The Big Picture

Economists Discuss the Federal Reserve
10 Wednesday PM Reads
ROI of Corporate Lobbying
Merrill Lynch: Market Analysis Technical Handbook
10 Wednesday AM Reads
Habits of the Bear, Bull Markets and Agency Issues
China’s ‘ghost mall’
Catching Falling Knives
Birds and Dinosaurs

Posted: 16 May 2013 02:00 AM PDT

Economists Michael Bordo, Marvin Goodfriend, Barry Eichengreen, and Allan Meltzer share their opinions on the Fed—past, present, and future.

Watch Sandra Pianalto, Cleveland Fed president, comment on how the past informs present Fed policies: http://www.clevelandfed.org/annualreport

Visit the Cleveland Fed’s channel for more videos: http://www.youtube.com/clevelandfed

10 Wednesday PM Reads

Posted: 15 May 2013 01:30 PM PDT

My afternoon train reads:

• Of course “hedge funds” lose money (Noah Opinion) see also A Professional Preps for the End of QE (Forbes)
• The Buffett Formula — How To Get Smarter (Farnam Street)
• The super soaraway Nikkei (FT Alphaville)
• Retirement: How They Do It Elsewhere (NYT)
• Even economists need lessons in quantitative easing, Bernanke style (Quartz) but see Why Hedge Funds' Criticism of the Fed May Be Right (DealBook)
• Exhuming Lehman (and looking for Signs in the Entrails) (It’s Not That Simple)
• Holder Says Leak Required “Very Aggressive Action”… Bank Crimes, Not So Much (HuffPo)
• Wall Street's gambler brain lacks moral conscience (MarketWatch)
• 10 Hotel Secrets from Behind the Front Desk (mental floss)
• The Water On the Moon Probably Came From Earth (Smithsonian)

What are you reading?

Chart of the Day

Source: Chart of the Day

ROI of Corporate Lobbying

Posted: 15 May 2013 11:30 AM PDT

click for ginormous graphic

Source: United Republic

Hat tip Fabius Maximus

Merrill Lynch: Market Analysis Technical Handbook

Posted: 15 May 2013 09:00 AM PDT

I wish I could find a public link for this:

Merrill Lynch just put out a very cool 60 page “primer” on Technical Analysis. It covers the core concepts behind technicals, including Trends, Relative Price Analysis, Price Momentum Indicators, Reversals, The importance of volume, Support and Resistance, Market Breadth
Market Sentiment, The Fibonacci Concept, and Putting it all together.

Of course, you could always go out and buy Edwards & Magee’s Technical Analysis of Stock Trends, but you get a very different read from practitioners working at a major wire house.

I have my own PDF (which I cannot post to Scribd for work product/copyright reasons), but if anyone knows of a public link, please share!

Source:
Primer: A handbook of the basics
Market Analysis Technical Handbook
Stephen Suttmeier, CFA, CMT; Jue Xiong, CFA; MacNeil Curry, CFA, CMT
We cover the basics of Trend, Momentum and other technical indicators and
methods.
Market Analysis | United States
Merrill Lynch 14 May 2013
http://www.ml.com/index.asp?id=7695_8137_47928

10 Wednesday AM Reads

Posted: 15 May 2013 07:00 AM PDT

My morning reads:

• This Bull Is Like the Tech Bubble, but Different (Businessweek)
• 63 Brand-New Quotes From Warren Buffett (Motley Fool)
• What Does Japan Mean For The Rest of the World? (Tim Duy’s Fed Watch) see also Mrs Watanabe all over the map but values not yet back to 2007 (Investing Japan’s Institutional Capital)
• Signposts: A Daily (Baker's) Dozen for Investors (Above the Market)
• For Insurers, No Doubts on Climate Change (NYT)
• CBO sees brighter economy with budget deficit to plunge to $642 billion this year (Washington Post) see also U.S. Budget Deficit Shrinks Far Faster Than Expected (NYT)
• The real IRS scandal: That 501(c)4 groups are tax exempt at all (Los Angeles Times)
• How To Have A Longer Marriage Than Kim Kardashian. (Scientific American)
• Is Apple’s iPhone really ‘dead in the water’? (Fortune)
• Facebook and ruined reputations (MarketWatch)

What are you reading?

Currencies react to Bank of Japan's recent monetary moves

Source: Washington Post

Habits of the Bear, Bull Markets and Agency Issues

Posted: 15 May 2013 04:30 AM PDT

“If you’re bullish and wrong, you usually have plenty of company. But if you’re bearish and wrong, it’s almost unforgivable.”

-Bob Kargenian, TABR Capital Management, Barron’s DECEMBER 15, 2012

The above quote from Barron’s has been on my mind for a while. I thought of it again as the markets have made a series of new highs, and the bear community has been split. Some have been “forced in,” while others have doubled down.

The context of the above was a letter to Barron’s in response to a December 1st 2012 Abelson commentary that stated “why money manager John Hussman is very bearish on stocks” (“A Real Cliff Hanger,” Up & Down Wall Street, Dec. 3)

There is an intricate set of issues here, but I want to focus on three aspects: 1) Psychology, 2) Error admission & correction, and 3) why “Other People’s Money” (OPM) agency issue is not present or understood by the commentariat — those ministers without portfolio who are the background noise to the market.

Since this rally began in March 2009, it has been disliked. I was a kid in 1973-74, so I have no firsthand recollection of how the crowd responded to the 76% bounce-back rally. 1933 was way before my time. Perhaps there was a touch of hyperbole when, back in 2009, I wrote this was the Most Hated Rally in Wall Street History®. I wasn’t present for these other similar crash bouncebacks, but I suspect the psychology was the same. Dispirited traders suffering from recency effects were overly impacted by memories of the crash. The rally left these frightened folks behind.

That emotional cognitive bias has prevented many from recognizing the turn or even committing in a small way to having upside exposure. There area great many reasons why the rally should not continue, and why it will end badly. There certainly are plenty of things to be concerned about. However, what makes investing in markets so different from other forms of intellectual debate is that we regularly get a resolution to the different arguments. We may have different timelines, and the daily action is essentially noise, but we do get a resolution. Each month, each quarter, each year, we see which argument was more pragmatically correct in terms of the outcome of various risk assets. Their progress, or lack thereof, is the ultimate adjudicator.

This is not to say that markets are never wrong — they often can be, and for extended periods of time. However, beyond the psychology we discussed above (and ad nauseum elsewhere), there comes a point were you must admit error, reverse your position, and move on.

This is where the quote above comes in. If you are running OPM, you cannot miss a 145% move to the upside. The classic quote on this is “If you are bullish and wrong, your clients are angry at you. If you are bearish and wrong, they fire you.”

Hence, our agency issue. This is what is meant by “Forced in” — managers running real assets cannot sit on the sidelines. Eventually, they either buy in or lose so much in AUM that they have effectively been fired. This is why having some form of self analysis to examine when you are wrong, to be able to determine why, and then reverse your position is so crucial to anyone who is an investor (professional or amateur).

The exceptions are the Ministers without Portfolio. These are the talking heads, the pundits and strategists who can carve out an intellectual position that proves to be wildly wrong. And they can do so without penalty.

Think about who is on TV and splling pixels on the OpEd pages. These People who have been wrong on everything from Equities to Bonds to the Dollar to Gold to Apple and back again. How is it this parade of wrong way Riegels manages to keep showing up and blathering about whatever? Is there no accountability?

The answer is surprisingly simple: This is not a bug, its a feature. They are in the infotainment business, not the asset management business. Hence, being wrong, albeit entertainingly, is part of their jobs.

I started as a trader, moved to research, eventually coming back around as a money manager. I can tell you first hand that being eventually right — Dow 6800, anyone? — only works if your are on the sidelines yelling at the players. Your obligations completely change once you step onto the field of battle. When you are responsible for people’s portfolios, your role must change.

Note too, that this is not Chuck Prince’s dance when the music is playing. As CEO, his misaligned compensation encouraged him to dance right to the edge of the cliff. Some of us clearly put forward compelling analyses as to why that Housing/Derivatives/Subprime cycle was doomed.

Which brings me back to the present market. What we are dealing with today is a case of first impression — massive credit crisis and collapse, followed by massive Fed intervention. We don’t know how this plays out, as we have never seen anything quite like this in history. Can the Fed simply wait it out, and let $4 trillion in bonds to mature without rolling over? I have no idea, but neither do the folks insisting it ends with us living in a post-apocalyptic Mad Max era.

Just like every other cycle, one day, this bull market will end. I cannot tell you if its next Tuesday or sometime in 2019. The average (See first table below) is 3.8 years. We are now at 4.1 years. But the range is much broader, as both tables below makes clear.

There are many silly reasons for being either all in — or all out — of the markets. The bottom line is that you should have a firm grasp on your own investment posture, risk tolerances and financial goals. You should understand how we got here and why. Make sure you have some form of your own coherent plan. But if you are waiting for someone else on TV to tell you what to do, whether its Jim Cramer or David Tepper or even lil’ ole Me, then you have yourself a big problem.

There is asset management, and there is infotainment, and never the twain shall meet.

click for larger graphic