Friday, November 25, 2011

Traditional Business Media and the Occupy Movement

Press coverage of the Occupy movement has shifted its focus from the financial/political issues that created the movement to the commotion, arrests and individual acts of destruction that are its byproduct. Despite this, it is heartening to see that the mainstream financial press is examining some of the issues that the Occupy has highlighted. Three months ago, the prime topic was how to reduce the budget deficit (by cutting Social Security and Medicare, but not cutting military expenditures or raising taxes). Now there's talk of the decades-long shift of assets and income from the middle class to the ultra rich, and about the strangling influence of corporate money in politics and the media.

Here are some quotes, sympathetic and not, from recent articles in Fortune, Bloomberg Business Week,, and The New York Post (owned by Newscorp/Fox).

Occupy Wall Street’s Next Step Is to Set a Reform Agenda:
By the Editors of Bloomberg Business Week, November 16, 2011
So what’s next -- for protesters in New York and around the world? They might consider a proposal of one of the movement’s leading voices, Kalle Lasn, the founder of the Canadian website Adbusters: “We declare ‘victory’ and throw a party.”
Lasn -- who warned last week that “the other side is owning the narrative right now. People are talking about drugs and criminals at OWS” -- is right that there is much to celebrate. A small group of people has imprinted on the American and global consciousness an important message that must be addressed: Inequality is growing extreme, and opportunity is becoming constricted. Although the protesters appear to have no unified agenda and plenty of complaints, that core observation has struck a chord across political and economic divides the world over.
Rather than risk losing public support through accounts of lawbreaking at their encampment, or a dwindling of their numbers as cold weather sets in, the protesters in New York and elsewhere would do well to clear their heads, refine their message and set an agenda for reform.

The real ‘1 percent’ by Michael Tanner,
The New York Post, November 8, 2011
So just who are those top 1 percent of Americans that we’re all supposed to hate?
If you listen to President Obama, the protesters at Occupy Wall Street, and much of the media, it’s obvious. They’re either “trust-fund babies” who inherited their money, or greedy bankers and hedge-fund managers. Certainly, they haven’t worked especially hard for their money. While the recession has thrown millions of Americans out of work, they’ve been getting even richer. Worse, they don’t even pay their fair share in taxes: Millionaires and billionaires are paying a lower tax rate than their secretaries.
In reality, each of these stereotypes is wrong.

Memo to "one-percenters": Look out your limos by John Cassidy, contributor, November 4, 2011
For years ordinary citizens looked on impassively as their incomes stagnated, their jobs were shipped to China, and a few lucky folks made out like medieval crusaders. Every year journalists (myself included) would point to the latest Census Bureau data showing that the top 1% of earners were taking a bigger and bigger share of the national pie. (Between 1979 and 2007, says a new Congressional Budget Office study, it went from less than 8% to 17%.) And nothing would happen.
The message from our nation's financial elite is pretty clear: They just don't get it.

Occupy Wall Street Actually in the 1% by Shanthi Bharatwaj,, November 9, 2011
According to the Congressional Budget Office's latest report, income grew by 60% between 1979 and 2007 but it did not grow evenly. Incomes at the poorest fifth grew 18%, while the richest fifth saw incomes surge 65%. The top percentile saw incomes jump 275%.
While on the subject of income inequality, why not look at global income distribution as well? According to an article that appeared in The New York Times earlier this year, America is still a very wealthy country.
The article points to some interesting data in a book called the Haves and the Have-Nots by World Bank Economist Branko Milanovic. Apparently, a typical person in the bottom 5% of America's income distribution, those who probably make $6,700 a year, is richer than 68% of the world's population.

How Inequality Hurts the Economy Bloomberg Business Week by David J. Lynch,
Bloomberg Business Week, November 16, 2011
The public discussion about the widening gap between rich and poor hasn’t been this loud since the Great Depression. Warren Buffett has condemned the disparity, Occupy Wall Street has inveighed against it, President Barack Obama cites it to justify higher taxes on the wealthy. Much of the debate, though, has focused on inequality’s moral dimension. Somehow it just doesn’t seem right that so many Americans struggle while a handful prospers. What many are missing is the actual impact rising inequality is having on the U.S. economy. Hint: It isn’t good.
Since 1980 about 5 percent of annual national income has shifted from the middle class to the nation’s richest households. That means the wealthiest 5,934 households last year enjoyed an additional $650 billion beyond what they would have had if the economic pie had been divided as it was in 1980, according to Census Bureau data.
The typical U.S. household, meanwhile, has yet to regain the ground it lost during the recession. The median income of $49,445 at the end of 2010 remains a shade below the level reached in 1997, adjusted for inflation. “Income inequality in this country is just getting worse and worse and worse,” says James Chanos, president and founder of money managers Kynikos Associates. “And that is not a recipe for stable growth.”

Interesting Occupy-related websites: (some live streaming, chats and general assembly meetings)

Tuesday, October 25, 2011

Checking out Occupy Wall Street.

I haven't been this hopeful since the day before President Obama was inaugurated.

Twice last week I dropped by Caesar Chavez Park in Sacramento to see what's happening with Occupy Sacramento, hoping to learn more about them. Thursday after work I found a few dozen people there gathered around someone talking into a very low-volume bullhorn. I left feeling a little frustrated. But on Saturday, I joined 500 or more people who marched to the Capitol. It made me hopeful to see young people leading the events.

I was impressed by Occupy Wall Street (OWS) on line. I'm way behind the technology curve, so I appreciate that you don't have to be at a particular place to be part of the cause when you've got Facebook and Twitter and who knows what else. Here are links to the national and local websites.

At work on Monday I noticed that several knowledgeable Wall Street types had written articles sympathetic to the movement. The Quotes/Resources section below will provide additional information about some of their concerns.

For the first time since early in the Obama administration, progressives appear to have framed a slogan: "We Are the 99%", that is getting attention from the corporate media. The Republicans and Tea Party have consistently been able to control the issues agenda, using the main stream media to spread their messages, whether it be fear about "Obamacare", Terrorists", "The Deficit" or any other fear.

I'm just glad that the Occupy Movement is shining a light on some serious economic issues and the behavior that has happened and is still happening in the financial services industry.

Quotes and Resources to learn more about Occupy Wall Street

"The participants are mainly protesting social and economic inequality, corporate greed, as well as the power and influence of corporations, particularly from the financial service sector, and lobbyists over government." -- from "Occupy Wall Street" in Wikipedia


We now have the most unequal distribution of wealth and income of any major, advanced country on earth. The top one percent earn more income than the bottom 50 percent and the richest 400 Americans own more wealth than the bottom 150 million Americans. -- Senator Bernie Sanders (I-VT) Six Demands to Make of Wall Street


Do they have legitimate gripes?

To answer the latter question first, yes, they have very legitimate gripes.And if America cannot figure out a way to address these gripes, the country will likely become increasingly "de-stabilized," as sociologists might say. And in that scenario, the current protests will likely be only the beginning.

The problem in a nutshell is this: Inequality in this country has hit a level that has been seen only once in the nation's history, and unemployment has reached a level that has been seen only once since the Great Depression. And, at the same time, corporate profits are at a record high.
-- Commentary by Henry Bloget, former Wall Street insider and editor of Business Insider. Lots of charts about income inequality and redistribution to the very rich.


Inside Job is a documentary that traces the evolution of the issues that culminated in the economic meltdown of 2008 that have still not been adequately addressed.


Funny The New Yorker magazine cover.


Finally, check out Jon Stewart's funny monologue on Occupy Wall Street and the media response.


Thursday, September 29, 2011

What the heck is going on with the stock market?

Last Friday the Standard & Poor's 500 Index closed at 1136.  A year ago it closed at 1134.  In the mean time, this index of the 500 largest stocks rose 20% to 1360 in May before declining.   Long-term, buy-and-hold investors broke even despite occasional massive daily swings of 2 to 3%.  

So, somebody is making money. If I had to guess who, I'd start with the nice folks that brought us the Crash of 2008. They were never really punished for the schemes and scams that nearly collapsed the world economy, so they are back at work.  
I don't like to equate the stock market with a casino, but there are some similarities.  I used to tell clients that historically the small investor was on the same side of the table as the house or big investors.  I'm not sure if this is true anymore.

When high frequency traders (HFTs, see description below) make money whether the market goes up or down, volatility becomes more important than buying a good company for the long term.

I'm concerned that the impact of HFTs and increased short selling (see below) are harming long-term investors. I'm not speaking with certifiable knowledge; it's more of a gut feeling.

I know this commentary is geekier than usual, but you should know about these two of many factors that, I believe, are negatively impacting the stock market.
Usually, when I start feeling pessimistic about the stock market and things seem like they can only get worse, it's been a sign that the stock market is about to turn around. Let's hope so.


High frequency trading (HFT) is the use of sophisticated technological tools to trade securities like stocks or options, and is typically characterized by several distinguishing features[1]:

HFT is highly quantitative, employing computerized algorithms to analyze incoming market data and implement proprietary trading strategies;

HFT usually implies a firm holds an investment position only for very brief periods of time - even just seconds - and rapidly trades into and out of those positions, sometimes thousands or tens of thousands of times a day;

HFT firms typically end a trading day with no net investment position in the securities they trade;

HFT operations are usually found in proprietary firms or on proprietary trading desks in larger, diversified firms;

HFT strategies are usually very sensitive to the processing speed of markets and of their own access to the market.
In high-frequency trading, programs analyze market data to capture trading opportunities that may open up for only a fraction of a second to several hours.[2]

High-frequency trading, (HFT), uses computer programs and sometimes specialised hardware [3] to hold short-term positions in equities, options, futures, ETFs, currencies, and other financial instruments that possess electronic trading capability.[4] High-frequency traders compete on a basis of speed with other high frequency traders, not long-term investors (who typically look for opportunities over a period of weeks, months, or years), and compete with each other for very small, consistent profits.[5]

SHORT SELLING (from Wikipedia)

In finance, short selling (also known as shorting or going short) is the practice of selling assets, usually securities, that have been borrowed from a third party (usually a broker) with the intention of buying identical assets back at a later date to return to that third party. The short seller hopes to profit from a decline in the price of the assets between the sale and the repurchase, as the seller will pay less to buy the assets than it received on selling them. The short seller will incur a loss if the price of the assets rises (as it will have to buy them at a higher price than it sold them), and there is no theoretical limit to the loss that can be incurred by a short seller. Other costs of shorting may include a fee for borrowing the assets and payment of any dividends paid on the borrowed assets. "Shorting" and "going short" also refer to entering into any derivative or other contract under which the investor similarly profits from a fall in the value of an asset. Mathematically, short selling is equivalent to buying a negative amount of the assets.

Short selling is almost always conducted with assets traded in public securities, commodities or currency markets, as on such markets the amount being made or lost can be monitored in real time and it is generally possible to buy back the borrowed assets whenever required. Because such assets are fungible, any assets of the same type bought on those markets can be used to return to the lender.

Going short can be contrasted with the more conventional practice of "going long", whereby an investor profits from any increase in the price of the asset.

Monday, July 25, 2011

How High is the Debt Ceiling?

$14,300,000,000,000.00 or fourteen-point-three trillion dollars. That's a lot of money. If you stacked one-hundred dollar bills flat, one on top of each other, one million dollars would be four feet high. A stack the size of the total federal debt would be over 10,000 miles high!! By comparison, the diameter of the Earth is 7900 miles. I repeat, that's a lot of money.

The federal debt is the total amount that the United States has borrowed from US government bond owners: Federal Reserve and other Intergovernmental holders plus foreign countries/individuals, domestic individuals, banks, mutual funds, and pension plans. Many of you know that I'm a deficit/debt geek and have been for over forty years. You'd think that I'd be delighted that this issue is finally getting the attention it deserves, but this major threat is not being dealt with in an adult way; it's making me crazy.

If you were a struggling family, you can only get out of debt by doing two things: 1) decrease spending, particularly on your biggest discretionary expense, and 2) increase income. You can only cut spending so much. You won't let your children starve. So, you get a second job to generate more income. That's the responsible thing to do.

On a national level, to make a dent in the debt or just to reduce the annual budget deficit significantly we have to do to things: 1) decrease spending on the biggest discretionary item in the budget: military, wars and weapons, and 2) increase revenue (i.e. taxes). Few in Congress have guts enough to propose tax increases, except for on million-dollar earners and oil companies. Wimpy Democrats dare not object to increases in defense expenditures or getting out of a war or two. And don't get me started on our president. I'd categorize him a liberal Republican if they weren't already extinct.

Budget ceiling theatrics isn't really about fiscal responsibility. If it were, Republicans would not have voted to raise the debt ceiling seven times when George Bush II was in office and Republicans controlled the Congress most of the time. Social Security and Medicare do need some adjustments to make them viable for our children and grandchildren. But how can you morally cut benefits for a program that mostly pays for itself and that saves many barely surviving people while NOT asking massively profitable corporations and highly paid executives to share in the sacrifice to help balance our budget.

Oh, one more thing. If it has taken you four minutes to read this, the federal debt has increased by $5 million dollars, a stack of $100 bills twenty feet high. Check out the debt clock:

Friday, May 13, 2011

Is this a Good Time to Invest in the Stock Market?

I'm regularly asked this questions by clients, friends, strangers (once they know what I do), and by myself. My answer is usually: "yes. ," but it almost never seems like a good time to invest. When it does, watch out.

I've been doing investment work for 30+ years and following the market for nearly fifty. There are always multiple reasons not to invest: wars, terrorism, economic instability, political gridlock, interest rates, gas prices, natural and man-enhanced disasters ...and finally, the stock market, itself.

As I write this today there is talk of the federal government defaulting on its debt obligations (U.S. government bonds), historically considered to the safest investment in the world. Gasoline prices (not adjusted for inflation) are nearing an all time high and gas-price hysteria has returned. High unemployment figures continue, despite a brightening economy. Japan is just starting to recover from a series of catastrophes. And, the Middle East is in turmoil, again.

If I picked ten random days from the last thirty years, I'd guess nine of those would be days when it would make no logical sense to invest--unless you planned to invest for the long-term, diversified yourself properly, kept a prudent cash reserve and avoided consumer debt. Today would be one of those nine days.

Sunday, January 30, 2011

Is the "Lost Decade" Over?

The 10-year period from 2000-2009 has been referred to as the Lost Decade. During these years, the 10-year average annualized return of the U.S. equity market (as measured by the S&P 500) was -1% (-0.95% to be exact). A $10,000 investment on Jan. 1, 2000, was worth $9,089 on Dec. 31, 2009.

To put this performance into perspective, there have been 75 consecutive 10-year periods (rolling decades) since 1926. The average 10-year average annualized return for the S&P 500 over those 75 periods was 10.8%. (Raw performance data obtained from Morningstar Principia.)

Still, the Lost Decade was only lost if you were 100% invested in large-cap U.S. stocks. In fact, the last 10-year period was one of only four such periods since 1926 in which the S&P 500 produced a negative 10-year average annual return. The other three periods were 1929-1938 (-0.9%); 1930-1939 (-0.1%); and 1999-2008 (-1.4%).

--Lost and Found by Craig L. Israelson (Financial Planning, October 1, 2010)

When I looked at my clients' statements after the dismal second quarter of last year, it was truly disturbing. This wasn't the way things were supposed to work. I've been doing this work for over 30 years and I always said, "If you have your money invested for ten years or more, it is highly unlikely that you investment will be worth less a decade later."

This hasn't happened unless there was a depression as during two earlier periods in the 1930s. Two factors: 1) untempered optimism while the market was rising and 2) startling events like 9/11 and gracefully named "credit crisis."

Similarly, if someone had said in early October of 2008, when the economy was apparently close to a total collapse, that the S+P would rise by over 50% during the next 27 months, I would have been just as doubtful.

Anyway, it's nice to see the stock market rising over the last two years, and when you replace six months of poor performance in 2000 with six months of good performance in 2010, it makes the ten year performance numbers look much better.

My point is this: if you ask me what the stock market will do during the next year, my answer is likely to be "I don't know--and if you know someone who does know, don't invest with them."