The Market Ticker

Well that didn't take long.... just got this from Fidelity....

Fidelity® Contrafund® and Fidelity® Low-Priced Stock Fund have recently reopened to new investors. This presents an opportunity to invest in two funds run by managers with decades of experience in all kinds of markets, and backed by one of the largest investment research platforms in the world.

Fidelity Contrafund (FCNTX), Fidelity's largest equity fund, is a highly rated fund* that seeks growth opportunities in any type of market size, segment, or sector. The fund is run by Will Danoff, named Morningstar's 2007 Domestic Stock Fund Manager of the Year. He has more than 22 years of investment management experience, and has run Contrafund since 1990.

Fidelity Low-Priced Stock Fund (FLPSX) is a highly rated* small- to mid-cap fund that invests in growth or value stocks priced at $35 or less at the time of investment. The fund is run by Joel Tillinghast, named MarketWatch's Stockpicker of the Decade in November 2007, and Morningstar's Domestic-Stock Fund Manager of the Year in 2002. He has more than 20 years of investment management experience, and has run the fund since its inception in 1989.

The recent market activity has resulted in some negative mutual fund performance. Please click on each fund's name to learn more about how these two funds have performed and their latest ranking information.

SOME negative mutual fund performance?  SOME?

Hilarious, especially consider the Ticker I just wrote.....

A rather "sharp" and long missive from Mish (who I happen to like) eviscerating Peter Schiff makes clear the problem with chasing "gurus" and listening to them:

"I would like to see some proof of that statement. Specifically I would like to see the average returns posted by EuroPacific clients for 2008.

I have talked with many who claim they have invested with Schiff and are down anywhere from 40% to 70% in 2008. There are many other such claims on the internet. They are entirely believable for the simple reason Schiff's investment thesis was flat out wrong."

Eek.

For the record, 2008 annual returns in a diversified S&P 500 index fund were better than that.  Bigtime negative but down 40-70%? No.  If you had an over-concentration in financials - especially the wrong ones (e.g. WaMu, etc) you could easily have "achieved" that in the US markets, but in a diversified index-based portfolio that tracks the S&P 500 (or just bought it), no.

But this sort of "performance" belies the pitfalls of having someone else run your money for you, chief among the problems being that nobody cares about it as much as you do.

Mish makes a number of good points in his screed, which I highly recommend that everyone who is a Market Ticker fan go read in full.

One of the most-important factors he cites is lack of correlation.

I'd like to back off that even a bit more and point to something that most people ignore but definitely should not - and that is beta.

What is Beta?  Beta is roughly defined as "risk".  That is, if you have a Beta of 1.0 against the S&P 500 then your portfolio loses or gains as much as the S&P 500 does.

It is my opinion that one of the first rules when figuring out where to stuff your money is what beta you are willing to accept.  Many people on Tickerforum are running leveraged trading strategies that have full-portfolio Betas of 2, 3, or even 10!  When you're right this is great - when you're wrong you get nailed hard or even wiped out.

In a bull market my goal is to maintain a beta of roughly 0.5 (that is, half as risky as the SPX) and yet obtain a long-term multi-year return of 9% or better. 

But I am "effectively" retired; I live on my portfolio and trading, and if I lose the lot or get hit with a 50% drawdown I'm done in terms of being able to maintain my lifestyle - I will either have to go back to work "full time" doing something (not because I like it but rather because I have to) or accept that I'll be a social-security dude living in a trailer (if Social Security exists in another 20 years!) OR just put a gun in my mouth when the money runs out.  Since that's not an acceptable outcome I am much more risk-averse than many.

The problem with having someone else run your money is that they can't possibly understand these issues as well as you do.  They also don't care as much as you do.  They get paid off either commissions or "profit sharing and fees" (in the case of "hedge style" investments); either way they make money whether you do or not.

In fact this is the problem with so-called "investment managers" - I've yet to see one that charges you nothing when they lose against some benchmark.  That is, if you're in an all-equity portfolio then IMHO you should not pay anything for management if the portfolio on an annual basis cannot beat a benchmark that matches the portfolio's exposure.  For many diversified large-cap portfolio strategies the S&P 500 index appears to be a reasonable benchmark.  After all, why would you pay anything for management that is less successful on an objective basis than simply buying an unmanaged index that has a one-time all-in cost in a an online brokerage of $20-50 round trip (in and out) to handle a half-million or more in funds, or in fact can be done for zero using a mutual fund company like Vanguard?

Such "management structures" are not, to my knowledge, offered - by anyone.  Various managers have solicited me over the years and all have said such a structure is "illegal".  This, by the way, is a lie - Hedge Funds have something similar in that they have high-watermarks and both performance and base fees, so clearly, such a structure is legal - at least for qualified investors.

Yet this is not offered.

Why not?

The answer is obvious and simple - no manager would survive the first time he lost against the benchmark, and most of them do.  He wouldn't get paid and would shortly be out of business.

Are there valid reasons to use a "professional manager"?  Yes.  If you simply don't have time to care for your money, then its a choice.  But again, why not simply use a timing signal like the 20/50W that I've outlined in the past and do it yourself?  We're talking about something that takes literally 2 minutes a week to watch and moves money once every few years - how much time did you say you didn't have again?  You spend more time brushing your teeth Saturday morning than it takes to run a strategy like that, and it's a monster proven winner compared to the clowns who lost half your money - or more - over the last year.

For those who want to pay for "superior performance" I argue that you damn well ought to get what you are sold or you shouldn't be charged.  There are a few managers who have consistently (in both Bull and Bear markets) beaten the indices and a handful who didn't lose your shirt (and socks!) in this latest drawdown, but you can count the ones with a consistent record of being able to do this on your fingers and toes - although they all claim they can and will.

Then of course there is the risk of getting Made-Offed.  That's catastrophic, and it happens more than you'd think when you turn over the keys to your treasure chest.  The truly bad news is that it only has to happen once to ruin you.

For these reasons I have and will run my own money, and refuse to run anyone else's, because I've proved that over more than a decade I can hit those return numbers and live off my portfolio - and I firmly believe that everyone should do it themselves rather than "hire it out."  Yes, there are times I underperform my personal benchmarks, but on average the metrics and risk levels are met, and I always know - with certainty - exactly where my money is every night.

Bloomberg is allegedly reporting that Bernanke is "contemplating" buying the long end of the Treasury Curve due to "bond market instability."

Here's what he's unhappy about:

There is nothing "unstable" about any of this.  Rates are going higher.  Why?  Gee, let's see, Obama says he's going to blow $1 trillion on a "stimulus" package, the other $350 billion of the TARP was released, the GAO says we're going to run well north of a Trillion in deficits, and people are wondering why the bond market expects the government to pay up in higher interest rates for the right to borrow more than 10% (and that's almost certainly a LOW estimate) of the total outstanding debt in one freaking year after having added 16% in the last one?

You're kidding, right?  America is acting like a subprime credit-card customer who has decided to go nuts in the local "bigbox" electronics retailer, and the market is (appropriately) reacting to that by repricing RISK.

Bernanke thinks he will simply cap the market by intervening?

Let us dwell for a few minutes on how our government financials and currency actually work.

Treasury prints up T-Bills which it then sells.  The Fed is the purveyor of currency, which it produces by buying T-bills with "newly minted" dollars, expanding the total amount of dollars in the system when it so chooses.

Ok.

The market determines all interest rates.  Yes, even the "Fed Funds" rate; if you think The Fed leads the market, you need to go study some charts.  The Fed does not set rates, it is compelled to follow the market, because if it tries to force rates to where they do not want to go it can obtain that result in exactly two ways:

1. It must provide or draw an infinite amount of money into or out of the system in order to drive and maintain it outside of equilibrium OR
2. It must crowd out all private parties from a particular area of investment, thereby allowing The Fed to effectively "take over" from private parties.

The second is non-intuitive - you need to contemplate how the markets (for anything) work for a few minutes before it makes sense.

Consider a situation where The Fed "wants" the GSE funding cost to be, say, 2%.  The market wants it to be 4%, because the market perceives more risk than The Fed would like to have it admit.

The Fed can cause the GSE paper to trade at 2%, but if it does so it will be the only buyer of said paper, because nobody else will buy at a 2% coupon.

The same thing is about to happen here.  If Bernanke actually attempts to suppress the Treasury Market's interest rates, that is, "support the long end of the curve's price", then he will wind up having to buy all, or essentially all, of the supply.  People who own Treasuries will sell to him, surmising that he is overpaying, and gleefully taking what is an "extra" profit from his hands.

If you're wondering why the commercial and consumer lending market has gone straight to hell, this is the reason.  Bernanke has interfered with the private credit market in virtually every area, and in each place where he has "supported" the price of debt instruments (suppressing yields) he has wound up as effectively the only buyer in short order.

This is bad when we're talking about the private credit markets but if it shifts to Treasuries then the game is literally over immediately, because at that point you have just created a circle jerk.

Treasury prints Ts to finance its operations but the guy who buys them is the guy who prints the money in exchange.  Therefore every additional Treasury sale is no longer a debt sale, it is an act of printing money by the Central Bank and destroys the standard of living of everyone in The United States.

This, should Ben engage in it, is a willful act of destruction of your private property rights, your wealth, and your income.  It is not an accident, it is not "necessary" and it solves exactly nothing.

It is simply an attempt to defraud - yet again - the American People, this time by attempting to "make ok" the financing of deficit spending that the market simply will not support at the price Treasury wishes to pay.

Down this road lies the near-immediate implosion of all commercial credit as there will no longer be a "fair" reference against which it can be based.  We've already tampered with the commercial paper and mortgage security markets; this will complete the "transition" from a market economy in bonds to a command economy, complete with a self-appointed King who has simply ignored the provisions of The Federal Reserve Act when it suited him.

Bernanke will literally have reached the end game where he is the lender not only of last resort, but of the first and only resort at the same time, with all of his lending "decisions" being made by fiat instead of by the market's approximation and evaluation of risk.

Once this begins expect mass bankruptcies in the commercial sector as private credit provisioning will immediately disappear.  Bernanke's ability to replace that functionality is fanciful and he will soon learn this lesson the only way the market knows how to teach it - the hard way - just as he has had every other "plank" in his Doctoral Thesis destroyed - one at a time.

No, it is not inflationary when your job disappears because the place you work for goes under; while Ben can try to replace the entirety of the private credit market I wish him the best of luck in that endeavor, given that it is some fifty trillion dollars.  How much faith will the world have in The Fed when it tries to backstop a $50 trillion marketplace with under $1 trillion in banknotes?  It has already doubled its balance sheet - but this would require expanding it by twenty five more times.

He's going to fail at this endeavor in truly-spectacular fashion.

Got ?

British-style "honest government":

"Britain was just three hours away from going bust last year after a secret run on the banks, one of Gordon Brown's Ministers has revealed.

City Minister Paul Myners disclosed that on Friday, October 10, the country was 'very close' to a complete banking collapse after 'major depositors' attempted to withdraw their money en masse.

The Mail on Sunday has been told that the Treasury was preparing for the banks to shut their doors to all customers, terminate electronic transfers and even block hole-in-the-wall cash withdrawals.

And later on....

"But 60-year-old Lord Myners was accused last night of being 'completely irresponsible' for admitting the scale of the crisis while the recession was still deepening and major institutions such as Barclays remain under intense pressure. "

Absolutely.

Not only should one lie when in government but one should keep lying as long as is humanly possible.

And people want to call our government irresponsible and mendacious?

Heh Brits - you folks need to play a little game called "1776" over there - like tomorrow.

PS: It's always worse when you lie and are later caught.  Just ask Nixon, Clinton, or your market tomorrow, which I'm sure will react very "positively" to this news.

Our futures are down more than 1% at present and the Pound is getting destroyed, no doubt because of the revelation that your government has more in common with Herr Goebbels than a representative republic.

PPS: Oh President Obama!  Yes, you.  You've made all sorts of claims about "open government."  How about some open government on what's up with those swap lines that Bernanke opened with the BOE, their status, how far upside down they are, how and when he expects to get paid back on those, and exactly how many billions the taxpayer is on the hook for - and why it was done?   You don't think Bernanke played "let's keep a secret" too, do you?

Virtually everyone agrees on two things right now.

1. The second part of the TARP, $350 billion, will not go to Wall Street bankers (in the main)
2. $700 billion isn't anywhere near enough to clear the credit markets.

The second statement is axiomatic (remember, for more than a year I've said this is a $2.5-3 trillion problem just in residential real estate) while the first is one that appears to be inevitable in any event simply because the first half was squandered and stolen, and the people aren't going to tolerate that a second time.  Washington is (rightfully) concerned about a true pitchfork-and-torch brigade if, now knowing that this happened, they go ahead and allow it a second time.

The Washington Post has an interesting article on the mess, in which they say:

The situation is urgent. Home prices are plummeting and are projected by some financial analysts to lose a third of their peak value before the market recovers. Foreclosures have skyrocketed, with an estimated 8 million families expected to lose their homes over the next four years. Meanwhile, the jobless rate jumped to a 16-year high of 7.2 percent in December and is forecast to climb higher. Auto and credit card loans are also increasingly defaulting, raising the pressure on the banking system.

"Conditions are eroding far more rapidly than anyone anticipated," said Mark Zandi of Moody's Economy.com, one of three economists who addressed Senate Democrats on Thursday. "The job market is now consistently losing 500,000-plus jobs per month, something you couldn't have envisioned eight to 12 weeks ago. Losses in the banking system over the last week or two have been much larger than people had been expecting. We're coming to the realization that these things are self-reinforcing and the problems aren't developing in a linear way. They're getting worse very rapidly."

The escalating crisis has pushed the days-old Obama administration to a critical point: Obama must quickly choose a course of action, and he must choose correctly because the options are so expensive that he is unlikely to get a second chance, lawmakers and economists said.

Let's dissect this piece-by-piece.

• "Home prices will lose a third of their peak value" - uh, more than that.  Closer to half guys.  This is not bad, it in fact is good.  The key is affordability, not price.  In a nation where there has been little wage appreciation (nor can there be when we outsource the "making" part of our economy to China, India and Vietnam) you cannot have asset-price appreciation in things people need for very long.  More on this below (the math, that is); the focus on price is not only idiotic, it's backwards.  Notice that all the programs put in place to "stop home price depreciation" in fact have done nothing but toss money down a rathole?  That's because the issue is in fact affordability, and until homes are 2.5-3x incomes (median in both cases) the spiral will not stop - no matter what you do.  That appreciation occurred due to making credit available at a below-market price for the risk taken on, and that cannot be sustained.  Math never lies but politicians and hucksters of all stripes nearly always do.
• "Conditions are eroding far more rapidly than anyone anticipated".  Uh, no they're not.  I anticipated this quite clearly, as did a lot of other people.  Mark Zandi needs to be fired for uttering that crap, along with everyone else in the media or industry who has the audacity to say anything other than "we blew it and we accept responsibility for doing so, because the math was clear and we intentionally ignored it."
• "He must choose correctly" - yep.  Obama gets exactly one shot at this, and if he gets it wrong there is a risk not only of economic depression (a near-certainty at this point) but political and economic failure of The United States Federal Government.

Now let's look at another statement:

"A healthy banking system is critical to the broader economy because consumers and businesses count on credit to pay bills, create jobs and fuel other economic activity. Without lending, the economy would grind to a halt."

Unwittingly, The Washington Post just pointed out the root of the issue and why listening to the malfeasors and fools in DC and on Wall Street will not only fail, it will destroy our nation.

You can't use credit to pay bills in a sustainable fashion.  That is, pulling forward demand is destructive to the economy and paying principal and interest ("Bills") with the issuance of yet more credit is suicidal.

Again, I return to the math.  I have seen many complex derivations of various credit models, most of which rely on integration and differential equations.  While all of this is cute (and I actually understand most of it where the "Average Joe" on the street does not) the fact remains that when it comes to economics and monetary theory all this hand waving is a bunch of noise intended to obfuscate, not inform.

In fact the economic issues can be simply explained through exponents, as I have repeatedly pointed out.

If you have economic growth of 3% over 10 years your economic output grows to 1.34 times its original size (not 1.30.)  If consumer debt grows by 5% over the same 10 years the debt load grows to 1.62 times the original size (not 1.50.)  The longer this disparity goes on the worse the situation gets.

The following chart shows what has happened with consumer credit over the last 30 years (credit to "Chart Of The Day")

Notice a few interesting points - in every recession prior to the 2000-03 one consumer credit took a dive.  Why is this important?  Because those "dives" clear out the bad debt in the system, allowing it to "reset" to a (mostly) sustainable state. 

The exponential function guarantees that this has to take place or you will (not might) have a detonation of the monetary system and government involved.  This is not open to question or debate - it is a statement of mathematical fact.

The problem we face today and have since the summer of 2007 when the bubble burst is that Washington DC, heavily-influenced by the bribery of campaign contributions and lobbying from those on Wall Street and elsewhere in the very system that led to the creation of this excess credit have done their level best to convince a bunch of Representatives, Senators, and the White House that the math can be cheated, because to admit the truth of the mathematics means that those very people are the ones who will suffer most.

See, unlike past recessions this time the overcapacity and over-expansion didn't happen in "Main Street" - most of it happened on Wall Street among the bankers, and what they "overmanufacturered" was the false "economic expansion" brought about not by mining, manufacturing or growing (the only three true growth drivers) but instead by pushing paper - an act that doesn't grow anything and in fact siphons off economic growth to feed itself.

Again, back to some of the "first principles" I've espoused in previous Tickers, such as you can find here from October of 2007:

"Let's look at this from a simple pricing model.

Let's say you have some form of debt which, on a risk-adjusted basis, should "price" at 2% higher in interest rate than the 10 year treasury bond - both 10 year obligations.

Well, if it should price at 2% higher, then that's where it does price if its honestly rated, right?

But if I'm an investment banker, and the risk is really priced at 2% over the 10, then there's no money for me to make. The market insures this; if the price is too high (return too low) then nobody will buy, and if the price is too low (return too high) then the originator of the debt doesn't need me; they'll take the extra return directly from the market.

In point of fact, this is how banks for years made mortgages! They priced their risk according to your risk of not paying them back, and then held the loan on their own books. The risk of "getting it wrong" was theirs - the free market prevented them from raping you, because you could always shop around. If they overpriced your risk, you simply would not buy. If they under priced, they lost money. Thus the price of money tended to reasonably approximate the actual risk of you not making the payments.

All this has now changed, but the efficient market has not.

So how does Mr. Investment Banker make money, if the efficient market prohibits it?

He has to find a way to misprice the risk on purpose!

If he can get someone to claim that the risk over the 10 is only 1%, when in fact it is 2%, he can pocket the extra 100 bips. Of course the people who make that happen want some of the "cheese", so perhaps he only gets 50 bips, with the rest spread around the other guys who help him out.

But unfortunately the risk-adjusted price really is 2% over Treasuries. The "bad results" don't come for months or even years later, but when they do, they are relentless - and punishing.

Once that happens we find out that in fact the risk was mispriced. The default rates are in fact higher than the claimed risk "grade" said they would be.

This is not an "unanticipated event" for those who priced the risk. In fact it is not only an expected event, it is the only way those who priced the risk could have made money from the process!

Now I ain't a lawyer, and I don't play one on the Internet, but I did run a business for more than 10 years.

When you intentionally misrepresent something in order to make a profit this nasty word that starts with "F" comes to mind.

This is the gist of all of it guys and dolls, as I laid out more than a year ago - repeatedly.  Absolutely none of this was an accident, it was an inherent and necessary part of the systematic and organized fraud that Wall Street and Washington DC perpetrated upon the public and now they want us to pay for it.

Well guess what - one way or another, you're going to.

But let's do this the right way, so that the Wall Street fraudsters don't get a disproportionate benefit.

There are many who are calling for an RTC-style structure to the solution.  That's good - provided we actually follow it. 

The RTC closed and liquidated the failed S&Ls.  If the Banks of Wall Street (and elsewhere) are going to have their bad debt taken up by the taxpayer then we must first seize and liquidate those institutions just as done during the S&L crisis.

Yes, this means the stockholders get zero.  It means the bondholders get recovery value, such as it is (and if it is) and the only people who are truly protected are depositors.

Schumer is speaking the truth when he says this could cost $2.5-3 trillion dollars, and we might not be able to finance it.  But if we're going to make the attempt we must do it in a fashion that in fact models the RTC - that is, those institutions must be seized.

See, the banks will not agree to sell "assets" at their free market price.  If they were willing to do so the problem would already be solved as they would have been sold by now and we'd be done.  No, the banks are holding out for a "higher than market" price - that is, the government eating the loss.  But there is no "government", really - who eats that is you and I.

So we know in advance that the banks will not cooperate in a free market model.  Therefore we must send in the examiners, mark everything to a market price, and determine who is below regulatory capital levels on that basis.

We then have two models we can follow, and frankly, while I prefer one of them as it preserves the firms and their public ownership, I'm willing to take #2 if that's what government deems appropriate:

1. We "cram down" the capital structure as I have described before by however many levels are necessary to restore the bank to double regulatory capital minimums.  Why double?  Because the losses aren't over - we're probably about halfway there with home price depreciation and other assets have yet to reach bottom as well. 
2. We seize the institution, wiping out the shareholders and severely haircutting the bonds.  The bad assets are placed in an RTC-like structure with the government acquiring them at the current market price, that money being used to pay whatever haircut-level the bonds are worth.  Good assets are sold and again used to retire the debt at its "haircut" level.  The firm ceases to exist entirely, and the government then "runs down" the RTC-style portfolio.

#1 involves no public money of any sort.

#2 does involve public money, but the amount would be reasonable.  While the initial outlay will be huge, the fact remains that these bonds are not worth zero, and yet if acquired at market prices (in some cases 10 to 20 cents) there really isn't much further they can fall (can't go below zero!)  Since a good number of them will be worth somewhere near market price today in time, running them down in this fashion "works" in that while it requires a capital outlay the losses will not constitute the entire amount put in.  If we do #2 we may put up a capital outlay of a trillion dollars or more, but the ultimate losses are likely to be in the few hundred billion dollar range - bad, but manageable.

I prefer #1 for a whole host of reasons, not the least of which is that it does not detonate the institutions themselves, and it leaves the bondholders with ownership - and the ability to fire management and replace them with people who will do the right thing going forward.

#2 will work, but it detonates the companies and throws far more people out of work than #1.

What we must not do, on the other hand, is "buy out" the assets at above-market prices from the banks.  That not only leaves the incompetent management in place but at the same time it guarantees horrific losses for the taxpayer and dramatically increases the risk that foreigners, who we absolutely rely on to buy our government debt, will see this as yet another instance of Ponzi Finance and tell us to bite it, precipitating a full-on currency and political crisis.

American Policymakers have operated for decades on the premise that there is no other "safe haven" and thus they can spend with impunity.  This is a premise that we would be wise not to consider solid at this point in time, as we have demonstrated over the last year and a half that our government and nation in general not only have no idea what we're doing but that we will shield fraudsters, liars and thieves from failure through the application of unlimited public funds - a political and economic policy that is incongruent with being the world's reserve currency and "safe haven" play.