Wednesday, February 27, 2013

Market nears all-time highs and a casino on every corner

You know with me there always has to be a but...

So where would you rather be buying stocks?  Here at the top end of our 17 year chart?  Some of the
smartest people I know are having this debate daily.  Some are on the side of the fence that says - you can't fight the Fed and maybe we're on the verge of a new bull market.  This would suggest that we're finally about to break out to the upside another 20-40% over the next 5 years and you don't want to miss that ride.  I think that this is a fairly well understood message so I won't spend much time on that side of the argument.

However, the get out of dodge crowd has some pretty compelling evidence of their own.

* Profit margins are at record levels and they tend to mean revert (however, one could argue that this is a new era for corporations as global sourcing allows margins to grow much higher).

* By traditional measures US stocks appear expensive.  Only the 1929 and 2000 markets saw higher PE's and what happened to those markets?  I'll have to back and look :)

* Trading volumes are near historic lows - it's been a low volume melt-up

* Volatility spiked last week but prior to that run-up it was at historic lows.  A lack of volatility indicates complacency which is typically a worrisome sign for market watchers.

There are a pile of other factors but I won't bore you with the details suffice to say it's worth watching because investors have been burned badly twice in the past 12 years when we've hit these levels. 

What happens from here?

A chicken in every pot has become a casino on every corner...

First of all I'm no moralist when it comes to gambling.  I remember a certain run of 9's on a roulette wheel that took an epic trip to Vegas and made it LEGENDARY.  However, it's clear that in the Northeast we are living through a serious gambling arms race. 

Governor Cuomo wants to place 4 casinos in Upstate NY - which is the fastest way to chase economic development from this area, but I digress.  Mayor Bloomberg wants to put a casino in every burrough.  Finally, Chris Christie signed the internet gambling law into effect yesterday in NJ.  Atlantic City has to try something.  For the cost of tolls and gas you can almost fly round trip from Newark to Vegas so Atlantic City has been in decline for some time. Couple that with Sandy damage and casinos scattered all throughout NY and CT and you can see the appeal to try something new.

The first step will be small - just games that exist in the casinos today - video poker, slots, etc., and only open to NJ residents.  The ultimate goal, I believe will be to bring the Vegas sports books online.  If you think the Superbowl is crazy now, wait until you can bet $20 via paypal on the toin coss from the comfort of your living room.

The increased access to gaming will continue act as a tax on the poor and those that failed Algebra 1.  It's also very short sighted because most politicians believe that the tax revenues will be incremental.  What they don't realize is the guy that used to play $80/mth in scratch off tickets might now play $100 via the internet.  The state thinks they gained 15% of $100, but in reality they may end up in the red because they lost all of the lottery money.

The horse has left the barn on this issue so I'm tilting at windmills, but it saddens me to see our states put our most vulnerable citizens at risk for the sake a few extra dollars.

Stepping down from my soapbox :)

The Sequester

I think Washington is getting the message that the American public is tiring of all of these dramedies relating to budget/debt ceilings/etc.  However, while I have no unique insights, I do believe that they are going to let the sequester take place (for the record when using it as a noun, it's the sequester, when using it as a verb it's sequestration). 

However, I do expect a "grand compromise" to be announced sometime after 3/1 and before the 3/27 deadline required for a Continuing Resolution to keep the lights on in Washington.

The impact will be limited initially, but the impact of sequestration could be very real for some segments of the government.  Here is one minor example of the way a cut to federal funding impacts your bottom line.  The Federal Government created a program many years ago to promote the education of children with special needs.  This program, IDEA, currently serves over 500,000 students in the US.  When Congress created the program they promised to fund 40% of the local cost.  Today, they currently fund about 17% of those costs and while many have pushed for full funding that seems like a lofty goal in today's Congress.  So, that 17% of Federal Funding is now going to be subject to the sequester and instead of funding 17% of the cost of the program (when they promised to fund 40%) they will fund 16% of the program (a reduction of nearly $1 billion).  Costs for these programs are not declining, so the local burden for these programs will grow.  This takes money from other budget line items like instruction and materials or leads to higher property tax rates. 

I would argue that it's all coming from the same pool of money (my combined tax bill - state, federal, local) so whether the Federal government collects the tax or the local school collects the tax it makes little difference.  However, if you know a teacher that is laid off due to timing differences in revenue collection or if you are an employee fearing a furlough, this will seem very real to you.  The drag on the economy could be significant as people start curtailing spending "just in case" their job is in jeopardy.

If the consumer experiences a slowdown then we could slip back toward recession which I'll touch on in my next post.

So, in summary - the sequester happens, but expect a grand compromise on about 3/15 to keep the government going.  There will be some higher taxes, there will be some spending cuts and there will be some changes in the assumed growth rate of costs.

And now you can ignore the rest of the chatter on the news for the next 2 weeks.


Monday, February 25, 2013

Weekend round up...

It's amazing that the stock market's fortunes are tied to Italian elections but that seems to be lead story this morning.  The initial thought that a market friendly fresh face was going to sweep the elections but then the numbers actually started coming in and it was Berlusconi once again.  It will take some time to shake out the details but the Italian market was up 4% this morning and it's now in the red. 

So a butterfly flapped it's wings in China and that must explain the 40 cent jump in gas prices, right?  I offered up a couple of possible explanations last week but admittedly the standard excuses (Brent/west texas spread, refinery shutdowns, weak dollar) are all pretty lame.  Here's a new one though - Oil rigs in the Gulf are being shutdown by malware that has infected their computers.  Is this some new front in a global cyberwar?  Are the Chinese shutting down our oil rigs to damage our economy?  While this would make a great episode of "Homeland" it's not quite as sinister as that.  Many of these rigs are isolated from the traditional internet so workers tend bring their own USB drives.  Unfortunately, many of these workers tend to make some poor choices when it comes to web browsing and they download pirated music, tv shows, movies and other "items".  When they plug in their USB on rig - bam - the malware infects the main computers.  To date it sounds like the malware has just been a nuisance, but if someone puts two and two together there could be the potential to cause real damage one day.  See the gizmodo article here...

Stats of the day: If current trends hold, within a few years less than half the U.S. adult population will be married.  In 1960, nearly three-fourths of adults 18 and older were married. By 2010, that number had plummeted to a bare majority, 51 percent.

In 1960, the most- and least-educated adults were equally likely to be married. Now, nearly two-thirds of college graduates are married, compared to less than half of those with a high school diploma or less.

I'm admittedly out of the loop on Facebook.  I spurned it as a some kind of "People Magazine" filled with photos of people you once knew.  Then, I watched the demographics shift - Facebook was becoming full of older people - and I saw the writing on the wall.  Unfortunately, it is a powerful tool for marketing a local business so I'm on there again (see

However, if you've ever wondered why people in the know despise Facebook, just look at the hoops you have to jump through to protect yourself.

1. Protecting your future posts

"A quick note on tagging. When you tag any of your friends in a photo, check-in, update or any other activity, they can then see that content irrespective of the audience selector setting. By default, their friends can see it too, which is why people you don't know may sometimes comment on your status or one of your pictures. You can disable this behavior using the "Custom" option from the audience selector."

2. Protecting your past posts

"Click the cog icon on the toolbar (at the top of every Facebook screen), then choose "Privacy Settings." On the next screen select "Limit Past Posts." Read the confirmation message and select "Limit Old Posts" to restrict everything you've ever posted to friends only.

 3. Protecting yourself from your friends

Of course, your own updates are only half the story on Facebook. There's all the stuff your friends are posting on your Timeline and tagging you in, from embarrassing events to incriminating photos. All these updates and pictures belong to your friends, which means they control the audience—and who can find them on Graph Search. Still, you're not totally powerless. You can prevent these posts from appearing on your own Timeline, and restrict the ways in which you can be tagged. This in turn limits your exposure on Graph Search.

Open your "Account Settings" page from the cog icon drop-down menu at the top of any Facebook page, then choose "Timeline and Tagging." From here you can set up a "review posts" feature that lets you approve or block any attempts to tag you. You can also specify who is able to see posts you're tagged in, and posts on your own Timeline.

Good luck navigating this minefield.  No wonder everyone under 21 is snapchatting instead.


Tuesday, February 19, 2013

The "Spanx" Recovery

I recently saw a profile of the 40 yr old billionaire founder of Spanx.  Her innovative use of spandex has allowed millions of women (and now men) to skip that trip to the gym and have an extra slice of cake because the Spanx will hide all of your flaws.

Well, that feels a lot like watching the stock market hit new cycle highs every day.  Stocks have opened the year on a tear again this year (the third year in a row) without any real catalyst.  Gas prices are soaring and Walmart is wondering "Where are all the customers?", but have no fear the world's central banks will act as Spanx for the global economy and keep the markets marching higher.  Many, many indicators look just like 2007 - high complacency, low volatility, everyone on one side of the trade.... well, we remember how that ended up. 

I don't have a specific catalyst in mind but the market has moved in one direction without a catalyst and it may not need one to reverse course.  As Goldman said today - There was no obvious catalyst and there was no bullish data, but stocks went up.  Sometimes it's best not to look a gift horse in the mouth.

If fundamentals mattered you might care to take note of the fact that freight shipment volumes have fallen for 4 straight months and are back to their lowest levels in 2 years.  However, that would imply that the market cares about what is really happening in the real world.


$4 gas is back, Jack

The media seemed to catch wind of the fact that gas prices have been on a steady march upward for the better part of a month when the price at the pump topped $4 again.

Yes, nationally the average price of a gallon of gas is still below $4 but in the major population centers, Boston-DC and the West Coast $4 has been the norm for the past week or so.

As my astute 10 year old asked the other day, "Why is the price of gas going up again?".

In the past it's been easy to point to something like a war, a threat of war, a hurricane, etc., to explain the spike in prices, but this time it's different.  There is no single bogeyman to blame.

I'll start by describing one city in one country.  In India the rate of car ownership today is about 85 cars per 1,000 people.  Compare that to a developed country like the US where we have 812 cars per 1,000 people.  Now remember that there are 1,240,000,000 people in India and while they may never get to a ratio of 800 cars/1,000 people, they are adding nearly 500,000 cars per year to the streets of the capital New Delhi every year.  Oh, and remember the rate of car ownership in that other sizable Asian country is also just 85/1000 people.

The point is that demand for oil is going to remain high for the foreseeable future and no matter how many Tesla's we buy there will be 100 Indians or Chinese buying a traditional gas engine (so they can sit in horrific traffic).

I mention this because I think it is important to understand that we are entering a period of persistently high gas prices regardless of our own production efforts.  However, this merely provides a baseline, it doesn't really explain gas spiking as it has in the past month. 

The steady refrain that I keep hearing is that the current spike in prices is due to oil prices and refinery shutdowns.

Well, the oil price argument falls flat in the face of facts.  West Texas crude was about $96.10 a month ago and it's $97 now.  Yes, the price of a barrel of West Texas oil is higher today than it was for much of 2012, but it's not meaningfully higher.  The average price in 2012 seemed to be between $85 and $92/barrel for much of the year.  Now for those of us on the east coast Brent Crude is the primary pricing mechanism to watch and Brent crude has basically flat lined for a year.  It was $118 a year ago and it's $118 today.  One of the issues we are going to have come to grips with in the future is that while the US is now producing a tremendous amount of oil, it is very difficult to get that oil to all of our refineries.  Thus, we are likely to have wide spreads in oil and gas prices around the country for years to come.

The refinery issue seems to be a convenient scapegoat.  There have been many refineries that have been operating at a limited capacity after Sandy.  There are also many refineries that tend to go offline at this time of year to retool for the summer driving blends.  There appear to be one or two unscheduled shutdowns but they are not enough to drive prices up 10% on their own.

Other factors - I suppose we should mention Mideast tensions although that seems like it's actually cooled off in the past month.  OPEC has cut their production targets, but with Brent at $118 you'll get lots of cheating by their members.  Finally, the US dollar has weakened a bit in the past month and that is likely a factor.  A serious showdown in Washington over the Continuing Resolution or the Sequester will likely further weaken our currency (and drive up gas prices).

So, I guess what I'm saying is --- there is no good reason for this move in gas prices.  There are a number of issues that are all convening to impact the price of a gallon of gas - OPEC production, refinery shutdowns, persistently high oil prices, weaker US dollar - but none of them alone should cause a 10% spike in prices.



Sunday, February 03, 2013

Apparently, there is a sporting event going on?

The media remains obsessed with the Dow Jones Industrial Avg and arbitrary levels like 14,000 despite the repeated efforts of others to get them to focus on broader measures like the S&P 500. Well, that's neither here nor there, because the Dow's back over 14,000 and that means it's all happy days again.

I won't bore you with all of the details of the signals that I'm seeing now, I'll leave you with one of the easiest to remember.  When the whole world is zigging, you want to zag and when Barron's (the  Wall St Journal paper for weekend warrior investors) puts out a cover stating "New Highs coming!!" you had better have your game plan in place.  Couple this with a Paul Krugman piece that basically says the economy is getting ready for lift off and I getting nervous.  No one wants to hear it again, but Europe is slowing again and will likely cause some major headaches for US policymakers in the next 6 months. I'll have some more big picture thoughts in coming days.

In the era of Chinese hacking - in the last week the NY Times, Wall Street Journal and Twitter were all hacked - password are increasingly important.  I actually think that the next big thing is password generation/authentication but I don't have the capabilities to build that myself (note to wannabe billionaires out there: get cracking on this problem).

However, I found this story on passwords and the remarkably simple nature of many so many passwords interesting.

"Last month, an analysis of leaked pin numbers revealed that about one in 10 of us uses "1234"; a recent security breach at Yahoo showed that thousands of users' passwords were either "password", "welcome", "123456" or "ninja". People choose terrible passwords even when more is at stake than their savings: among military security specialists, it's well-known that at the height of the cold war, the "secret unlocking code" for America's nuclear missiles was 00000000.

Five years ago, Newsnight revealed that, until 1997, some British nuclear missiles were armed by turning a key in what was essentially a bike lock. To choose whether the bomb should explode in the air or on the ground, you turned dials using an Allen key, Ikea-style."