The Big Picture

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• Panzner Insights
• (Not so) Golden Rules About Investing (& Not Investing)
• WSJ/NBC Pollsters Discuss the Debate Results
• India’s Flash Crash
• Ritholtz’s Rules of Investing (part I)
• 10 Weekend Reads

Panzner Insights Posted: 06 Oct 2012 02:14 PM PDT After almost six years, 2,200 posts, and eight million page views, I’m moving on from posting regular updates at Financial Armageddon so I can devote my energies to my new members-only website called Panzner Insights, where I’ll be focusing on markets, economics, and geopolitics. Here is a post from the new site. Thanks, Michael ~~~ Housing: Plenty of Reasons to Be Pessimistic (Source) There's plenty of debate about—and money riding on—the question of whether we are in the midst of a sustainable recovery in the housing market. Nobody knows for sure, of course, but there are plenty of reasons to be pessimistic. For one thing, the supply of homes, in terms of what is currently on the market and what is potentially for sale whether or not prices rebound further—the so-called shadow inventory—remains significant relative to demand, even though data from the National Association of Realtors (NAR) shows that inventories of existing homes are back to where they were eight years ago. Aside from the question of whether developments that have occurred since then—including the fact that their are more ways to sell property than by going through a broker—have distorted the inventory calculation, the composition of sales has changed from what it was. Nowadays, a much greater share of transactions are in the "distressed" category than before the bubble burst. Given that more than 20 percent of sales are foreclosures and short sales makes the current ratio look healthier than it is in comparable terms. Needless to say, shadow inventory is far greater than it was during the go-go years, when people were happy to remain long despite a booming market. With prices having fallen sharply since then, we now have a situation akin to those seen in other post-collapse markets: Holders can turn seller on a heartbeat as prices move closer to what they paid or owe on their mortgages. Given that more than 20 percent of mortgagees are underwater, that represents a sizable overhang. The tide of past, present, and future foreclosures—actual and de facto—has also left lenders with substantial holdings of "real estate owned" (REO) properties that will undoubtedly be offered for sale at some point. These are not voluntary investments being held for the long-term; they are unwanted assets that are costing money by the day to finance and maintain. According to HousingWire, nearly half of mortgage giant Fannie Mae's REO holdings are unable to reach the market at present. It's not just about supply, however. Demand is significantly less than it used to be for a variety of reasons, most notably because it is much harder to get financing now than it was when the property market was booming. Despite some recent loosening of credit conditions and ultra-low mortgage rates, anecdotal and other reports make it clear that lenders are generally unwilling to grant loans except on stringent terms to the highest quality borrowers. But even if you discount the fact that traditional home buyers are having a difficult time borrowing the money they need to buy a home, it's apparent that other factors, including societal shifts, are undermining demand—and will likely continue doing so for the foreseeable future. Number one among them are economic conditions in the post-crisis era, which are having an adverse affect on prospective homeowners' willingness and ability to take the plunge. A structurally weak employment market, where temporary and low-paid services jobs comprise the lion's share of the jobs being created and where the odds of finding another, better paying, and more secure opportunity are low, is not the catalyst for people to step up and make what could be the biggest investment of their lives. Demographic factors are also playing a role. The upheavals of the past decade or so have reaffirmed the truism that growing older means trading down and taking less risk. And while ultra-low interest rates have pushed some of those who survive on their savings to invest in something other than a bank CD, real estate is definitely not the investment of choice. At the same time, broader societal changes, including more people living alone and more single-parent households, is undercutting demand for what has traditionally been a nuclear family-oriented investment. Perspectives about what really matters are evolving as well, especially among the younger generation. Whereas in the past the milestones of getting married, buying a car, and acquiring a home represented the natural progression of things when children reached adulthood, priorities have changed. A recent Bloomberg report noted that 4G wireless telephones trumped V-8 cars for the 80 million U.S. consumers born from 1981 to 2001. Meanwhile, the still-ailing post-crisis economy has convinced a growing number of young people to embrace "the age of frugality." In addition to shifting preferences, many of those who are at the lower end of the demographic scale already have a big financial burden hanging around their necks, which precludes them from taking on other big commitments like a mortgage—that is, student loans. Aside from the fact that, for many graduates, these obligations are far higher than they were, proportionally speaking, even a decade ago, the prospect of being in the hole for as far as the eye can leave a lasting impression on impressionable individuals. Policy-making in Washington and by the Federal Reserve further underscore doubts about taking big risks that might backfire. While the latter keeps reassuring everyone that it has matters under control and that interest rates will remain low for years to come, given how many promises they and other authorities have broken over the past several decades, it's not surprising that people are hesitant to count on that on those assertions going forward. Lastly and perhaps most importantly, demand is being undermined by broader-scale mood swings. People are beginning to accept that it isn't necessary to own your own home, nor is it necessarily a long-term goal. That might seem like heresy in a country where property ownership has been viewed as a God-given right, but when you consider that in economic powerhouse Germany the share of residential property accounted for by rentals is more than 60 percent in most states and 90 percent in the capital, Berlin, it's not all that strange. In sum, while it is easy to focus on the traditional indicators of supply and demand and start believing that the long-awaited recovery in the property market has arrived at last, the fact is that much has changed in the wake of the events of the past decade, a development that is likely to weigh on prices for many years to come.

(Not so) Golden Rules About Investing (& Not Investing) Posted: 06 Oct 2012 12:00 PM PDT After last week’s Rules frenzy, Cassandra Does Tokyo sent this in. Enjoy: ~~~ Trolling the blogosphere, it seems to be the season for sharing one’s so-called Golden Rules of Investing. So here goes…   Cassandra’s 25-3/4 (or so) Tungsten-Filled Golden Rules #25-3/4. Do as I do – not as I say – but do it without delay! (NB: 13F-HR’s are too late!) #25-1/2. The trend is your friend….errrr….ummm…..except when its not. #25-1/4. Whatever kind of metaphorical market animal you are (bull, coq, chicken, weasel, whatever), always remember that Pigs Get Slaughtered. #25. Buy “The Best of Breed” companies…..unless they are priced at levels preceding the moment when Pigs Get Slaughtered, or when the trend is not your friend, or I am saying the opposite of what I am doing. #24. NEVER short “Best of Breed” companies…except when Pigs Are Getting Systematically Slaughtered in other “Best of Breed” companies (but don’t get piggy puking out the pigs). #23. Cut your losses short and let your winners ride – but not when pigs are getting slaughtered #22. No one ever made a dime by panicking … unless apparently you’re following the previous rule #23 which says you should cut your losses short and let your winners ride. #21. NEVER double-down (except when you have material non-public information and deep pockets) or if you’re Ed Thorp, or if you’re playing at The Martingale Room. #20. “Systems” always stop working (Even if they DID actually work at one point). So forget about asking about their “system”: what you really want to know about is their Plans B&C for when it DOES stop working (and why they’re not using them NOW). #19. Diversify to control risk – except if you are Eddie Lampert #18. Don’t own too many names – unless you’re Ed Thorp or diversifying to control risk per the above rule #17. Invest in what you know – unless you don’t know a whole lot about those things. #16. Buy when others are (almost finished being) fearful. #15. Buy when there is blood in the streets – but only after it has dried a little bit. #14. But NEVER buy when the blood in the street is your own. (See rule #23 above) #13. Never catch a falling knife (unless you know why it’s falling and/or approximately when it’s likely to stop). Catching a rather dull falling knife, however, is OK. (NB: IF you ignore this rule and try to catch the falling knife, and discover it is hazardous, and the street becomes stained with your blood, see rule #23 above). #12. Leverage is poison! (unless you’re doing risk-parity and then it’s sorta kinda seems theoretically OK, but then again, maybe not just when yields are near zero and everyone else is doing risk-parity or has risk-off asset allocations and…) #11. Cranking up risk in order to target return when vol is low is like smoking a cigarette out of your butt-hole – it’s just stupid. #10-1/2. A great coder is worth at least six fraternity brothers. #10. NEVER allocate money to anyone who feels the need to sum their aggregate number of years experience to some impressively large number. #9. NEVER invest with anyone with an improbably-inflated CV. If he’s embellished his Starbucks-fetching experience while an intern into something rather more grandiose – imagine what he (and it will be an egotistical ‘He’) is capable of fabricating in regards to his investment strategy and performance! #8. NEVER invest with an investment manager who buys and then increases positions in less-liquid securities at higher and higher prices (unless those prices are likely to be demonstratively requited by per share growth metrics) #7. Be entirely skeptical of an investment manager who touts his self-professed superior research skills, proprietary channel checking methods, or interns sent to dumpster-dive to gain an edge. This is almost certainly first-class balderdash. #6. If your broker says you’re his first call (and you believe him) you’re an idiot. Always assume you are the LAST one to receive a “tip” or sell-side research. Prop Desks, friends&family of potentially anyone in the research publishing & distribution chain, SAC, MW all will have had the chance to act upon it before you. #5-1/2. Oh and I forgot one which is the keystone to resolving the logic flaws at the root of the conflicting rules: “One man’s momentum is another man’s reversion….” #5. If you pay an upfront load for the ‘privilege’ of investing in a fund, you’re an idiot. #4. If you invest in a hedge fund with anything less than annual incentive-fee crystallization, you’re an idiot. #3. The moment your Advisor, Letter-Writer, Investment Guru mentions “Hyperinflation” or “Government Conspiracy” – run away in the other direction as fast as you can. #2-1/2. To catch a gopher, you’ve got to think like a gopher. #2. NEVER subsidize losers with winners – unless you’re diversifying to control risk – where rule#23 will tell you to sell your losers and let your winners ride – unless the losers are “what you know” and therefore you SHOULD be investing in it – doubly-so if you have material non-public information, and especially if there is Blood In The Streets – unless of course it’s your own blood, in which case you should return to #23 and sell your losers – at least until tomorrow when you wake up and see that there is blood in the Street and you remember to be greedy when the others are fearful… #1. Never listen to other peoples Golden Rules – particularly those filled with Tungsten.

WSJ/NBC Pollsters Discuss the Debate Results Posted: 06 Oct 2012 10:44 AM PDT Veteran pollsters Bill McInturff and Fred Yang join D.C. Bureau for a hard analysis of whether Mitt Romney’s debate performance will make a dent in the polls. Photo: Associated Press Romney at Debate ‘Better Than Anyone Since 1984′

India’s Flash Crash Posted: 06 Oct 2012 10:00 AM PDT Hat tip Alphaville   Hey look, its not just the US’s capital market that have been hollowed out by HFT — India’s as well. Not quite a 1000 Dow points, but keep working on it — you’ll get there!

Ritholtz’s Rules of Investing (part I) Posted: 06 Oct 2012 07:00 AM PDT Each year on the Big Picture, the blog I call home, I update my top trading rules and aphorisms. It's a collection I have gathered over the years of my favorite trader, analyst, economist and investor viewpoints on what — and what not — to do when it comes to investing in the capital markets. Whenever I publish a list like this, someone invariably asks: "You have been at this for 20 years (and you seem to like numbered lists), what have you learned over that time?"  Fair enough. You could probably cobble together my guide from what I've written for The Washington Post. Let me save you the trouble. Here is the first half of my dozen rules for investing. (Come back next time for the rest.) 1 Cut your losers short and let your winners run: Perhaps the best investing advice ever, its sophistication is belied by its apparent simplicity. Letting your winners run generates all sorts of desirable outcomes: It allows compounding to occur, gives you the benefit of time and keeps your transaction costs, fees and taxes low. Since this rule does not allow you to take a quick profit for no reason (other than having one), it also forces you to develop an actual exit strategy. Similarly, cutting your losers short forces you to be humble and intelligent. It rotates you away from the sectors and stocks that are not working. Best of all, you are forced to admit your own fallibility — crucial for all investors. 2 Avoid predictions and forecasts: Humans are very bad at guessing what the future will bring. The academic literature overwhelmingly proves this. If you prefer anecdotal evidence, recall how many economists forecast the Great Recession (almost none), the initial reviews of the iPad (mostly panned) or even the iPhone (meh!). For your own investing, you should ignore other people's forecasts. And you should avoid making any yourself. Why? Because when investors make forecasts they focus more on being right than making money. They unconsciously shift their portfolio toward their predictions rather than what is occurring in the markets. This is a recipe for disaster. Consider how many people completely missed the huge rally since the March 2009 lows, mostly because of forecasts of another crash. They were rooting for their prediction, instead of spotting the opportunity. 3 Understand crowd behavior: The investor who understands the behavior of crowds has an enormous advantage over one who doesn't. He understands that investing often involves figuring out where the crowd is going, even if it's objectively "wrong." Recall Keynes's theoretical beauty contest, where players were not trying to pick who they thought was prettiest, but rather, select who they anticipated the crowd might pick. Investing isn't necessarily a process of picking the "best" asset class, sector or stock, but rather, selecting what the crowd is buying. Investors sometimes forget that, most of the time, the crowd is the market. (You can take advantage of this by, as Rule 6 suggests, becoming a index investor). The psychology of crowd behavior is such that higher prices attract more buyers — and lower prices create sellers. Fear of missing a rally is a powerful element; fear of losses is even stronger. 4 Think like a contrarian: The crowd can be fickle, overly emotional or even irrational. The contrarian learns to recognize when the crowd turns into an unruly mob. When that happens, it's time to stop betting with the group, and take the other side of the trade — betting against the crowd. Most people accept conventional wisdom at face value, tend toward widely accepted social mores and are uncomfortable being a lone voice of dissent. There is an evolutionary reason for this: Humans are social animals, and we have evolved to cooperate with the members of our tribe and to work with the group. But there is a qualitative difference between what the majority of rational-thinking market participants are doing and the reflexive, panicked behavior of an unthinking mob. The true contrarian can tell the difference between a crowd and a mob, a market rally and a bubble. The tricky part is the timing. 5 Asset allocation is crucial: What is your relative weighting of stocks, bonds, real estate and commodities? In the popular finance media, this gets little attention. Yet all of the academic studies show that it's the most important decision an investor makes. It's far more important than stock selection, yet that's all anyone seems to want to talk about. As we noted last summer, "Stock picking is for fun. Asset allocation is for making money over the long haul." The world's greatest stock picker would have gotten shellacked in 2008; the world's worst stock picker made a ton of money in 2009. The weighting you select for various asset classes is a function of such factors as your age, income, risk tolerance and retirement needs. It is what serious investors focus on. 6 Are you an active or passive investor: For the equity portion of your allocation, you must answer a crucial question: Do you buy indexes and garner market-level returns, or do you pick stocks (or sectors) and time the market in an attempt to beat the indices? Those who try to beat the market have a tough road ahead: Each year, 80 percent of professional managers fail to beat their benchmark. Of the few who do, once you take fees and costs into consideration, less than 2 percent actually hit that bogey. If you want to beat the market, understand the long odds that are working against you. That is why for most investors, indexing is a much better bet. In conclusion, investors need to fully understand the challenges that face them: Capital markets are about making the best probabilistic decisions using imperfect information about an unknowable future. Sometimes you have an embarrassment of riches to select from; other times you are choosing the "least-worst" option. Either way, you will never have perfect information that allows you to bet on a sure thing. There is no magic elixir. ~~~ Ritholtz is chief executive of FusionIQ, a quantitative research firm. He is the author of "Bailout Nation" and runs a finance blog, the Big Picture. You can follow him on Twitter: @Ritholtz. For previous Ritholtz columns, go to washingtonpost.com/business.

10 Weekend Reads Posted: 06 Oct 2012 04:00 AM PDT Some longer form reads to start off your weekend: • Who Destroyed the Economy? The Case Against the Baby Boomers (The Atlantic) • October Surprise? (Barron’s) • Swallowed by the London Whale: The Woman Who Took the Fall for JPMorgan Chase (NYT Magazine) • What’s Your ‘Magic’ Retirement-Savings Number? (WSJ) • Deep Thoughts With the Homeless Billionaire (Businessweek) • Jamie Dimon on the Line (Vanity Fair) see also Why Breaking Up MegaBanks Would Help Investors (naked capitalism) • Bernanke's QE3 Will Turn Out Better Than Japan's (Bloomberg) • A Guitar Maker Aims to Stay Plugged In (NYT) • How Republicans Went Crazy, Democrats Became Useless and the Middle Class Got Shafted (Truth Out) • The Trouble with Comments (Contently) What are you doing this weekend?   Poll: Does China Represent More of an Economic Threat or Opportunity Source: History Squared

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