A cartel is a formal agreement among competing firms to control the price and supply of a particular good or service. In order to promote competition, U.S. companies are prohibited from forming cartels. In theory, cartels should not last anyway because there is too much incentive to cheat.
That hasn’t prevented OPEC, the world’s best known cartel, from defying theory. The Organization of Petroleum Exporting Countries, currently consisting of a dozen nations, has been thriving since it was first formed in 1960. OPEC operates under a system of production quotas agreed to by its members. Saudi Arabia, the largest producer by far, is also the most influential.
That didn’t stop Ali Naimi, Saudi Arabia’s Minister of Petroleum and Resources, from calling Wednesday’s OPEC meeting in Vienna one of the worst ever saying, “In my 16 years as a minister, I have not seen as obstinate a position without move like this meeting.” He was referring to the hard line taken by Iran and OPEC’s subsequent failure to reach agreement to increase supply. Oil prices immediately surged on the news.
They shouldn’t have. Naimi went on to explain that Saudi Arabia, Kuwait, Qatar, and the United Arab Emirates “are able and willing to supply whatever the market needs,” which he currently estimates as an additional 1.5 million barrels per day. He made it clear that there would be no shortage of supply.
Does this portend the end of OPEC? Probably not. Yet cheating on production quotas has been going on for a long time. Most oil producing nations would love to sell as much as possible at the current $100 per barrel. Now that OPEC has failed to reach an agreement, the spigots should open wider. It shouldn’t take long before oil falls to $90 per barrel.
Thursday, June 09, 2011
Wednesday, June 08, 2011
Stocks Suddenly Losing Favor
The following commentary was released today to subscribers of the Forbes Special Situation Survey.
Stocks have suddenly exhibited weakness with the S&P 500 down about 6% since its April 29 high. Housing, employment, and energy continue to present the greatest headwinds. The latest S&P/Case-Shiller figures indicate that existing housing prices have double-dipped, setting new lows since their 2006 highs; nonfarm payroll figures have weakened once again with the unemployment rate jumping to 9.1%; and although energy prices have backed off their recent highs, the high cost of gasoline continues to present a significant challenge to most consumers.
Furthermore, high levels of debt remain a serious concern. Some economists argue that government debt as a proportion of GDP is not out of line, at least when compared to WWII era levels. However, if we include unfunded liabilities (i.e., social security, Medicare and Medicaid), state and local government debt, corporate debt, and consumer debt, total debt as a percent of GDP is at record levels. Government’s inability to properly address the debt and deficit is becoming an increasingly worrisome issue for the economy and investors.
One concern not often discussed is the increasing amount of programmed trading taking place in the markets. Programmed trading was behind the “flash crash” of May 6, 2010 when the Dow plunged 600 points in a matter of minutes. As institutional investors increase their reliance on computerized algorithms to execute orders, fewer human beings are involved in the actual decision-making process of buying and selling stocks. This is exaggerating the movements in stock prices. Investing, as opposed to trading, becomes more challenging in this kind of market. While it is still safe to assume that relying on fundamentals makes sense over the long term, irrational behavior can dominate the markets over the short term. Just as bubbles often get larger before they burst, undervalued stocks can get cheaper before investors come to their senses. Research in Motion (RIMM), one of the stocks on our buy list, is getting hammered by this kind of activity. A combination of irrational behavior and programmed trading appears to have contributed to the stock’s decline.
Given the serious problems in the economy, there really was no justification for the market’s strong rally from last September through April. Although some stocks appear to be extremely cheap, investors should remain extremely cautious about the overall market’s prospects. I recently had the opportunity to meet with several experienced investors including Forbes columnists Gary Shilling and Ken Fisher. Shilling continues to be bearish on stocks. That’s no surprise. Fisher, who is usually bullish, says he now expects stocks to finish relatively flat for the year. Given the serious challenges that must be overcome, it’s starting to look as if even a flat year might be too optimistic of a forecast.
Stocks have suddenly exhibited weakness with the S&P 500 down about 6% since its April 29 high. Housing, employment, and energy continue to present the greatest headwinds. The latest S&P/Case-Shiller figures indicate that existing housing prices have double-dipped, setting new lows since their 2006 highs; nonfarm payroll figures have weakened once again with the unemployment rate jumping to 9.1%; and although energy prices have backed off their recent highs, the high cost of gasoline continues to present a significant challenge to most consumers.
Furthermore, high levels of debt remain a serious concern. Some economists argue that government debt as a proportion of GDP is not out of line, at least when compared to WWII era levels. However, if we include unfunded liabilities (i.e., social security, Medicare and Medicaid), state and local government debt, corporate debt, and consumer debt, total debt as a percent of GDP is at record levels. Government’s inability to properly address the debt and deficit is becoming an increasingly worrisome issue for the economy and investors.
One concern not often discussed is the increasing amount of programmed trading taking place in the markets. Programmed trading was behind the “flash crash” of May 6, 2010 when the Dow plunged 600 points in a matter of minutes. As institutional investors increase their reliance on computerized algorithms to execute orders, fewer human beings are involved in the actual decision-making process of buying and selling stocks. This is exaggerating the movements in stock prices. Investing, as opposed to trading, becomes more challenging in this kind of market. While it is still safe to assume that relying on fundamentals makes sense over the long term, irrational behavior can dominate the markets over the short term. Just as bubbles often get larger before they burst, undervalued stocks can get cheaper before investors come to their senses. Research in Motion (RIMM), one of the stocks on our buy list, is getting hammered by this kind of activity. A combination of irrational behavior and programmed trading appears to have contributed to the stock’s decline.
Given the serious problems in the economy, there really was no justification for the market’s strong rally from last September through April. Although some stocks appear to be extremely cheap, investors should remain extremely cautious about the overall market’s prospects. I recently had the opportunity to meet with several experienced investors including Forbes columnists Gary Shilling and Ken Fisher. Shilling continues to be bearish on stocks. That’s no surprise. Fisher, who is usually bullish, says he now expects stocks to finish relatively flat for the year. Given the serious challenges that must be overcome, it’s starting to look as if even a flat year might be too optimistic of a forecast.
Tuesday, May 17, 2011
A Chink in His Armor
A couple of weeks ago, Berkshire Hathaway's audit committee issued an 18-page report about David Sokol's stock trades in Lubrizol Corporation. What stood out was how vigorously the report defended Warren Buffett, how strongly it blamed David Sokol, and how much it differed from Warren Buffett's own news release dated just one month earlier.
The audit committee concluded that Sokol had violated company policies and that he made misleading and incomplete disclosures about his stock trades. All that might be true, yet Buffett's earlier release defended Sokol and his stock trades. Buffett wrote, "Neither Dave nor I feel his Lubrizol trades were in any way unlawful." That statement might also be true. So far, at least, Sokol has not been charged with a crime. However, since the SEC is still investigating, the matter isn't closed. In any case, it certainly does appear that Sokol violated his fiduciary responsibility to Berkshire Hathaway. It seems that Lubrizol's CEO and the Citigroup bankers who brought Lubrizol to Sokol's attention were under the impression that Sokol was representing Berkshire Hathaway. Sokol should not have been using that information to execute trades in his own account.
The mere fact that Sokol resigned suggests there is probably more to this story. Most likely, Sokol would not have resigned unless he was asked to resign or unless he thought he had done something wrong. Buffett wrote that Sokol's resignation "came as a surprise to me." That's a bit hard to believe, especially since Buffett also says that Sokol tried to resign twice before. Furthermore, the report issued by the audit committee states that Buffett asked Berkshire's CFO Marc Hamburg to look into Sokol's trades as early as March 15, two weeks before Sokol resigned.
Furthermore, if the company's board of directors is genuinely convinced that Sokol violated company policy by trading in Lubrizol stock, it seems they would have an obligation to all their shareholders to try and recoup Sokol's profits from those trades. Initiating legal action, however, could require that both Sokol and Buffett testify under oath; something the board might prefer to avoid.
Unfortunately, the entire matter has given Buffett's stellar reputation a bit of a blow. At worst, it appears that Buffett tacitly approved Sokol's inappropriate trades, or at least chose to ignore the matter. At best, it appears that Buffett was completely duped by one of his most trusted lieutenants. Either way, this incident has put a chink in Buffett's shining armor.
The audit committee concluded that Sokol had violated company policies and that he made misleading and incomplete disclosures about his stock trades. All that might be true, yet Buffett's earlier release defended Sokol and his stock trades. Buffett wrote, "Neither Dave nor I feel his Lubrizol trades were in any way unlawful." That statement might also be true. So far, at least, Sokol has not been charged with a crime. However, since the SEC is still investigating, the matter isn't closed. In any case, it certainly does appear that Sokol violated his fiduciary responsibility to Berkshire Hathaway. It seems that Lubrizol's CEO and the Citigroup bankers who brought Lubrizol to Sokol's attention were under the impression that Sokol was representing Berkshire Hathaway. Sokol should not have been using that information to execute trades in his own account.
The mere fact that Sokol resigned suggests there is probably more to this story. Most likely, Sokol would not have resigned unless he was asked to resign or unless he thought he had done something wrong. Buffett wrote that Sokol's resignation "came as a surprise to me." That's a bit hard to believe, especially since Buffett also says that Sokol tried to resign twice before. Furthermore, the report issued by the audit committee states that Buffett asked Berkshire's CFO Marc Hamburg to look into Sokol's trades as early as March 15, two weeks before Sokol resigned.
Furthermore, if the company's board of directors is genuinely convinced that Sokol violated company policy by trading in Lubrizol stock, it seems they would have an obligation to all their shareholders to try and recoup Sokol's profits from those trades. Initiating legal action, however, could require that both Sokol and Buffett testify under oath; something the board might prefer to avoid.
Unfortunately, the entire matter has given Buffett's stellar reputation a bit of a blow. At worst, it appears that Buffett tacitly approved Sokol's inappropriate trades, or at least chose to ignore the matter. At best, it appears that Buffett was completely duped by one of his most trusted lieutenants. Either way, this incident has put a chink in Buffett's shining armor.
Monday, May 16, 2011
$3,000 Per Night
No doubt everyone has heard by now of the arrest of Dominique Strauss-Kahn, Managing Director of the International Monetary Fund. Mr. Strauss-Kahn, whose past exploits have earned him the nickname "The Great Seducer," is accused of sexually assaulting a chambermaid in his suite in the Sofitel hotel in New York City. If true, this is a horrendous crime. A court of law is certainly the appropriate place to decide his guilt or innocence, but things don't look good for him. At least one other woman is now claiming that he sexually assaulted her almost 10 years ago.
In any case, another question needs to be asked as well. The IMF is an international organization tasked with helping countries that have run out of money. It gets its funding from member nations, each of which pays a quota. Not surprisingly, the United States has the largest quota by far. As Managing Director, Mr. Strauss-Kahn reportedly earns well over $400,000 per year tax free. Mr. Strauss-Kahn was staying in a room that costs $3,000 per night. So here's the question: Who paid for the hotel room? Did the money come from Mr. Strauss-Kahn's own pocket (not likely), or was the U.S. taxpayer on the hook for the bulk of the bill?
In any case, another question needs to be asked as well. The IMF is an international organization tasked with helping countries that have run out of money. It gets its funding from member nations, each of which pays a quota. Not surprisingly, the United States has the largest quota by far. As Managing Director, Mr. Strauss-Kahn reportedly earns well over $400,000 per year tax free. Mr. Strauss-Kahn was staying in a room that costs $3,000 per night. So here's the question: Who paid for the hotel room? Did the money come from Mr. Strauss-Kahn's own pocket (not likely), or was the U.S. taxpayer on the hook for the bulk of the bill?
Wednesday, April 27, 2011
Don't Blame Gouging for High Gasoline Prices
The price of gasoline is perhaps the one price consumers notice more than any other. They see it prominently displayed every time they drive by a gas station and they feel it right in their wallet every time they fill up their tank. So when gasoline prices are on the rise, it isn’t surprising to hear consumers complain. In recent weeks, they have been doing a lot of complaining.
According to the AAA’s Daily Fuel Gauge Report, the national average price of regular gasoline is currently $3.87 per gallon. That’s up from $2.85 a year ago and $3.58 just one month ago. Never mind that gasoline prices are still much cheaper in the U.S. than in most other countries, or that gasoline prices are not out of line when adjusted for inflation during the past several decades. The recent rapid rise has consumers crying foul and state attorneys general warning gas stations not to price gouge. Attorney General Martha Coakley of Massachusetts has been at the forefront of these efforts to scare gas station operators. She recently cited a provision in the law that prohibits the selling of petroleum based products at “an unconscionably high price,” whatever that means.
While some price gouging might be occurring in certain markets, in general, gouging is not nearly the universal problem some politicians would like us to believe it is. The fact of the matter is that gasoline prices are up for a number of valid economic reasons.
First, supply has been disrupted. Gasoline is made from crude oil and unrest in the Middle East, particularly Libya, has disrupted supply causing crude oil prices to rise. The Obama administration’s reluctance to allow more drilling in the U.S., especially after the BP oil spill in the Gulf of Mexico, is also having a negative impact on supply.
Second, in an attempt to stimulate the economy, the U.S. government has debased the value of the dollar. A cheaper dollar increases the price of imports. Not coincidentally, oil is our biggest import. In addition, when investors fear a falling dollar, they pile into commodity-based futures contracts, contributing to rise in prices.
Third, demand for gasoline is on the rise. Recessions soften demand for all kinds of goods and services, including gasoline. But when economies recover, demand strengthens. While the U.S. recovery has been lackluster, the fact is that jobs numbers are improving. Gasoline demand has strengthened as more people have begun commuting again to work.
Price gouging is an unlikely explanation in highly populated markets where there are several gas stations within a three or four mile radius. If you think the price is too high at one station, it is easy to go to another. For gouging to take place in such areas, gas station owners would have to be colluding with one another. Unless someone conducts a thorough forensic audit of their books, it would be impossible to prove they are gouging. On the contrary, most gasoline retailers typically make only about a nickel per gallon. While it’s true that some stations charge more than others, the difference is usually explained by higher costs. For example, a station located in a prime spot such as a busy intersection is probably paying more for its lease than one located in a more remote part of town.
If politicians really want to reduce the price of gasoline, they should get off the backs of gas station owners and focus instead on taxes. State and federal taxes add about 43 cents per gallon on average to the price of gasoline. Yet this doesn’t take into account the additional revenues they generate by taxing the profits of all the entities involved in the petroleum business. The truth is that the government makes more money when gasoline prices go up. Politicians will lend a sympathetic ear to complaining consumers, but the last thing they want is lower tax revenues.
Click on WBUR in Boston to listen to my interview on this topic.
According to the AAA’s Daily Fuel Gauge Report, the national average price of regular gasoline is currently $3.87 per gallon. That’s up from $2.85 a year ago and $3.58 just one month ago. Never mind that gasoline prices are still much cheaper in the U.S. than in most other countries, or that gasoline prices are not out of line when adjusted for inflation during the past several decades. The recent rapid rise has consumers crying foul and state attorneys general warning gas stations not to price gouge. Attorney General Martha Coakley of Massachusetts has been at the forefront of these efforts to scare gas station operators. She recently cited a provision in the law that prohibits the selling of petroleum based products at “an unconscionably high price,” whatever that means.
While some price gouging might be occurring in certain markets, in general, gouging is not nearly the universal problem some politicians would like us to believe it is. The fact of the matter is that gasoline prices are up for a number of valid economic reasons.
First, supply has been disrupted. Gasoline is made from crude oil and unrest in the Middle East, particularly Libya, has disrupted supply causing crude oil prices to rise. The Obama administration’s reluctance to allow more drilling in the U.S., especially after the BP oil spill in the Gulf of Mexico, is also having a negative impact on supply.
Second, in an attempt to stimulate the economy, the U.S. government has debased the value of the dollar. A cheaper dollar increases the price of imports. Not coincidentally, oil is our biggest import. In addition, when investors fear a falling dollar, they pile into commodity-based futures contracts, contributing to rise in prices.
Third, demand for gasoline is on the rise. Recessions soften demand for all kinds of goods and services, including gasoline. But when economies recover, demand strengthens. While the U.S. recovery has been lackluster, the fact is that jobs numbers are improving. Gasoline demand has strengthened as more people have begun commuting again to work.
Price gouging is an unlikely explanation in highly populated markets where there are several gas stations within a three or four mile radius. If you think the price is too high at one station, it is easy to go to another. For gouging to take place in such areas, gas station owners would have to be colluding with one another. Unless someone conducts a thorough forensic audit of their books, it would be impossible to prove they are gouging. On the contrary, most gasoline retailers typically make only about a nickel per gallon. While it’s true that some stations charge more than others, the difference is usually explained by higher costs. For example, a station located in a prime spot such as a busy intersection is probably paying more for its lease than one located in a more remote part of town.
If politicians really want to reduce the price of gasoline, they should get off the backs of gas station owners and focus instead on taxes. State and federal taxes add about 43 cents per gallon on average to the price of gasoline. Yet this doesn’t take into account the additional revenues they generate by taxing the profits of all the entities involved in the petroleum business. The truth is that the government makes more money when gasoline prices go up. Politicians will lend a sympathetic ear to complaining consumers, but the last thing they want is lower tax revenues.
Click on WBUR in Boston to listen to my interview on this topic.
Sunday, April 24, 2011
Poor Governance at Berkshire Hathaway is Not a New Problem
Corporate governance has long been a topic of interest to financial researchers in academia. Law schools, too, have spent a lot of time on the issue. The issue of corporate governance arises from the separation of ownership and control at large publicly traded companies. After all, governance is largely irrelevant at closely held companies that are managed by the owners. If the CEO owns all the stock and shirks his responsibilities, he hurts only himself. But when there are many shareholders with only a few actually working at the company, governance becomes a big deal.
With Berkshire Hathaway's shareholders' meeting coming up next weekend, there has been much talk about governance. Warren Buffett is famous for having a hands-off approach to management. He says he buys good companies with good managers and then stays out of the way. He does not want to get involved in the operations.
However, David Sokol's recent resignation from Berkshire Hathaway has a lot of observers wondering if Buffett should not be more hands on. They are also wondering if Berkshire's board of directors is paying sufficient attention to governance.
I find this sudden attention to corporate governance at Berkshire long overdue. In fact, I devoted an entire chapter to the topic in my 2008 book, Even Buffett Isn't Perfect. Yet when the book came out, some critics wondered why anyone would worry about governance at Berkshire. With Sokol's sudden resignation and with the SEC investigating his stock trades, I suspect the critics have finally figured out the answer to that question.
With Berkshire Hathaway's shareholders' meeting coming up next weekend, there has been much talk about governance. Warren Buffett is famous for having a hands-off approach to management. He says he buys good companies with good managers and then stays out of the way. He does not want to get involved in the operations.
However, David Sokol's recent resignation from Berkshire Hathaway has a lot of observers wondering if Buffett should not be more hands on. They are also wondering if Berkshire's board of directors is paying sufficient attention to governance.
I find this sudden attention to corporate governance at Berkshire long overdue. In fact, I devoted an entire chapter to the topic in my 2008 book, Even Buffett Isn't Perfect. Yet when the book came out, some critics wondered why anyone would worry about governance at Berkshire. With Sokol's sudden resignation and with the SEC investigating his stock trades, I suspect the critics have finally figured out the answer to that question.
Friday, April 01, 2011
Sokol Tarnishes Buffett's Reputation
Until just a few days ago, David Sokol was a star manager at Berkshire Hathaway. He was CEO of NetJets and Chairman of MidAmerican Energy Holdings. Now he's caught up in a stock trading scandal involving Lubrizol, a company Berkshire Hathaway is in the process of acquiring. I did a two-part interview on CNBC yesterday about this issue. Here is Part I, and here is Part II. In addition, here is an article I wrote about the situation for The Fiscal Times.
Wednesday, March 30, 2011
Housing Heads for a Double Dip
The latest S&P/Case-Shiller figures are disconcerting. There is no evidence that the housing market is improving. On the contrary, it appears to be headed for a double dip. Read my latest commentary at The Fiscal Times.
Thursday, March 17, 2011
Book Review
Just want to thank Brenda Jubin who runs the blog, Reading the Markets,for the favorable review of my latest book, The Forbes/CFA Institute Investment Course co-authored with Steve Horan of the CFA Institute and Chuck Trzcinka of Indiana University.
Friday, March 11, 2011
We Could See More Selling Ahead
I'm growing increasing concerned about the behavior of the stock market. Stocks have been strong despite serious concerns about the economy, but yesterday's almost two percent selloff could be a harbinger of things to come. While I continue to find compelling buys in individual stocks (which I highlight in the Forbes Special Situation Survey, my outlook for the market as a whole is growing more bearish. I explain why in a recent posting at The Fiscal Times.
Wednesday, March 02, 2011
Buffett's Letter Does Not Disappoint
Buffett's annual letters to shareholders always make for interesting reading. They are full of pithy comments and there is usually a surprise or two. This year's letter was no exception. Read more at The Fiscal Times.
Thursday, February 17, 2011
What's in a Name?
Have you heard about the controversy surrounding Deutsche Borse's merger with NYSE Euronext? It seems people are more concerned about what the name of the combined entity might be than they are about a German company acquiring one of America's most venerated institutions. Read more at The Fiscal Times.
Tuesday, February 15, 2011
Correction Ahead
I'm getting increasingly concerned that investors are being too complacent about some serious issues that will plague the economy for years to come. While investor sentiment could drive the stock market higher in the near term, unless we get our economic house in order, the long term does not look very rosy. You can read my views on these matters at The Fiscal Times and at Forbes.com.
Sunday, January 30, 2011
Don't Blame Egypt
You can try blaming the rioting in Egypt, lower-than-expected GDP growth, and disappointing guidance from bellwether Amazon for Friday’s sell-off in stocks. Most likely, however, the real culprit was simply jittery investors trying to lock in profits from an extremely strong rally, which they suspect cannot last much longer.
In fact, as of Thursday’s close, the S&P 500 had surged 27% from its July 2, 2010 low. That is a great return for a full year let alone for just six months. The average annualized gain from equities is closer to 10% (including dividends). Rational investors know this pace is not sustainable. Given the severe sell-off in 2008 and into 2009 that followed the financial crisis, and the sell-off from 2000 to 2002 that followed the dot com bubble, many investors are exercising much more caution than they did in the 1990s. They want to make sure they don’t get caught in the next round of heavy selling. Of course, this does not mean that stocks will plunge. However, it could mean that prices remain flat for the remainder of the year.
Stocks have done great since hitting bottom on March 9, 2009. The strong gains in recent months were probably justified. After all, pundits like to say that the bottom line is the bottom line. In other words, in the final analysis, profits are the only thing that matters. And there is no question that corporate profit growth has been impressive. In recent quarters, we have been treated to better-than-expected earnings reports and decent year-over-year earnings gains. With earnings results like these, there is no reason why stocks should not have rallied.
Yet many problems remain. The federal budget deficit is too large and the government is carrying too much debt. States and municipalities are drowning in public pension obligations. The unemployment rate is improving, but much too slowly. Mortgage delinquencies and foreclosures remain too high, there are too many homes available for sale, and housing prices remain depressed. Worldwide inflation is on the rise. There are even problems at the corporate level. Yes, corporate profits are strong, but the same cannot be said for sales. Many companies are reporting anemic growth on the top line at best. Others continue to see revenues decline. Corporations are squeezing more profits from fewer sales only by aggressively cutting costs. This kind of cost cutting cannot go on forever. All businesses eventually reach a point where more profits can be produced only from more sales. Most are probably at that point already.
Academics like to say that markets are efficient, meaning that, on average, stocks sell for what they are worth. Yet even the academics recognize that markets are not perfect. Stock prices often go to extremes. When sentiment turns negative, prices fall well below what the fundamentals would dictate. When investors turn too bullish, prices overshoot on the upside. A 10 percent correction should not surprise anyone. In fact, a healthy sell-off should be welcomed by all long term investors who are holding cash that needs to be put to work.
In fact, as of Thursday’s close, the S&P 500 had surged 27% from its July 2, 2010 low. That is a great return for a full year let alone for just six months. The average annualized gain from equities is closer to 10% (including dividends). Rational investors know this pace is not sustainable. Given the severe sell-off in 2008 and into 2009 that followed the financial crisis, and the sell-off from 2000 to 2002 that followed the dot com bubble, many investors are exercising much more caution than they did in the 1990s. They want to make sure they don’t get caught in the next round of heavy selling. Of course, this does not mean that stocks will plunge. However, it could mean that prices remain flat for the remainder of the year.
Stocks have done great since hitting bottom on March 9, 2009. The strong gains in recent months were probably justified. After all, pundits like to say that the bottom line is the bottom line. In other words, in the final analysis, profits are the only thing that matters. And there is no question that corporate profit growth has been impressive. In recent quarters, we have been treated to better-than-expected earnings reports and decent year-over-year earnings gains. With earnings results like these, there is no reason why stocks should not have rallied.
Yet many problems remain. The federal budget deficit is too large and the government is carrying too much debt. States and municipalities are drowning in public pension obligations. The unemployment rate is improving, but much too slowly. Mortgage delinquencies and foreclosures remain too high, there are too many homes available for sale, and housing prices remain depressed. Worldwide inflation is on the rise. There are even problems at the corporate level. Yes, corporate profits are strong, but the same cannot be said for sales. Many companies are reporting anemic growth on the top line at best. Others continue to see revenues decline. Corporations are squeezing more profits from fewer sales only by aggressively cutting costs. This kind of cost cutting cannot go on forever. All businesses eventually reach a point where more profits can be produced only from more sales. Most are probably at that point already.
Academics like to say that markets are efficient, meaning that, on average, stocks sell for what they are worth. Yet even the academics recognize that markets are not perfect. Stock prices often go to extremes. When sentiment turns negative, prices fall well below what the fundamentals would dictate. When investors turn too bullish, prices overshoot on the upside. A 10 percent correction should not surprise anyone. In fact, a healthy sell-off should be welcomed by all long term investors who are holding cash that needs to be put to work.
Monday, January 24, 2011
The Forbes/CFA Institute Investment Course
Many years ago, Forbes began producing a product called The Forbes Stock Market Course. When I joined Forbes in 1997, it was time to revise it. So with the help of Steve Horan and Chuck Trzcinka, two finance professors, we rewrote and updated the draft. Recently, we did it again. I'm pleased to announce that this time it is published by Wiley and we have renamed it The Forbes/CFA Institute Investment Course. You can take a look at the Table of Contents at Amazon.com.
Tuesday, January 11, 2011
Forbes Special Situation Survey Investment Newsletter
Investment newsletter editors constantly compete against one another, trying to pick the best stocks and turn in the best returns. Sometimes the performance claims sound too good to be believed. This is why Mark Hulbert created the Hulbert Financial Digest, a publication that does nothing but track the performance of investment newsletters. Hulbert tries to provide an independent and objective look at how newsletters really are performing.
I am pleased to report that Hulbert continues to rank the Forbes Special Situation Survey as one of the best. According to Hulbert, out of about 180 investment newsletters on the market, ours is ranked #2 over the past three and five years. The table below displays our annual returns as determined by Hulbert and compares them to the S&P 500. These results were achieved without the use of shorts, derivatives, or margin. The newsletter follows a long-only strategy that is always fully invested in stocks. The figures speak for themselves.
I am pleased to report that Hulbert continues to rank the Forbes Special Situation Survey as one of the best. According to Hulbert, out of about 180 investment newsletters on the market, ours is ranked #2 over the past three and five years. The table below displays our annual returns as determined by Hulbert and compares them to the S&P 500. These results were achieved without the use of shorts, derivatives, or margin. The newsletter follows a long-only strategy that is always fully invested in stocks. The figures speak for themselves.
Monday, January 03, 2011
Don't Bet on Lower Housing Prices in 2011
A month ago I was enjoying warm weather on the Crystal Symphony off the Pacific coast of Mexico. I was there for the 18th Forbes Cruise for Investors. We discussed many things including the housing and employment markets. Today, at The Fiscal Times I explain why housing prices won't go lower in 2011.
Thursday, November 11, 2010
The Glitter of Gold Hangs Over Seoul
The G-20 summit is underway in Korea and Robert Zoellick's comments about using a gold standard for currencies has shaken things up a bit. Here is view of the summit at The Fiscal Times.
Monday, November 08, 2010
Let Businesses Get Down to Business
Friday's jobs report was better than expected. Non-farm payrolls increased by 151,000 in October and all of the gains came in the private sector. Unfortunately, there isn't much in what I would call the productive industries. The job gains came in areas like health care and eating and drinking establishments. Mining saw some gains, but most of it was in support services. Things like construction and manufacturing are still doing badly. Here is my interview on MSNBC about the jobs report.
Thursday, November 04, 2010
Kill This Subsidy
I have never understood why mortgage interest is tax deductible. This subsidy simply bloats the value of homes, favors the home building and real estate industries over other industries, and encourages people to take on more debt than they otherwise would. Read more at Let's Kill This Housing Subsidy.
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