funds.
There have been many times in the past when investors got out of bonds and into stocks at the wrong time; but there is something a little different about this rotation. Although investors are flocking back to stocks, they are not interested in making their own picks. Instead, they are going into passively managed index funds, especially exchange-traded funds.
Several years ago I had the privilege of hosting Jack Bogle, founder of The Vanguard Group, for lunch. Mr. Bogle is a long-time advocate for passive investing. Although he isn't fond of ETFs (because he thinks they encourage trading), he must be very pleased with the growing interest in index investing. Let's just hope this rotation is not signalling another market top.
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Sunday, January 13, 2013
Rudisha Wins Top Honor
Track & Field News magazine just came out with its selections for male and female Athletes of the Year. (Yes, I know this has nothing to do with the economy or the markets, but I love the sport of track and field, or athletics as the rest of the world calls it, as much as I love investing.) On the men's side, they selected David Rudisha of Kenya. I could not agree more. Readers may recall that I said in my July 31, 2012 post that if I had to bet on just one athlete to win a gold medal in the London Olympics, Rudisha would be the man.
Not only did he win that gold medal, he also broke his own world record in the process, setting a new record in the remarkable time of 1:40.91. In fact, Rudisha ran a flawless race, leading from start to finish. He went through the opening 400 meters in under 50 seconds, an absolutely blistering pace. Anyone who has ever run a lap on a track knows how difficult it is to break 50 seconds. Imagine having to immediately follow that with a second lap at about the same pace.
Rudisha's selection was somewhat controversial. I know some track fans would have preferred Usain Bolt (who won three gold medals in London), Ashton Eaton (who dominated the Decathlon), or Mo Farah (who won both the 5,000 meters and 10,000 meters, a grueling combination). They are all outstanding athletes. It is a difficult choice, yet Rudisha deserves the honor. As Track & Field News Editor Gary Hill explained, "Voting members are big on individual achievement." In other words, they discount the relays and they pay a lot of attention to world records. Rudisha was the only top athlete to have an outstanding season and to win a gold medal and set a world record at the Olympic Games.
In fact, Rudisha has dominated the 800 meters for several years. This is the fourth year in a row he was given the top honor by Track & Field News. Yet the man turned 24 years old just last month. He has many great races ahead of him. The competition, however, is right on his heels. The silver medalist in London, Nijel Amos of Botswana finished only 0.82 seconds behind Rudisha. Amos was just 18 years old during the Games. The bronze medalist, Mohamed Aman of Ethiopia, was 20 years old during the Games. There are two additional top-ranked Kenyan two-lappers who are currently 18 years old. A third is only 19. This means the 800 meters is going to give track fans a lot to look forward to in coming years. I really don't think it will be long before someone runs the race in under 1:40, a barrier that not too long ago seemed impossible to break.
On the women's side, the magazine selected Valerie Adams, a shot putter from New Zealand. This decision was less controversial. Adams had an undefeated season and held 16 of the longest tosses of the year. Adams beat out British heptathlete Jessica Ennis, American sprinter Allyson Felix, and Australian hurdler Sally Pearson.
Thanks for bearing with me. I promise to get back to financial matters in the near future.
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Friday, January 11, 2013
A Disconnect Between Housing and Jobs
There is plenty of evidence as of late that the housing market is improving. Sales and prices for both new and existing homes are on the rise. Since housing starts remain below trend and since household formation is growing, one could reasonably surmise that the recent improvements in the housing market are poised to continue.
However, the fate of the housing market is closely tied to the employment market. People are more likely to buy homes if they are employed and if they feel secure in their jobs. No matter how low mortgage rates go, people don't buy homes if they fear that they might get fired in the near future.
This is why the recent improvements in the housing market are a bit perplexing. Yes, the unemployment rate is falling, but the employment participation rate shows no sign of improvement. In addition, initial jobless claims are still too high and the gains in nonfarm payrolls are too low.
The recent announcements out of American Express and Morgan Stanley add to the worries about jobs. American Express said it plans to reduce head count by 5,400. That's equivalent to 8.5% of its workforce. Morgan Stanley will eliminate 1,600 jobs, about 3% of its total workforce. This is on top of a 6% workforce reduction in 2012.
The fact that these two major companies are still trying to reduce costs by reducing head count means that they are not particularly optimistic about their prospects for growth in the near future. For them, the economy still feels like it is in a recession. Because both American Express and Morgan Stanley are in the financial services industry, there might be a tendency on the part of some analysts to hope that their problems are isolated. I don't agree with this assessment. If the economy were truly improving, I would expect to see stronger growth from these kinds of firms. As for the housing market, the recent signs of strength cannot continue if major employers keep cutting their ranks.
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However, the fate of the housing market is closely tied to the employment market. People are more likely to buy homes if they are employed and if they feel secure in their jobs. No matter how low mortgage rates go, people don't buy homes if they fear that they might get fired in the near future.
This is why the recent improvements in the housing market are a bit perplexing. Yes, the unemployment rate is falling, but the employment participation rate shows no sign of improvement. In addition, initial jobless claims are still too high and the gains in nonfarm payrolls are too low.
The recent announcements out of American Express and Morgan Stanley add to the worries about jobs. American Express said it plans to reduce head count by 5,400. That's equivalent to 8.5% of its workforce. Morgan Stanley will eliminate 1,600 jobs, about 3% of its total workforce. This is on top of a 6% workforce reduction in 2012.
The fact that these two major companies are still trying to reduce costs by reducing head count means that they are not particularly optimistic about their prospects for growth in the near future. For them, the economy still feels like it is in a recession. Because both American Express and Morgan Stanley are in the financial services industry, there might be a tendency on the part of some analysts to hope that their problems are isolated. I don't agree with this assessment. If the economy were truly improving, I would expect to see stronger growth from these kinds of firms. As for the housing market, the recent signs of strength cannot continue if major employers keep cutting their ranks.
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Wednesday, January 09, 2013
Torturing the Data
I get a kick out of so-called indicators that are supposed to predict how the stock market will do. I just read about one called the "First Five Days" indicator. This one supposedly predicts that stocks will rise for the full year if they are up during the first five trading days of that year. Since there are 252 trading days in 2013, I suppose this is better than the "First 250 Days" indicator.
The Super Bowl indicator predicts an up year if a team from the old NFL wins the Super Bowl. Some investors rely on astronomy to help them decide how to position their portfolios. Others rely on weather.
About 20 years ago one of the most prestigious academic journals in economics published a paper that supposedly proved that stocks are more likely to rise on days that are sunny in New York City than on days that are rainy. The theory is that weather affects the mood of traders. It isn't entirely clear why the weather in New York City would affect the mood of a trader in Dallas or San Francisco, but that's the theory. In any case, according to the author, the statistics supported the theory. However, the results could simply be a statistical anomaly. After all, stocks go up more often than they go down and, on average, there more sunny days than rainy days in New York City.
These indicators remind me of what one of my favorite statistics professors in graduate school used to say, "If you torture the data long enough, it will confess."
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The Super Bowl indicator predicts an up year if a team from the old NFL wins the Super Bowl. Some investors rely on astronomy to help them decide how to position their portfolios. Others rely on weather.
About 20 years ago one of the most prestigious academic journals in economics published a paper that supposedly proved that stocks are more likely to rise on days that are sunny in New York City than on days that are rainy. The theory is that weather affects the mood of traders. It isn't entirely clear why the weather in New York City would affect the mood of a trader in Dallas or San Francisco, but that's the theory. In any case, according to the author, the statistics supported the theory. However, the results could simply be a statistical anomaly. After all, stocks go up more often than they go down and, on average, there more sunny days than rainy days in New York City.
These indicators remind me of what one of my favorite statistics professors in graduate school used to say, "If you torture the data long enough, it will confess."
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Thursday, January 03, 2013
Feldstein Says The Fed Is Blowing It
I want to call your attention to an interesting op-ed written in today's Wall Street Journal by Martin Feldstein, a noted economist and professor at Harvard University. Feldstein argues that the Federal Reserve's easy-money policies are setting the economy up for more difficult times in the future. Feldstein warns that interest rates will surge when the Fed stops buying all those Treasury and mortgage-backed securities, which it eventually must. He further argues that the Fed's policies are inflationary. Because the banks have much more reserves than they are legally required to hold, inflation will rise once they start lending the money aggressively in response to aggregate demand. In addition, the Fed's dual mandate (i.e., price stability and full employment) will prevent it from acting quickly enough to stem inflation. Finally, Feldstein argues that the Fed's policies take the heat off Congress by allow it to ignore the serious problems of high debt and large deficits that plague our economy. The longer these problems are ignored, the more difficult they will be to fix.
Wednesday, January 02, 2013
Not Perfect But Better Than Nothing
Well folks, a deal to avert the fiscal cliff has been struck and, at least for today, investors are celebrating. Not surprisingly, the deal is flawed, but it is better than no deal at all. And the resolution, if it can be called that, proves one thing. Politicians will wait until the very last second before doing something. In this case, they waited even a little longer.
The big news is that tax rates will not go up as much as they would have gone up if no deal had been reached. But the fact that rates are going up at all is not good news. The top income tax rate (singles earning more than $400,000 or couples earning more than $450,000) goes from 35% to 39.6%. However, due to limitations on exemptions and deductions, it effectively goes well above 40%. The top rate on dividends and long-term capital gains goes from 15% to 20%. But due to a new health care related tax on investment income, it actually goes up to 23.8%. Working people making modest amounts of income, even those who pay no federal income tax at all, will see a significant increase in payroll taxes. And let's not forget the 2.3% excise tax (i.e., a tax on sales, not income) that will hit medical device makers.
If there is one thing we know for sure it is that taxes affect behavior. If you want less of something, all you have to do is tax it. Cigarettes provide a great example. Many states jacked up taxes on tobacco for two reasons: They wanted to raise revenue and they wanted people to smoke less. In fact, what happened was that so many people gave up smoking that revenues fell well short of targets.
Nonetheless, the fiscal cliff deal that passed both the Senate and House was about the best we could hope for at this time. Investors are right to celebrate today by driving up stock prices. Unfortunately, the rally may not last. After all, Congress didn't really do anything to address spending. In just a few short months we'll be facing more crises as we approach the debt ceiling and the sequester (i.e., mandatory spending cuts). Furthermore, as all adults in Washington know, entitlement reform is the only way to get this country back on a path toward fiscal responsibility. That means Medicare and Social Security. After all, there is no point worrying about a leaky toilet if your house is also infested with termites. Washington needs to focus on the big things that really matter.
Finally, I'll call your attention to a recent mention in Investor's Business Daily. I was asked to name my favorite exchange-traded fund for 2013. Thanks to low fees and a big exposure to Apple, I picked the Vanguard Information Technology ETF (VGT).
The big news is that tax rates will not go up as much as they would have gone up if no deal had been reached. But the fact that rates are going up at all is not good news. The top income tax rate (singles earning more than $400,000 or couples earning more than $450,000) goes from 35% to 39.6%. However, due to limitations on exemptions and deductions, it effectively goes well above 40%. The top rate on dividends and long-term capital gains goes from 15% to 20%. But due to a new health care related tax on investment income, it actually goes up to 23.8%. Working people making modest amounts of income, even those who pay no federal income tax at all, will see a significant increase in payroll taxes. And let's not forget the 2.3% excise tax (i.e., a tax on sales, not income) that will hit medical device makers.
If there is one thing we know for sure it is that taxes affect behavior. If you want less of something, all you have to do is tax it. Cigarettes provide a great example. Many states jacked up taxes on tobacco for two reasons: They wanted to raise revenue and they wanted people to smoke less. In fact, what happened was that so many people gave up smoking that revenues fell well short of targets.
Nonetheless, the fiscal cliff deal that passed both the Senate and House was about the best we could hope for at this time. Investors are right to celebrate today by driving up stock prices. Unfortunately, the rally may not last. After all, Congress didn't really do anything to address spending. In just a few short months we'll be facing more crises as we approach the debt ceiling and the sequester (i.e., mandatory spending cuts). Furthermore, as all adults in Washington know, entitlement reform is the only way to get this country back on a path toward fiscal responsibility. That means Medicare and Social Security. After all, there is no point worrying about a leaky toilet if your house is also infested with termites. Washington needs to focus on the big things that really matter.
Finally, I'll call your attention to a recent mention in Investor's Business Daily. I was asked to name my favorite exchange-traded fund for 2013. Thanks to low fees and a big exposure to Apple, I picked the Vanguard Information Technology ETF (VGT).
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