The Average Joe Investor

A Must Read

2008-10-24T14:29:00.000-07:00

If you haven't caught the Forbes cover article this month (written by Steve Forbes), then it's time you headed over to the Forbes site and get your read on.

-AvgJoe

The market's flubber bounce

2008-10-13T13:50:00.000-07:00

I've been sitting here for a few minutes now wondering what exactly you say on a day like today. Happily, it doesn't involve finding some new way to describe a continually plunging stock market. In fact, quite the opposite. I'm sure you've seen already, but each of the three major US indexes is up more than 11%. Let me just go ahead and repeat that: over 11%.

How does this rank historically? From what I've got from Yahoo!Finance, it looks like this is the sixth largest percentage gain on the Dow (note: ignore the hoopla over the point gain, that's meaningless -- focus on the percentage). Ominously, all of the single-day percentage gains higher than today's were during the Great Depression.

Now I know this will make everyone jump to the conclusion that this means we're in the same situation as back then. I don't believe it does, so I'm not going to drag out the comparison any further.

What I will say is that there are two primary factors that are going to be front and center for me going forward: 1) the economy's reaction to the global efforts to jump start the credit markets and 2) how far the repricing of risk goes and how persistent it is. The reason for #1 is that if the economy falters then the companies that we're investing in (broadly) will be hurt by pinched sales and profitability. Simple as that.

#2 comes from the fact that over time investors tend to determine their required returns differently depending on how scared they are. People are very scared right now and want a big return to take pretty much any risk. If that continues to be the case, valuations for stocks will continue below what they had been before this drop began.

As for tomorrow... who knows? It's hard enough evaluating the market when fundamentals are in the driver seat. When investor psychology takes over -- particularly when there are a lot of unknowns -- things get interesting.

-AvgJoe

Finance on SNL

2008-10-12T09:39:00.000-07:00

So who couldn't use a laugh right now? (and if you answered "not me" then you need a laugh more than the rest of us)

Check out this Update from Saturday Night Live. About halfway through is the "Fix It" bit, which is pretty much how I feel at this point.

-AvgJoe

Run and hide or stay and fight?

2008-10-09T13:21:00.000-07:00

That's a really good question right now, especially since the Dow finished today down 39.4% from last year's peak. That's worse than the 37.8% drop that the Dow saw from peak to trough during the post-Internet Bubble blow-up. It now only trails two periods of stock market malaise -- the Great Depression and the extended down market during the late 60's and 70's.

During the Great Depression stocks declined 89% from summer 1929 to summer 1932, then spiked back up from 1932 to 1937 only to plunge another 52% from 1937 to 1942. In all it took 25 years for the Dow to recover its 1929 high.

After peaking in early 1966, the Dow had plunged 42% by Fall of 1974. And though '74 was the bottom, the market bounced up and down until 1982 when it finally started showing some real life again.

So are we in for a long period of terrible stock performance? I don't think so. Now I fully realize that I have been wrong on a lot over the past year, and certainly wasn't on the leading edge of this recent melt-down (and my portfolio shows this). I've now jumped on the "cyclical bear market" bandwagon, but, as others more prescient than myself have pointed out, this bear market really started back at the turn of the millennium. Right now we're down about 27% from the peak of 2000. And if you'd invested in the Dow in early 1998, you would have been roughly flat over the past 11 years. In other words, if this is a cyclical bear market, then we're well into it.

But that doesn't really help with the pressing question does it? So what do we do with our money? Well, I don't have the answer for any particular individual (when you need the money is a big question), but I'll tell you what I'm doing: I'm staying put. The problem with starting to freak out right now, or with trying to guess where the bottom is, is that there's a good likelihood that you'll miss out on some of the recovery -- which can happen fast.

How fast? After the bottom in 1932, the Dow rallied over 70% in two months. After bottoming out again in 1938, the market bounced back up over 20% in the next five months. May of 1970 was one of the many bottoms during that period and the market was up almost 35% over the next year. December of 1974 was the bottom of that period and over the next six months the Dow was back up 43%. And I could go on.

The point is that as violent and fast as this decline has been, the recovery can be equally so and trying to guess when to get out and when to get back in is more likely to get you in trouble than really get you market beating results. When markets start trading more on emotion than fundamentals, keeping a cool head is your best weapon.

If you've been investing all along in stable companies with good balance sheets that produce a good or service that's in real demand, then staying put is probably your best bet.

-AvgJoe

For the last time, this isn't just about Wall Street!

2008-10-08T16:03:00.001-07:00

I'm going to puke if I hear the phrase "Wall Street bailout" uttered one more time. Ooops, just puked, I guess somebody, somewhere just said it again. Why? Because people around the US still seem to believe that this is a bailout that "helps Wall Street, even after Wall Street destroyed our economy."

There's two parts to this, and in this blog I'm going to cover Wall Street destroying our economy. Did Wall Street play a part in what is going on? Sure! But there's no way that any of this could have happened without the help of good ol' Main Street.

Oh no Average Joe, you're not going to say something bad about the good, hard working people on Main Street, are you?

You bet I am.

Look, I don't have anything against Main Street -- heck, I'm part of Main Street and I'm getting nothing but lumps from what's going on right now. But at the core of all of the problems -- which has already been pretty well hammered home -- is the demise of waves of mortgage loans, subprime and not.

What Wall Street did was complicated, but the problems that it created are relatively simple. They took mortgage loans, packaged them into securitized vehicles, and sold them off to third party investors. This allowed lending banks to lend more because the securitizations took loans off of their books, and it also made investors more inclined to dip their toes into riskier credit profiles because they believed that the securitization vehicles were priced and structured such that they would still deliver acceptable returns.

Unfortunately, Wall Street used faulty assumptions -- like that the real estate market doesn't go down -- and so when the supposedly unthinkable started to happen, the value of all these securitized securities (most of us know them as MBSs, CDOs, etc) tanked. This caused cascading problems because many of these securities were rated very highly and therefore treated as gold by many banks, insurance companies, etc. The end result, among other things, is the credit lock-up that everyone is so scared of right now.

That's a very very brief overview of Wall Street's hand in this mess, but I certainly didn't want to ignore their handiwork. Now on to Main Street.

This is even simpler. If the core of the problem here is defaulting mortgages then we've got a heck of a lot of people out there that took out loans (which, remember, are agreements to pay back a certain amount of money) and decided not to pay them back. Easy as that. Now this is where the staunch defenders of Main Street come in with vehement arguments, so let's take a look at a few of them:

1) "But there was predatory lending!" -- I fully accept that there were lenders out there that were out and out fraudulent and hid details of the loans from people. But let's think about the scope of this mess and consider whether we really believe that there was really that much fraud out there. Without solid proof I'm very skeptical of that many predatory loans being foisted on people. In fact, I'll go ahead and give you 5% of the defaulting loans over the past couple years as predatory and fraudulent -- I think that's a pretty high percentage, but that still leaves 95% that we have to explain.

2) "People didn't understand the terms of the loan!" -- This argument just makes me shake my head. I think about the amount of research the average Joe Sixpack will do when trying to figure out what TV to buy and I wonder why we don't expect a commensurate amount of proactive research out of Joe Sixpack when he's looking to take out a loan for, say, $200,000. If you don't fully understand what you're signing your name to, why in the world would you borrow that kind of money??

3) "The mortgage brokers misled the buyers!" -- Fraud notwithstanding (see above for fraud), the mortgage brokers are salespeople. I'm not saying that they should be holding back information, but at the end of the day their job is to sell a loan to the home buyer, not make sure that the home buyer is getting the best deal possible. Referring back to #2, how many of those Joe Sixpack TV buyers implicitly trust the Best Buy salesmen? Yet they seem to expect that mortgage brokers are the guardians of their best interests.

I could go on, but I think you get the point. The bottom line is that I think we're overlooking the whole concept of personal responsibility when it comes to people taking out these huge loans. And when we talk about buying up faltering mortgage loans and renegotiating them with the home owner -- I mean, come on, talk about moral hazard!

Forgive me if this seems one-sided -- I do fully believe that most of the people that are defaulting should never have been given the money in the first place, let alone at the terms they got it on. But I think that when we're talking about the ingredients for the current mess it's a big mistake to leave the borrowers out of the equation, and that's exactly what has happened. Give Joe Sixpack a free ride and you're basically telling him that it's OK to take out a loan and then blame the lender when you realize that you got yourself in over your head.

Will the rhetoric change? Not a chance. During an election year (and really, what isn't an election year?) there's no way your going to hear anyone from the government scold the normal, everyday, hard working Americans. When they're getting ready to hit the voting booth, they can do no wrong!

So I'll keep cringing at the characterization of the current economic mess, but at least I've logged my protest. Am I selling out my fellow average Joes? I don't think so, I think I'm just asking for the best out of them. I think we can be a country that lives to a higher standard, and that means owning up to mistakes all around.

-AvgJoe

For the last time, this isn't just about Wall Street!

2008-10-08T16:03:00.000-07:00

Joe is on Twitter

2008-10-07T18:08:00.000-07:00

Brevity is in for Average Joe! Check out my new page on Twitter: http://twitter.com/KoppTheFool.

-AvgJoe

Cafferty on Palin

2008-09-30T14:27:00.000-07:00

I'm a little behind lately, but I just saw this reaction from Jack Cafferty to the answer that vice presidential hopeful Sarah Palin gave to a question about the $700 billion bailout package.

Now I try to leave politics out of this blog, but this is definitely a cross-roads between politics and and finance (and there's been a lot of that lately). I really can't add too much to what Cafferty said, the answer that she gave is really pretty pathetic and to an issue that will be one of the biggest facing the new administration -- whomever that will be.

Actually, it's kind of funny in a way. Watching her fumbling answer I was reminded of the investment banking interviews I did coming out of college. I studied economics in college and I didn't stray too far in my studies into finance, so I wasn't nearly as prepared as the business undergrads from my school. Being young, I also wasn't all that good at interviewing and didn't have the whole "if you don't know it, don't try and fake it" thing down.

Anyway, while watching Palin muddle through whatever the heck she was talking about, I literally could feel the nerves and stress that I got the few times that I did try to fake my way through an interview answer. Needless to say, the times that I faked it, it didn't work out well for me, and this catastraphic answer certainly hasn't worked well for Palin. I guess I'm just counfounded that her people didn't have her so, so, so ready for this question -- it's not like it came out of the blue.

I guess at least we got an absolutely hilarious SNL skit out of it...

-AvgJoe

The Bailout Plan

2008-09-28T15:36:00.000-07:00

I'm pretty bummed that I've been crazy busy lately and unable to post here as we go through what will likely be the most (or at least one of the most) memorable financial events that we'll see in our lifetimes. I'm encouraged that today it sounds like a deal has been struck that we can move forward on. And, yes, I said "encouraged," meaning that I am in support of the plan.

I'll keep it short and sweet, but here's how I feel about it. When somebody is sick and has an elevated fever, the first step is to treat the patient's fever so that it doesn't kill him before you have a chance to treat the underlying sickness. The financial system is currently burning up with fever and the Treasury's plan is aimed at bringing that fever back down. It won't fix the underlying problems that need to be addressed in the economy, but it will help quell the panic and allow us to address those issues (hopefully!).

Rather than try to reinvent the wheel, I'll direct you to this article from the AP that talks about the potential winners and losers from the plan being pushed through. I have some slight differences in places, but overall I like what they've said.

Tomorrow certainly will be interesting!

-AvgJoe

Yesterday's Oil Spike: More Than Meets the Eye

2008-09-23T11:40:00.000-07:00

Kind of like Transformers, yesterday's big spike in oil wasn't exactly what it seemed to be. In short, yesterday was the expiration of monthly oil contracts and it appears that traders decided to go after some players that were short going into expiration. The result was that you had a big pop as the short sellers rushed to cover and some people went long to try and play the big move.

It was funny to me that most media outlets didn't seem to pick up on this. Up to the end of the day, the AP articles on Yahoo!Finance were still saying that oil was getting bid up as a result of the $700 billion financial bailout plan. I have to give props to CNBC, though, because they were all over it -- probably one of the few useful things I've gotten from watching that manic channel.

Basically that's it, not much need for further explanation. Today, a quick check over at the Nymex shows that now that the new contracts are trading, we've got crude back at under $107 per barrel.

-AvgJoe

Oil Trader Reclassification

2008-08-05T15:08:00.000-07:00

Couldn't help but take notice of this article, which says that the Commodities Futures Trading Commission just revised its numbers on how much of the open interest on oil futures is held by speculators. The number was at 38% and they upped it to 48%. So nearly half of the open interest in NYMEX crude futures are held by speculators... yeah, no chance that speculators could be moving the market.

What's even more intriguing is the fact that the article says it looks like just one trader was reclassified in bringing up that number. They don't really give any more info on that, but if that's true, then it means that there's some really big money out there swinging at oil.

-AvgJoe

Loving the Bears

2008-07-31T08:36:00.000-07:00

What's my favorite part about the bears out there right now? This quote from a Bloomberg article today illustrates it well:

"The markets don't like it,'' said Peter Boockvar, an equity strategist at Miller Tabak & Co. in New York. "You listen to a market of optimists who think the worst is over and that it's gonna be OK, but this data is showing you it's not.''

Similar to Mr. Boockvar, most of the bears out there seem to think that they're in the minority, fighting to get the rest of the market to understand that there's trouble ahead. Maybe I'm reading the wrong news sources, but most of the news and commentary I'm reading these days is pretty pessimistic. Plus, as I noted back in June (and Merrill Lynch recently updated), fund managers are pretty darn bearish across the board.

And in case everyone forgot, the S&P is still down nearly 20% from its peak -- and last I checked stocks decline when more people are bearish than bullish. If we were surrounded by nutty optimists, I'd guess that we would've seen more of a recovery.

Now obviously I'm an optimist here, and so maybe I'm pulling the same stunt, but the cries of "oh, everything is terrible and nobody else besides me seems to understand that!" are getting a little old.

-AvgJoe

This Time It's Different?

2008-07-24T15:03:00.000-07:00

Ahh, that fateful phrase.

I'll keep it short and sweet here, and I'm likely not offering anything that you haven't heard before, so think of this more as a friendly reminder. For the seven years from 1973 to 1980 average annual oil prices rose about 690% or roughly 34% per year during that period. After the peak in 1980, oil spent the next eight years in decline and fell a total of 60%.

Over the past 10 years, the average price for oil is up around 720% (using average price for 2008 as opposed to current price), or roughly 24% per year.

I can already hear people saying that it's different this time because it's not an artificial supply side shock as in the 70s. Ok, could be... but I'm certainly not banking on it.

-AvgJoe

Cramer Addendum

2008-07-24T09:42:00.000-07:00

I couldn't help but share this to follow up on the previous blog post. Apparently now banks are a buy? Hmmm...

Don't get me wrong, I share Cramer's new view -- in fact, I own both Bank of America (NYSE: BAC) and American Express (NYSE: AXP). I just find it astonishing that his opinion changed that drastically in so short of a time. I can only assume that's a philosophical difference in investing based on fundamentals and investing based on timing the market.

But hey, how can you not love Cramer?

-AvgJoe

Cramer Calls a Bottom?

2008-07-21T08:36:00.000-07:00

I don't know how many people caught this, but I read the same article on TheStreet.com last week. In short, Jim Cramer got ultra bearish last Tuesday saying that there was little hope on the horizon and that there won't be a turn until we see a number of additional, high profile, bankruptcies. From the article:

The bottom line here -- there is too much going wrong right now, too much to put us anywhere near sound footing. I suspect that every rally will be met with selling until we see a multitude of collapses like IndyMac. ... Someone asked me yesterday, "When do we bottom?" I said it wouldn't be until all the banks that have to fail do so and GM files bankruptcy along with Ford. I said it matter-of-factly, because I meant it and because it is obvious.

As we know now, that article perfectly preceded the big rally in financials last week on the back of stronger than expected earnings from bank majors, including Wells Fargo (NYSE: WFC).
This week started off on a good note for the financials as well, with Bank of America (NYSE: BAC) also surprising to the upside.

If you've read much of this blog, then you know I don't do market timing and I won't be the one calling tops or bottoms. But if the market does recover from here, that will have been pretty bad timing for Cramer to have unleashed his inner polar bear.

-AvgJoe

Disclosure: I own shares of Bank of America.

Couldn't Help Myself: Yet More On Oil

2008-07-18T17:00:00.000-07:00

I couldn't just leave well enough along, right?

The reason for the additional post was the fact that I clicked through the Yahoo! Finance front page to this article.

Though I certainly wouldn't mind it if this week's price action was the sound of the oil bubble popping, I'm not primarily concerned with that (on a side note, the title of this article is fairly poor because we aren't told whether it's the biggest dollar drop ever or biggest percentage drop. Given the high price of oil, it wouldn't be nearly as impressive if it was simply the biggest dollar drop ever). What I am interested in, though, is some of the commentary in the article which again brings me back to my "oil is not being driven by supply and demand alone" thesis.

For instance:

"Some brave traders used the week's pullback in oil prices as a chance to buy barrels that suddenly seemed to be on sale. But oil analysts were advising investors to beware."

or

"Still, with oil recording yet another drop on Friday, some industry experts who just days ago thought there was more juice left in oil's meteoric run are reconsidering."

or

"'Buying here is an opportunity if you are a deep believer in $200 (a barrel), otherwise we think that caution would be better applied,' analyst Olivier Jakob of Petromatrix in Switzerland said in a research note."

Do these sound like commentaries on a global commodity market being driven by supply and demand or a frothy financial market that's being closely watched by traders? In fact, I looked up Petromatrix's website and here's a bit from the firm's description:

"After 15 years experience in the commodity trading industry we have created Petromatrix as we found the market lacking independent coverage of the oil markets. At Petromatrix we are not offering any financial or brokerage services, all we care about is reading the market right. ... Our clients include oil majors, trading companies, international banks, hedge funds, down to private individuals. They value our track record, our concise reports, our speed at delivering analysis, our trading focus and experience."

Sounds to me based on this that there are an awful lot of investing / speculative players out there looking for data on oil. Is it possible they're also participating in the market? And I have to imagine that Petromatrix is only one of many firms offering this type of independent coverage of oil price expectations.

Things that make you go hmmmmm...

-AvgJoe

More On Oil Prices

2008-07-18T14:43:00.000-07:00

Much to my chagrin, there isn't a whole lot of back-and-forth on my blog (though I'm surely at fault for that with my unreliable posting schedule), but there was a great response to my blog post yesterday about oil prices and I wanted to make sure to highlight it and respond.

I'm not going to pretend that a big part of the reason that I like the response isn't because it happens to agree with my own view. However, I think it does really underscore some of my own thinking. Here's what Michael over at The Macro & Micro has to say:

To answer your question - well you seem to have already done so - S/D have not changed that much... it is the speculation that has changed. While the economist suggests we not 'blame the speculators' (http://www.economist.com/opinion/displayStory.cfm?source=most_read&story_id=11670357), I still find myself disagreeing.

One line in the article "But they do so based on their expectations of future trends in supply and demand, not on whims." is frankly not true. Often speculator 'expectations' may be 'educated whims' - that are wrong. The index funds and the smarter players make a move and everyone else who knows nothing follows - typical herd mentallity.

For example:

1. "On January 17, 2006 crude oil for February delivery rose by USD 2.38 (3.7%) to USD 66.30 a barrel. This was the highest increase since early October 2005." (http://en.wikipedia.org/wiki/Oil_price_increases_of_2004-2006)

2. This jump was a futures market response to the Nigerian violence... in which a temporary 250,000 barrels per day was not produced from Nigeria.

3. According to the 'profit fromthe peak' front flap (I'm seriously considering this book), oil consumption is 86m barrels a day. 250,000 is not even 1 percent of that.. its like .3% - however oil prices rose 3%. less than .5% is barely a drop in the bucket, but the price raise was hardly warranted. It was speculation.

Can I say I couldn't agree more? One of the things I've tried to do is actually sit down and put together some sort of supply and demand curve (the stuff of Econ 101) for oil. Now I understand that it's hard to substitute in many of the places where oil is used, but frankly I couldn't come up with a reasonable graph that would explain the change in the price of oil over the past few years.

As for The Economist, yeah, that was pretty disappointing for me to read. The Economist is easily my single favorite publication ever and I can't help but think they missed the boat on this one. Is all the price action due to speculators? No. But I think there's a healthy margin that is. And as Michael pointed out, it's wrong to assume that all those buying and selling oil futures are fundamental driven investors looking at oil consumption and production statistics. You've got plenty of technical analysts and trend followers out there who are going to be basing their trading on price action and chart patters, not real supply and demand.

So, as I said before, I welcome responses and thoughts -- even if they differ from my own. We're talking about a huge global market here and so I certainly can't claim to have all the answers.

-AvgJoe

The Oil Price Conundrum

2008-07-17T16:44:00.000-07:00

Ok, so here's where my brain bends when it comes to oil prices and what's driving the spike. In a market that's driven primarily by supply and demand -- particularly a massive global market, like the one for oil -- I don't think it's crazy to expect relatively orderly price movements. Sure prices can move up or move down, and do either drastically, but if it's really supply and demand driving it either way, I'd expect to see those changes be spread over a period of time.

By contrast, in a market driven by some sort of speculative force, drastic price swings would be expected as speculators anxiously try to read the tea leaves and capture the maximum profit before pulling their parachute right at the top.

Now look at the price action of oil just over the past couple days. Have supply and demand conditions really changed that much to warrant such a big swing in price? And how about the price action of the past year, has supply and demand really diverged that much to cause (roughly) a doubling in price? (Judging by the statistics from BP I don't think so...)

I'd love to get readers opinions on this, so feel free to chime in the comment section below or send me an email and let me know what you think.

In the meantime, I'm about to crack open the review edition of Profit From the Peak that Wiley & Sons was nice enough to send over to me and see if that has the answers I'm looking for. I will be sure to let you all know what I think when I finish.

-AvgJoe

Will the Real Average Joes Please Stand Up?

2008-07-02T13:14:00.000-07:00

I call myself "The Average Joe Investor," which suggests that I'm just like everyone else and that if I can invest, then anyone reading this can invest. Or at least that was my intention behind the name. And it's true to a large extent -- I don't have any special powers, I don't have an MBA or CFA, and I don't have a long history as a stock analyst or trader (now you're wondering why you're reading this at all...). Sure, I work in the finance industry, but it's helping The Motley Fool bring investing to more individuals -- just like I've always hoped to do here.

But -- and that's a big but -- there is something that separates me from many truly average Joes out there. Namely, I'm interested in investing, interested in stocks, and interested in financial analysis. And unfortunately, I don’t think that individuals should bother investing if they don't have some interest in it -- even more so if their primary motivation is to get rich quick from the stock market.

However, for most of the population out there that would rather eat a live worm than read an annual report, there's no need to skip over stocks altogether. For years, investing greats like Warren Buffett and Jack Bogle have been harping on the vehicle that is perfect for the, let's say disinterested, investor. And that vehicle is index funds.

Index funds give you a broad exposure to a market and charge very low management fees, meaning that you benefit from the appreciation of the overall market without having to spend the time to pick and analyze stocks, or overpay for somebody to manage your money. In terms of which index funds to go with, an S&P 500 fund (such as Vanguard's) or a wider US market fund (like the Wilshire 5000) should probably be the core of your investment portfolio. But today there are a handful of other areas that you can also get exposure to through index funds, including both developed and emerging international markets and bonds -- all of which should probably claim some portion of your portfolio.

In the end, I think one of the biggest questions when it comes to investing isn't whether you're smart enough or talented enough, but whether you have the interest. If you're not interested in investing you're simply not going to do all the work necessary to get the results that you want. And you'll likely just end up wasting both time and money. So if you're new to investing, take some time to sit down and really think about whether business analysis, financial statements, and industry research are really interesting to you. If not, it's no big deal, just put your money into index funds and realize that you've saved yourself a lot of time and effort that you can now turn towards a hobby that you actually enjoy.

Of course if you come to the conclusion that this is all really interesting to you, well, keep learning and keep investing!

-AvgJoe

Bearish Fund Managers

2008-06-22T21:59:00.000-07:00

The headline of the Merrill Lynch press release reads: "Merrill Lynch Fund Manager Survey Finds Investors Most Underweight Equities in a Decade."

Merrill releases these surveys periodically and they're usually interesting to tune into. Here's a link to this one: Fund manager survey.

You can imagine what the tone of the release is.

Now I know that I tend to come in on the bullish side a lot, but I can't help but see an interesting bullish lining on this. In short, if fund managers are already the most underweight in a decade, what does that mean for the future? Well, certainly they could get even more underweight equities. However, we could also conclude that a lot of the market's tumble since last October came from this massive pullout from institutional investors. So now they've got all this investor money sitting on the sidelines. I wouldn't suggest that they're going to start reinvesting it even if they don't see a turning economic tide, but what I will say is that when these fund managers do think they see a turn coming, there may be institutional investors tripping over each other trying to get money back into the market.

When does this happen? I don't know. But it'll be an interesting scene when it does.

-AvgJoe

How Scary is Consumer Credit?

2008-06-20T15:21:00.000-07:00

A crucial piece of figuring out exactly where our economy stands is in interpreting the statistical data that we get from the government and other sources. It can often be easy to take a headline number and assume that the simplest interpretation is the correct interpretation -- and this is what often happens in the press. Spend a little bit more time mulling the data and you may have a different picture.

Consumer credit is something I've been mulling a lot over the past year, and for good reason -- headline after headline screams about the death of the US consumer and the pile of debt that's drowning him (and her). If you keep up with the news, it's probable that at some point you've run into the statistic that there is currently over $3,100 of revolving (read: credit card) debt outstanding for every man, woman, and child in the United States. To me at least, that sounds scary at first glance. After all, if you take a family of four, the simple math tells you that they have roughly $12,700 in outstanding credit card debt.

Now here's a speculation that I actually don't have a data-supported answer for: a not insignificant portion of that revolving debt outstanding is not what most of us would truly consider debt. I'll explain. On a monthly basis, I charge almost everything that I consume to my credit card (gotta love those airline miles). When my billing period comes up each month, I pay off the card in full and haven't paid a single red cent of interest for years (and when I did it was because I spaced out and forgot to make my payment one month).

In my own mental accounting, I would not consider that true debt -- I spend the money on my credit card as if I'm spending the cash from my bank account. In other words, I only spend what I actually have. However, if you were to take a snapshot of my credit report at a given point in time, you'd likely conclude that I have a couple thousand dollars in credit card debt.

So if we break down the Federal Reserve statistics for revolving debt outstanding, it's well worth considering how much of that "debt" is truly debt weighing on consumers, and how much of it is what you might call "convenience debt" that consumers repay from month to month.

-AvgJoe

(Now if you have the facts on this question I'd love to hear them so drop me a line either by email or in the comments...)

Bears Behind Bars

2008-06-19T15:57:00.000-07:00

Today two former Bear Stearns employees, Ralph Cioffi and Matthew Tannin, were arrested on charges of securities fraud and insider trading. You may remember the whole debacle as the tip of the mortgage iceberg last summer. A pair of hedge funds at Bear just absolutely blew up, and the magnitude of the losses seemed to finally wake everybody up to how much danger there really was in the subprime mortgage market.

One might even say that this hedge fund debacle was the first nail in the coffin for Bear Stearns itself. After all, it was primarily a complete loss in customer and creditor confidence that ended up forcing the firm to sell out for practically nothing.

Of course, running a hedge fund into the ground is hardly illegal -- as the hedge fund industry has grown by leaps and bounds there are undoubtedly a lot of funds that have either been unlucky or just mismanaged and ended up sending "I'm so sorry" letters to their investors. The rub here is that prosecutors are alleging that Cioffi and Tannin knew that the funds were in trouble but told investors other wise and -- worse yet -- may have misstated asset values.

Among the bits of evidence:

- Emails exchanged between Cioffi and Tannin in April of 2007 in which Tannin said that the subprime market "looks pretty damn ugly. ... If we believe [our internal modeling] is ANYWHERE CLOSE to accurate I think we should close the funds now."

- Cioffi pulled $2 million of his own money from the fund but still said that investors should stay in it.

Scapegoats or hucksters? If the above is true it'd be hard to argue that they were simply victims of a collapsing market.

-AvgJoe

The Goldman Sachs Firing Method

2008-06-18T14:59:00.000-07:00

I'm not sure whether to love Goldman Sachs more for coming up with this or Dealbreaker.com for bringing it to my attention.

In short, it sounds like Goldman is looking to unload some of its analysts and instead of pulling the ol' Donald Trump and hollering "you're fired!" (which would hardly fit Goldman's white shoe culture) they decided to get more creative.

Now before I tell you what exactly they did, I should clarify what an analyst is in this context for those that haven't had the pleasure of being one (alas, I have). Analysts are the lowest of the low in the investment banking world. They are typically recent university grads (undergrad) who do thankless work and labor an ungodly number of hours -- for, of course, a pretty hefty paycheck when compared to their non-investment banking friends. An investment banking analyst program typically lasts two years, at which point the analysts are expected to head off to get their MBA.

So Goldman management brought in these hapless youngsters and instead of telling them that they're being laid off, they're claiming that the analysts have been put in an "accelerated program" which, conveniently, ends in August.

From Dealbreaker:

We just received a little more color on the revolutionary approach, from a young alum, who notes: "At one point I actually though the [managing director] was going to say, 'Congratulations!'" which we can obviously all agree would have been awesome.

Kudos to Goldman for deftly skirting the issue.

Here's a link to the original Dealbreaker story.

-AvgJoe

Good investing fundamentals

2008-06-17T11:16:00.000-07:00

[note: I'm going to write as if this blog hasn't skipped a beat... hopefully those that have been waiting since March for a new post don't want to tar and feather me...]

When it comes to investing, there's a lot of talk about fundamentals. Usually, though, it's the fundamentals of the company we're investing in -- ie margins, sales growth, book value, etc. While finding good fundamentals in the companies that you invest in is definitely important, it's just as important to practice good fundamentals as an investor.

I actually got to thinking about this while watching golf over the past few days. I have to say, I was really pulling for Rocco Mediate to knock of Tiger Woods in the US Open. It's not that I dislike Tiger, it's just that Rocco is so darn likable -- plus I have a tendency to root for underdogs.

As I was watching, though, I was impressed -- as ever -- by Tiger. His fundamentals are tremendous -- keeping the ball on the fairway, sinking puts, etc. Rocco, meanwhile, played a very gutsy tournament, but did so by making some great shots to make up for prior poor ones. In the end, it was his inability to come back from a poor tee shot on the sudden death hole that sealed the victory for Tiger.

As an investor, it's crucial to be like Tiger. Do all the little things right to make sure that you're buying a quality company at a reasonable price each and every time. More importantly, keep focused and don't allow yourself to make infrequent, but big, mistakes that can seriously take away from all your other good investments. And through thick and thin demonstrate some mental toughness. The probabilities of investing assure that you will have investments that don't work out -- learn what you can from those, but don't let that disappointment cause you to do something stupid with a subsequent investment.

And as long as we're focusing on Tiger, I'd point out that if you don't feel like you have a solid investment process that you use to choose your stocks, then it's important that you take the time to step back from investing and establish that. Even though Tiger was one of the hottest golfers on the tour and was winning major events, he decided a few years back that his swing wasn't what he wanted it to be. So he made some major changes to it -- changes that led to an extended break in his winning ways. Today? Well, I'm no golf expert, but the results seem to speak for themselves.

It can be easy to get caught up in the actual investing of investing and not think much about the process of investing. So if you haven't thought much about your process lately, maybe now is a good time to take a step back and make sure your fundamentals are tip top. After all, it's fun to be Rocco playing for the US Open, but it's even better to be Tiger and winning time after time.

-AvgJoe

Time to Rethink Stocks?

2008-03-03T19:04:00.000-08:00

A recent column by Fortune writer Allan Sloan is ominously titled "Don't expect another bull market." In the article, Mr. Sloan argues that the period from 1982 through 2000 was an unrepeatable stock market party and it's going to lead to a lot of disappointment if investors are anchored too heavily to the returns from that time period.

To a large extent his argument holds -- taking numbers from Yahoo!Finance, I found that the S&P 500 increased around 15% per year between the beginning of 1982 and the start of 2000. This is a far cry from the 7.8% that I calculated for the period from January 1950 and January of this year. Of course the numbers that Mr. Sloan was looking at for his article -- and he does note this -- are fairly particular to the time period he chose. If we shift the range a bit, say, 1987 to 2008 or 1977 to 2008, the annual returns fall and are closer to the longer term average.

But it'd be nitpicky of me to lose the point in the details. The last 20 years have been very good for stocks and individual investors have found there way into the market in greater numbers. This may have led to some over-excitement in the markets and unsustainable valuations.

Yale economist Robert Shiller has collected data (which I've already visited) on the stock market going back as far as 1871 and has calculated the P/E of the stock market based on average 10-year trailing earnings for every month since then. Over the course of the last 100 years or so, this P/E number has spent most of its time ranging from the mid-single-digits to the low-20s. But in 1992, the P/E broke above 20 and made a mad dash to the mid-40s during the DotCom bubble. At the beginning of this year, Mr. Shiller's numbers show us at 24 -- safely down from the dizzying peaks of the DotCom days, but hardly low by historical standards.

So what's ahead? To Mr. Sloan's original point, investors that anticipate easily racking up 15% or greater annual returns may have to readjust their expectations. At the same time, it may be more important than ever that investors take valuation into consideration when making investment decisions. Investors have been reminded on numerous instances that valuation does matter (aside from the DotCom era there was always the Nifty Fifty).

-AvgJoe