Investors Get Nervous About Election

Initial jobless claims come out Thursday morning as they do every Thursday morning. Economists are expecting a figure of about 375,000. Any number significantly better helps President Obama make his case that the employment picture is improving. Any number significantly worse bodes well for Mitt Romney.

I delved into this matter in my July 19 posting. In that posting I showed that initial jobless claims have been improving significantly ever since they peaked in early 2009. I also pointed out, however, that the employment participation rate has been deteriorating. In fact, it is at a 30-year low. Some observers have said this is because of the baby boomers retiring. There is some truth to that. Unfortunately, that explains only part of the story. The bulk of the decline in the participation rate is due to large numbers of people simply dropping out of the workforce due to an inability to find jobs.

I have also discussed in the past why the stock market has been rallying even as the economy has been struggling. The bottom line is the Fed. The Federal Reserve has been pushing an easy monetary policy. Each time the Fed announces another round of quantitative easing, stocks rally. In a bit of twisted logic, however, stocks sold off on Tuesday in part because more investors are starting to believe that Mitt Romney may actually win the presidential election. Investors seem to believe that Romney will be better than Obama for the economy in the long run; but in the short run a Romney victory might mean an end to the Fed's easy monetary policy. Romney has already said he would not reappoint Ben Bernanke as Fed Chairman. He will likely replace Bernanke with someone who is more hawkish. That could be bad for stocks as interest rates rise back to what are considered normal levels.

The election is still a toss up. What is clear, however, is that stock market volatility is rising. It still makes sense to invest for the long run. You should, however, be prepared for some severe gyrations.

Investor's Business Daily on Apple

Back in March, I had a posting asking if Apple was a BUY? My conclusion was that momentum would probably take the stock higher, but Apple wasn't a stock I would buy at the time. Of course, the stock did go higher and eventually topped $700 per share. But Apple has fallen back quite a bit in the last few weeks. Since Apple is the largest stock by market cap in the S&P 500 and NASDAQ, it has a huge influence on those indices. I love Apple's products, but I as I explain in today's Investor's Business Daily, there has simply been too much enthusiasm over the iPhone, the iPad, and Apple TV.

Book Interview

Click on Equities.com to read my interview with Henry Truc about The Forbes/CFA Institute Investment Course.

Low Interest Rates Are Punishing Savers

Stephen Horan of the CFA Institute interviewed me last week about the challenges of trying to generate income in a low-interest rate era. Click here to watch the interview.

Is the Rally Going Beyond the Fundamentals?

The following commentary was previously sent to subscribers of the Forbes Special Situation Survey investment newsletter. 

We are growing increasingly concerned that the fundamentals do not justify the recent rise in stock prices. The U.S. economy continues to struggle. At the end of September, the Bureau of Economic Analysis revised its estimate for second quarter GDP growth from 1.7% (on an annual basis) to just 1.3%. Because growth is so anemic, the unemployment rate remains stuck at more than 8%. The official figure for August was 8.1%. (The September estimate will be released this Friday.) While it is true that the unemployment rate is down significantly from its peak of 10.0% in October 2009, we find the dismal participation rate more alarming. This little noticed, but extremely important metric has plunged to 63.5%, its lowest level since September 1981! In part, the decline is explained by demographics. After all, baby boomers are retiring in large numbers. Unfortunately, a greater portion of the decline in the participation rate is explained by people dropping out of the workforce simply because they are too discouraged to keep looking for work.

Even the few bits of good economic news have to be taken with a grain of salt. The latest ISM Index came in at 51.5. Any reading above 50 signals expansion in the manufacturing sector. However, this metric is barely above the critical level, meaning that any expansion is weak at best. The ISM Index was signaling contraction during the prior three months and it could easily fall below 50 again. In addition, the Chicago PMI, which came out just a few days earlier, dipped below 50, hitting its lowest level in three years. The housing market is giving some investors comfort with both new and existing home sales and prices picking up; yet the numbers remain at incredibly depressed levels. 

What explains the run up in stocks? We attribute it to a number of factors. First, Federal Reserve Chairman Ben Bernanke keeps delivering more stimuli and promises to keep interest rates low indefinitely. In a few more years, we may be talking about QE 15. The rise in stock prices shows how painful it is for investors to fight the Fed. Second, as bad as things are in Europe, investors go “risk on” every time a European politician or banker indicates that the abyss may be a little further away than they initially thought. Third, investors are hoping that no matter who wins the presidential election in the United States, no politician would be stupid enough to let the country go over the fiscal cliff. Unfortunately, we don’t know many investors who have grown rich by overestimating the intelligence of politicians.

We are about to enter what is known on Wall Street as “earnings season.” While stock prices may rise or fall on any particular day for any number of reasons, over the long run, nothing matters more than sales and earnings. We are concerned with the large number of companies that are issuing warnings. Companies frequently lower expectations in order to beat the reduced estimates; but this time around there appear to be a greater number doing so than usual. Furthermore, sales growth is slowing. The markets have been unusually tranquil in recent months. We suspect things are about to get much more volatile. Cautious investors might want to reduce exposure to equities at this time.

Fed Throws Granny Off The Cliff

At last week's press conference, Fed Chairman Ben Bernanke defended his low-interest rate policy even though it is punishing savers. Specifically, he said, "My colleagues and I are very much aware that holders of interest-bearing assets, such as certificates of deposit, are receiving very low returns. But low interest rates also support the value of many other assets that Americans own, such as homes and businesses large and small. Indeed, in general, healthy investment returns cannot be sustained in a weak economy, and of course it is difficult to save for retirement or other goals without the income from a job. Thus, while low interest rates do impose some costs, Americans will ultimately benefit most from the healthy and growing economy that low interest rates help promote."

A liberal group that supports the Democrats recently ran an ad that shows a Paul Ryan stand-in throwing an old woman in a wheel chair off a cliff. The message was that Ryan doesn't care about elderly Americans.

But isn't the Fed's low interest rate policy sending the same message? Elderly Americans are the ones that depend most on income from interest. They are the ones that keep their savings in relatively safe assets, such as savings accounts and the certificates of deposit that Chairman Bernanke talked about. Bernanke believes that his low interest rate policy is good for America in the long run. So far, the evidence on that is debatable. What is clearly true, however, is that for elderly Americans, the long run is not very long. They have already saved for retirement. Now they must depend on the income their savings generate, which thanks to Mr. Bernanke, is virtually zero. Does the Fed Chairman really want people in their 80s and 90s taking money out of the bank and putting it into the stock market?

Karen Dynan of the Brookings Institution has a paper out titled, "What's Been Weighing on Consumption?" Here's an interesting line from her paper: "Although interest income typically falls along with interest rates in cyclical downturns, the decline in such income in the current cycle has been materially larger than in the past (just as the sustained low level of interest rates is unusual by past experience)."

And here's an interesting paper from William McBride of the Tax Foundation titled, "The Great Recession and Volatility in the Sources of Personal Income." He includes an interesting table that breaks down income from source. The data is from the IRS and unfortunately it only goes up to 2009, yet is shows interest income falling precipitously after 2007. No doubt, an updated table would show an even sharper drop.

Is the Fed's low-interest rate policy really helping the economy? Perhaps a little. Since high interest rates are not what ails the economy, it isn't clear why the Fed keeps trying to drive them lower. What is perfectly clear, however, is that low interest rates are punishing savers, especially elderly savers. Now who's really the one "throwing Granny off the cliff?"

A Preview to the Fed's Announcement

President Obama's recent speech at the Democratic National Conference seemed to focus a bit too much on the tough road ahead. Perhaps astute traders took that to mean that the next day's jobs report would be disappointing. It sure was. Nonfarm payrolls increased by an incredibly anemic 96,000. What's worse, the gains for June and July were revised down from 64,000 and 163,000 to 45,000 and 141,000, respectively.

Furthermore, the one piece of good news turned out to be an anomaly. The unemployment rate fell from 8.3% to 8.1%, but only because more people dropped out of the labor force. I have been beating the drum for some time about the deteriorating employment participation rate. It just keeps on falling. It is now down to 63.5%, the lowest it has been since September 1981!

So why didn't the stock market sell off on the news? Because, in their twisted logic, investors seem to believe that the worse the jobs numbers get, the greater the odds for more monetary stimulus from the Federal Reserve. In fact, if the jobs numbers had been strong, stocks probably would have sold off.

The Fed's Open Market Committee will meet this Wednesday and Thursday. The Fed will then provide its economic projections and Chairman Bernanke will hold a press conference. Investors will be listening carefully and hoping for more stimulus. Chances are good that something (perhaps QE3) is on the way. It remains doubtful, however, if it will do much good. After all, high interest rates are not what ails this economy. The Fed's announcement might boost stocks, but only temporarily. With Europe facing recession, growth slowing in China, and the U.S. economy stuck at less than 2% growth, the returns from more monetary stimulus could be meager at best.

Stocks Rally on ECB, Jobs, and ISM

Another day, another rally fueled by a central bank. Just a few weeks ago, Mario Draghi, president of the ECB, promised to do whatever it takes to defend the euro. Today, he announced a new "unlimited" bond-buying program dubbed outright monetary transactions (OMTs). Draghi said the ECB would focus on buying bonds that mature in one to three years. There are some hurdles that must be cleared before the ECB executes these so-called OMTs so it isn't entirely clear just how much money the ECB will throw into troubled economies. Other than giving us a new acronym, however, it is unlikely that the ECB will be able to prevent a recession in the European Union.

Stocks got a further boost from better-than-expected numbers about the U.S. jobs market. The ADP report showed a gain of 201,000 jobs in August; and the July estimate was revised up by 10,000 to 173,000. In addition, initial jobless claims fell to 365,000 for the week ended September 1. Both the ADP jobs report and initial jobless claims are on an improving trend.

There was more good news. The ISM services index came in at 53.7 for August, which was better than expected, better than the July estimate, and more importantly, better than the critical level of 50. This means that the services sector is expanding. This is especially critical since the manufacturing sector has been contracting for three months in a row.

As welcome as today's rally is, investors should remain cautious. After all, in the long run, how well the stock market does depends on corporate profits and the health of the overall economy. There is good reason to worry about both. For example, FedEx Corporation recently reduced earnings guidance for its fiscal first quarter, which just ended on August 31. Management blamed the weak global economy. Because FedEx's customers include most of the world's corporations, it is a bellwether of how the business sector is doing. As for the economy, it remains stuck at below 2% annual growth. What's worse, things are even deteriorating in the world's strongest major economy. A key manufacturing index in China fell to a nine-month low.

Despite the need for caution, stocks could still move higher. Tomorrow we get the all-important nonfarm payroll figures. The market is expecting to hear that 130,000 new jobs were created in August. Given today's ADP number, that expectation appears easy to beat. As for the unemployment rate, the expectation is that it will remain steady at 8.3%.

President Barack Obama addresses the Democratic National Convention tonight. When he takes the podium, he will already know what tomorrow's payroll announcement will be. No doubt he will play it close to the vest, but you can bet that a lot of investors will be looking for hints of what to expect in the morning.

Markets Rally on Expectations of QE3

Fed Chairman Ben Bernanke delivered his much anticipated speech in Jackson Hole, Wyoming this morning. I have criticized Bernanke for his reluctance to make clear that the economy's problems must be addressed through fiscal reforms. Well, today he spoke up strongly about that. Bernanke said, "Uncertainties about fiscal policy, notably about the resolution of the so-called fiscal cliff and the lifting of the debt ceiling, are probably also restraining activity, although the magnitudes of these effects are hard to judge. It is critical that fiscal policymakers put in place a credible plan that sets the federal budget on a sustainable trajectory in the medium and longer runs."

Thanks, Ben, for making that clear. The market rallied in response to Bernanke's remarks, but not because he called for fiscal reforms. It rallied because, once again, the Chairman implied that more monetary stimulus could come. To critics (like me) who believe the economy's problems are not due to high interest rates, Bernanke said, "Early in my tenure as a member of the Board of Governors, I gave a speech that considered options for monetary policy when the short-term policy interest rate is close to its effective lower bound. I was reacting to common assertions at the time that monetary policymakers would be 'out of ammunition' as the federal funds rate came closer to zero. I argued that, to the contrary, policy could still be effective near the lower bound. Now, with several years of experience with nontraditional policies both in the United States and in other advanced economies, we know more about how such policies work. It seems clear, based on this experience, that such policies can be effective."

I would say such policies were not nearly as effective as changes to fiscal policies would have been, but that's beside the point. The point is that Bernanke is saying that despite near zero interest rates, he believes that even more quantitative easing will help. Does this mean he will actually do more? These two sentences from the speech answer that question. "Over the past five years, the Federal Reserve has acted to support economic growth and foster job creation, and it is important to achieve further progress, particularly in the labor market. Taking due account of the uncertainties and limits of its policy tools, the Federal Reserve will provide additional policy accommodation as needed to promote a stronger economic recovery and sustained improvement in labor market conditions in a context of price stability."

Bernanke is giving Congress cover. He says fiscal reforms are a must, but he also says more quantitative easing will help. Let there be no doubt. QE3 is on the way.

Two Interesting Papers From NBER

I noticed a couple of interesting working papers on the National Bureau of Economic Research (NBER) website. The first (NBER Working Paper No. 18075) has to do with how changes in housing wealth affect college choice. You might expect that as the value of a family's home grows, the more likely that family is to send their child to a better (and more expensive) school. Indeed, Michael Lovenheim of Cornell University and Lockwood Reynolds of Kent State University document that for every $10,000 increase in housing wealth, the probability of attending an elite public university increases by two percent. Furthermore, they found that the effect is strongest for the lowest income homeowners. However, their study was limited to the 1993-2003 time period, which is well before the housing bust began. It would be interesting to see what has happened to college choice now that so many homeowners are under water on their mortgages. It would also be interesting to see what is going on at the very expensive elite private universities. I suspect only the very poor and very rich are able to attend these kinds of schools. The very rich, of course, don't really care how high tuition goes. They are more than happy to write a big check to send Johnny to a top school. As for the poor, they are eligible for all kinds of grants. (Harvard, for example, waives tuition for students coming from families that make less than $60,000 per year). As is usually the case, it is the middle class that gets squeezed. They are considered too well off to qualify for grants, yet they are not well off enough to be immune to the pain of writing a large tuition check.

The second paper (NBER Working Paper No. 18035) has to do with how recent recessions have affected the income of the wealthy. Conventional wisdom says that the wealthy are immune to recessions. No matter what happens, they continue to roll in the big bucks. Indeed, the authors, Fatih Guvenen, Serdar Ozkan, and Jae Song argue that in past recessions, lower income individuals suffered larger drops in income than did the very rich. They find, however, that just the opposite occurred during the most recent two recessions. I suspect the authors' findings may be related to sources of income. For example, the very rich are more likely than the poor to generate a substantial amount of income from interest, dividends, and capital gains. The most recent recessions, of course, have decimated investment income. With interest rates so low, interest income has all but disappeared; and income from dividends have not made up for large capital losses. Some people might applaud the low interest rate environment and the toll it is taking on wealthy savers. They should not rejoice. Low interest rates punish every saver (rich or poor) who is trying to plan for the future.

Housing Market Improves Marginally

There has been a lot of talk in recent weeks about the improving housing market. One of the most closely followed indicators, the S&P/Case-Shiller Index, came out today. The results were consistent with the thesis that the housing market is improving. The 20-City Composite index showed marginal improvement on both a month-over-month and a year-over-year basis. Indeed, the numbers have been improving for five months in a row. (See the tail end of the chart above.) Because Case-Shiller is delayed by almost two months, the most recent figures reflect sales in June. As a result, it is entirely possible that the housing market is actually stronger than what the latest numbers indicate.

Keep in mind that Case-Shiller does not examine new home sales. It examines repeat sales of existing homes only. Since the existing home market is much larger than the new home market, the improving figures are all the more encouraging. Despite the improvement, however, the gains are minuscule and the index remains depressed. In fact, the year-over-year gain was less than one-half of one percent. The Case-Shiller index remains 32% below the all-time high set in April 2006. According to the index, on average, homes purchased after June 2003 are now worth less than they were then.

Despite the most recent improvements, housing prices are not about to escalate. The most we can say for now is that the declines might be over. We would need to see much stronger job creation before any meaningful housing appreciation occurs.

A (Tall) Tale of Two Armstrongs

This has been a tough week for folks named Armstrong. First, Lance announced that he was giving up his fight to prove that he didn't take performance-enhancing drugs. He was immediately stripped of his seven Tour de France titles. Those victories will be awarded to the "clean" runners up, no matter how deep they have to go to find them.

After the news about Lance, we learned that Neil passed away. Of course, Neil is famous for being the first man to walk on the moon. But soon after Neil's death, it was revealed that he, too, had dabbled with performance-enhancing drugs. Some experts believe this gave him an edge, allowing him to beat Buzz Aldrin out of the escape hatch of their spacecraft. It seems that Neil will be stripped of his title. From now on Buzz will be known as the First Man to Walk on the Moon, assuming of course that he was clean.

Speak the Truth Ben

On August 1, Darrell Issa, Chairman of the Congressional Committee on Oversight and Reform, wrote a 10-page letter to Ben Bernanke, Chairman of the Board of Governors of the Federal Reserve System. In this letter, Issa asked 22 specific questions about the economy and what it takes to bring it out of its current malaise. Issa extensively cited the opinions of Allan Meltzer (an economics professor at Carnegie Mellon University), David Stockman (former Director of the Office of Management and Budget), and Andy Kessler (a noted investor). All three individuals have been critical of Federal Reserve policy.

Bernanke's answers to Issa's questions are revealing, often more for what they don't say than for what they do say. For example, in his first question, Issa asks if forcing interest rates even lower than they already are will do much good to promote growth and reduce unemployment. Without actually saying so, Bernanke implies that the answer is no. Issa's next three questions are about bank reserves. He wants to know if these reserves are excessively high and if they are helping the U.S. economy. Bernanke dances around those questions and instead focuses on how reserves got so high. Reading between the lines, however, it seems that he thinks that, yes, reserves are too high and, no, high reserves are not doing much good to help the economy. 

Another point that seems to come through loud and clear is that the Fed's so-called dual mandate (maximum employment and stable prices) is making the Fed's job extremely difficult. Of course, Bernanke does not say this directly. Nonetheless, he seems keenly aware that pressure to maximize employment today is increasing the risk of significant inflation tomorrow.

The Fed Chairman is clearly caught in the middle of an ideological debate taking place in Congress. Democrats want him to continue doing whatever it takes to reduce interest rates and maximize employment. Republicans want him to admit that current monetary policy risks significant inflation and that it is no longer doing any good anyway. Republicans want Bernanke to say loud and clear that the economy's problems must be addressed through fiscal policy.

Indeed, it should be crystal clear to every observer that the Fed has done enough already. It has ballooned its balance sheet and it has driven interest rates to historic lows. It is impossible to believe that the economy is suffering from excessively high interest rates. It also impossible to believe that reducing rates even further will do any good. On the contrary, low rates are punishing savers (especially older Americans who tend to keep their capital in bank accounts) and increasing the risk of future inflation. Perhaps Bernanke finds a need to be "political" when responding to inquiries from politicians. It would be refreshing, however, if he'd simply say what he really believes.

Hanke's Prescription for Tight Money

In a forthcoming article in Globe Asia, Steve Hanke argues that, contrary to popular belief, the money supply in the U.S. is tight and that this is keeping the economy from growing. He reaches this conclusion in his article, Money: West vs. East, by looking at the combined liabilities of the central bank and the banking system. He says many economists make the mistake of focusing on the former and ignoring the latter. What's key is that the state money supply is dwarfed by the bank money supply.

Sure enough, state money has almost tripled since the collapse of Lehman Brothers in 2008. This is because the Federal Reserve has flooded the economy with dollars. At the same time, however, bank money has contracted thanks largely to new regulations and increased capital requirements. Indeed, Hanke shows that the bank money supply, which makes up more than 90% of the total supply, has shrunk almost 10% since the Lehman crisis.

Hanke's best solution is to relieve the banking sector of some of the onerous regulations imposed since 2008. He recognizes, however, that this can't happen quickly enough. Therefore, he prescribes a more immediate remedy. He says the government should borrow short-term money from the commercial banks and use the proceeds to purchase long-dated government bonds from the public. In effect, the government's net debt obligations remain the same, but the average duration of its debt decreases. When the government buys debt from the public, that money gets deposited into banks. As a result, this action increases the money supply without increasing net government debt.

This all sounds a bit like quantitative easing, but Hanke argues it is very different. With QE, the purchased bonds land on the Fed's balance sheet. They don't disappear. With his recommendation, the bonds are purchased directly by the government and are simply canceled out.

With interest rates so low, perhaps it would be better for the government to borrow long term from the banks and use the proceeds to buy back short-term bonds. Duration will rise, which does not seem like a good thing at first--unless, of course, you expect interest rates to rise in future periods. An outcome that appears quite likely.

Rudisha is the Greatest

Perhaps it's true that nothing is certain, but picking David Rudisha to win a gold medal is about as certain as anything gets. He broke the world record, too. I can't wait to see a sub 1:40 800 meters.

Track Starts Friday, But Don't Forget the Jobs Report

The world's attention (and mine) has turned to the Olympics. The most outstanding performance so far was Mr. Bean's during the opening ceremonies. However, I'm really looking forward to the track & field events, which begin on Friday, the same day that July's jobs report is released. Economists are expecting an increase of about 100,000 in nonfarm payrolls. They also expect the unemployment rate to remain steady at 8.2%. However, last week's GDP figure portends weaker results. Real GDP increased at an annual rate of just 1.5% during the second quarter. This beat the expectations of some economists, but fell well short of the revised 2.0% growth figure for the first quarter, indicating a general slowdown in economic activity from Q1 to Q2. Particularly worrisome was the anemic 1.5% growth in personal consumption expenditures. That was down from 2.4% in Q1. Expenditures on durable goods actually fell 1.0%.

We'll get a better idea of what the jobs report might look when the ADP Employment Report comes out tomorrow. Although the ADP report is based on actual payroll figures, it does not always accurately predict what the nonfarm payrolls might look like. Over time, however, there is a strong correlation between the two. 

Initial jobless claims come out Thursday and the ISM Indexes will be released on Wednesday and Friday. These also have the potential to move the markets. The former gives us an indication of layoffs. While many companies are still reluctant to hire workers, layoffs appear to have slowed. As a result, initial jobless claims could be better than the expected 365,000. As for ISM, the manufacturing index is expected to come in around 50 while the services index is expected to be a bit stronger. Yet these are extremely weak expectations since any number below 50 suggests contraction. 

The S&P 500 rallied 3.6% from last Wednesday to Friday. That's a nice move, but the gain had nothing to do with outstanding economic results or corporate profits. On the contrary, the economy is still struggling and corporations are reducing guidance. But stocks are rallying on hopes that European leaders will finally get serious about addressing their problems and that the Federal Reserve is about to initiate a new round of quantitative easing. Rallies based on these kinds of expectations are likely to fizzle out. 

As for the Olympics, nothing is for certain. Yet if I had to put my money on just one athlete, it would be David Rudisha of Kenya in the 800 meters. He is the current world record holder. One of these days he may become the first man to break 1:40. 

Improving Jobless Claims Hide Real Story

A number of pundits argue that President Obama's reelection prospects rest largely on the employment market. Some predict that unless the unemployment rate falls to below 7.0% by November, an unlikely outcome, he won't get reelected. Today we learned that initial jobless claims jumped up 34,000 to 386,000 for the week ended July 14. Despite the increase, the Obama camp can at least make a case that initial jobless claims have improved significantly since they took control of the White House in January 2009. The number peaked at 667,000 for the week ended March 28, 2009, but as shown in the graph below, things have certainly been moving in the right direction ever since.

Unfortunately, the situation looks much worse when you examine the employment participation rate. This figure has dropped from 65.7% in January 2009 to just 63.8% in June 2012.

To put this decline in context, the civilian noninstitutional population over the age of 16 totaled 234,739,000 in January 2009, of which 154,236,000 million were in the labor force. Since then, the population has grown by 3.6% to 243,155,000, but the labor force has grown by just 0.6% to 155,163,000. In other words, had the labor participation rate remained constant, there would be approximately 4.6 million more individuals in the labor force.

Where did all these people go? They simply dropped out. Because the employment market is so bad, some gave up looking for work. Others "chose" to retire early. Still others decided to stay in school, hoping things would improve by the time they got yet another degree. The official unemployment rate of 8.2% is bad enough, but if we were to account for the missing 4.6 million, the unemployment rate would be a much higher 10.9%. It is not the improving trend in initial jobless claims, but the deteriorating labor participation rate that tells the real story about the dismal state of the U.S. employment market.

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The Fed is Willing But Unable; Congress is Able But Unwilling

Ben Bernanke answered questions from the Senate Banking Committee today. A few items really stuck out. The first is how obvious it should be to everyone, even the politicians, that economic problems in the U.S. cannot be solved by tweaking monetary policy. They can only be addressed by fiscal policy. The second was how hard some of the committee members tried to change the subject. Instead of focusing on important economic problems here in the U.S. and how to solve them, members with their heads stuck in the sand chose to attack banks for manipulating LIBOR. They wanted to know what the Fed was doing about this; as if it could do anything.

Economic problems in the U.S. have nothing to do with interest rates being too high. They have everything to do with the so-called fiscal cliff, something only Congress can fix. Perhaps the most enlightening moment was provided by Senator Charles Schumer of New York. Addressing Chairman Bernanke as if he were a bad schoolboy who had not done his homework, Schumer first forced Bernanke to admit that the Fed was not out of tools then he told Bernanke to go back and do his job. Why? Because Congress refuses to do its fiscal job.

The Increasingly Elusive Level Playing Field

According to finance theory, a stock's price at any moment in time represents the present value of future expected cash flows. Prices fluctuate because investors disagree on what those cash flows will be or at what rate they should be discounted. When new information hits the market, stock prices can exhibit tremendous volatility.

As most investors know, it is extremely difficult to earn excess returns by relying solely on publicly available information, yet it is very easy to make a lot of money by relying on material and non-public information; what is often referred to as inside information. The problem, of course, is that using inside information is illegal. As a result, some investors looking for an edge try to access material information that is not necessarily coming from "inside" the corporation. Today's New York Times provides an excellent example of hedge funds operating in this gray area.

In Surveys Give Big Investors Early View From Analysts, Gretchen Morgenson explains how some of the biggest hedge funds are getting an early peek at what analysts think about the companies they cover. Morgenson claims that certain documents actually "state that the goal is to receive nonpublic information." What's worse, she says that documents state that surveys filled out by analysts for hedge fund clients "allow for front-running analyst recommendations."

While it is not clear if this practice of surveying analysts constitutes a violation of law, it certainly adds to the suspicion and unease that many ordinary investors share that the stock market is not operating on a level playing field. Hedge funds, in particular, are using more and more sophisticated technologies that allow them to buy or sell large amounts of stock in milliseconds, before other investors can access or process information. This explains in part why so many retail investors are either out of the market entirely or investing solely through mutual funds or exchange-traded funds. Morgenson's article will no doubt prompt regulators to ask a whole lot of questions.

A Buyout is RIMM's Best Hope for Survival

Research in Motion is the worst stock recommendation I have ever made. The company introduced one of the greatest technological devices ever invented, yet it squandered its market-leading position and it is now in danger of going out of business. Its demise is due almost entirely to mismanagement. RIMM was previously run by co-CEOs, a management structure that was doomed for failure. And while Apple and Samsung came out with generation after generation of new devices that wowed consumers, RIMM kept promising that it was working on something big. That promise is now ringing hollow.

Yesterday's (lack of) earnings announcement was extremely disconcerting. Revenues for the first quarter of fiscal 2013 plunged to $2.81 billion from $4.19 billion in the previous quarter. The company reported a net loss of $518 million or 99 cents per share. However, believe it or not, the subscriber base actually increased marginally and cash, cash equivalents, short-term, and long-term investments increased by more than $100 million during the quarter to $2.25 billion. That comes out to almost $4.30 per share.

RIMM is banking its future on the BlackBerry 10. Management said yesterday that this new platform will be available during the first calendar quarter of 2013. This announcement is being interrupted as a delay. After all, the company previously said that the BlackBerry 10 would be launched during the second half of fiscal 2013. The more important concern is whether the BlackBerry 10 will live up to expectations and, even if it does, will that make a difference. RIMM has demonstrated the device to developers, many of which were duly impressed; however, even if the BlackBerry 10 blows the iPhone out of the water, it may be too late to save the company.

It is becoming increasingly clear that RIMM's best chance for survival depends on it being acquired. In the past, the company turned down a number of offers. This time, it is actively seeking strategic alternatives. I would think that there are a number of companies that would be interested in getting access to RIMM's patents, international distribution channel, and its secure network. As always, it's just a matter of price. Given the company's cash horde and lack of debt, a 35% premium to the current market price would cost a potential acquirer only about $6 per share out of pocket.