Felder & Company

Hit the Links

2012-05-26T08:11:00.000-07:00

Facebook Shows There's a Sucker Born Every Minute flpbd.it/YQuBm
100 Million Americans Without Jobs pulse.me/s/9xFwT
Elon Musk is the most inspiring entrepreneur in the world read.bi/KZFI07
Is now a good time to buy a home? Hell yes! shar.es/qsLLz
"The 1%" Is Buying Up All Of The Low End Real Estate read.bi/J96uBK
"Panic resurfaces" flpbd.it/e0PW5
The smart money is taking Jim Rogers' advice bit.ly/Jv0a8Z
‘The death of equities’… again? flpbd.it/5ioun
Slim Family Sees European Crisis as Good Time to Invest bloom.bg/KyKYpv
Insiders are buying this pullback flpbd.it/jlvzF
This is what a buying opportunity looks like flpbd.it/lEvsw
Nasdaq's Dirty Little Secret bit.ly/JV9xBD
"Confederacy of Dunces" Finds its Ignatius in Galifianakis vulture.com/2012/05/exclus…
The Right Way to Try to Buy Happiness flpbd.it/JioOA
Dustin Penner's big goal gets big reaction from Los Angeles Kings fans latimes.com/sports/la-sp-k…
Check out this gallery of exquisitely timed photos on-msn.com/JYZxJt

Mayday?

2012-05-24T13:19:00.000-07:00

Not so long ago, May Day in fact, the tea leaves flashed a 'mayday' and stocks responded almost immediately by going down like one of the miserable adversaries of Manfred von Richthofen, the World War I flying ace also known as the "Red Baron." To extend the metaphor let's say Europe is the Red Baron whose reputation currently has his enemies, the financial markets, shaking in their flight suits. What these preoccupied pilots may not yet see, however, is that there is hope on the horizon.

Jim Rogers has said, "just about every time you go against panic, you will be right if you can stick it out," and panic has returned to the stock market as measured by a variety of indicators. As hard as it is to believe after a correction that is currently only flirting with the 10% threshold, the Citigroup Panic/Euphoria Model, Individual Investor Sentiment and Surveys of Wall Street Strategists demonstrate that investors are about as scared as they were during the depths of the financial crisis. This now familiar and pervasive despondency toward the equity markets has inspired the Financial Times, in very Business-Week-like fashion, to call it the 'death of equities' in today's edition.

While I haven't heard Jim Rogers say he is currently taking advantage of this situation in the stock market, two other all-star investors have publicly declared their fervor for the opportunity at hand. Warren Buffett and Carlos Slim, two men whose combined worth is greater than the economic output of most countries, are currently in the markets buying stocks as they go "on sale." Corporate insiders have also recently stepped into the fray in a validation of the faith contrarian investors like these two are placing in them.

It may pay to remember that, while the Red Baron justly earned his reputation, during his heyday many of his feats were exaggerated far beyond what he accomplished in reality. He was shot down and the war eventually ended. Likewise, the situation in Europe presents great risk to the global economy but it won't put the likes of Coca-Cola, General Motors or America Movil out of business nor will it go on forever without some sort of resolution. In fact, the smart money is betting on it.

Nasdaq's Dirty Little Secret

2012-05-23T11:56:00.000-07:00

The following charts show the cumulative advance/decline lines of the New York Stock Exchange and the Nasdaq. Basically, each day you subtract the number of declining stocks from the number of advancing stocks on the exchange and wind up with a net positive or negative number. Add all the days together and the charts below are what you get.

Could there be a more dramatic difference in the two? 'What causes this massive dichotomy?' you ask. The answer, I believe, is very simple: the New York Stock Exchange simply has higher listing standards.

My guess is that many of the companies that go public on the Nasdaq do so because they don't qualify for the NYSE. Ultimately, they have a higher failure rate hence the long-term downtrend in the chart above. The bottom line is that the average Joe should be much more leery of potential IPO "faceplants" over at that exchange.

Faceplant

2012-05-22T13:16:00.000-07:00

I don't really have much to say about the Facebook IPO other than my usual, 'when everyone and their mom thinks it's cool to buy something it's probably not the best time to buy it,' or some such thing. We've seen this story way too many times over the past few years. I just wanted to publish the title, really.

Hit the Links: We've Got Balls

2012-05-05T10:47:00.002-07:00

For more links like these follow me on Twitter

The Tea Leaves Are Telling Me to Take Profits

2012-05-01T09:26:00.000-07:00

It's been a while since I ran down a few charts and those that follow are of major significance in my book so let's take a look.

First up is the Philadelphia Bank Index. The numbers in red are DeMark sell signals (9 is a completed setup and 13 is a completed sell signal). The DeMark 9-13-9 is, at the very least, a red flag. Technically, to my eyes, it looks like the banks have broken down out of their 2012 uptrend and are now testing the break - usually a great sell setup in itself.

This next chart is the same index on a weekly time frame. While the major indexes have regained most of the ground they lost during the financial crisis the banks are clearly nowhere near doing so. This pennant pattern on the chart usually resolves in the direction of the trend that proceeded it (lower).

Below is a daily chart of the Russell 2000 Index which tracks small-cap companies. I love watching this index because I feel it is a good gauge for the overall health of the stock market. When small companies are trading well it tells me that the breadth or participation of a rally is healthy and vice versa. The clear head and shoulders pattern on the chart below, combined with the completed DeMark sell signal at the end of March (13 on the chart) suggests the small caps are at risk of giving up the rally.

Finally, taking a look at the weekly chart that goes back to the 2009 bottom, the small caps are still at risk of forming a very large head and shoulders pattern that would resolve about 40% below current prices.

I'm not calling for another epic bear market along those lines. I'm just saying that after the phenomenal rally we've had year-to-date it may pay to zig (get more conservative) while everyone else zags (counts their profits).

My Linus Pauling Problem

2012-04-25T15:16:00.000-07:00

Ever since I read "How To Live Longer And Feel Better" nearly a decade ago I've felt a certain sympathy for Linus Pauling. You see he was trying very hard to put his wisdom to work to improve the quality of people's lives. His biggest problem in this regard was that his product/message had no potential for economic benefit for those that helped him spread the word or even sell it. How can one man with a very simple message hope to compete with the world's largest drug companies and their marketing budgets?

Now I don't dare put myself on the same level as a 2-time Nobel Prize winner (in 2 separate disciplines, I might add) but this is exactly the situation I find myself in with "Fire Wall Street." I very strongly believe that almost everyone should read it and implement its methods but because nobody will profit from this (myself included) it's reach will be severely limited.

But I knew this going in. I never had any dreams for the book greater than just giving away a few copies to friends who have asked for my advice in the past. And ultimately it feels good just to know that it's out there.

The Ultimate Irony

2012-04-12T02:00:00.000-07:00

The ultimate irony in the financial markets is that they inspire people to do precisely the wrong thing at exactly the wrong time. Residential real estate over the past decade is a great example of this.

Back in 2005 I knew more individuals that were buying up as much residential real estate as possible than I could count on two hands. Today prices are, in many cases, less than half what they were then and the cost of ownership, due to rock bottom interest rates, is just a small fraction of what it was. How have people reacted to this once-in-a-lifetime opportunity? By swearing they will never buy another house as long as they live.

At the same time, Warren Buffett considers this his #1 investment idea (buying homes and renting them out). This is what makes a successful investor: the ability to not just leave the lemming parade but to take advantage of the opportunities it creates.

To some degree this is happening in every security in every asset class every day.

Milestone

2012-03-12T01:30:00.000-07:00

Over the weekend this site passed 50,000 page views. I don't know if that's a lot by finance blog standards but I'm pretty proud of it, nonetheless.

Thanks to everyone out there who has encouraged me from day one and all along the way. Frankly, I write here more for me than for you. It just helps me with my thought process to work through some exposition in this kind of a casual but public medium.

Still, it's very rewarding to me to think that this blog has probably helped a variety of people in a variety of ways even if I never had direct contact with them.

Looking back at my very first post, which I wrote in May of 2005, I warned of a severe recession on the horizon. I was a bit early but if it helped just one person prepare for what was to come it has been well worth the effort.

Hit the Links

2012-03-09T02:00:00.000-08:00

Hedge Funds' Dirty Little Secret

2012-03-08T02:00:00.000-08:00

I've made the argument that it's silly to pay someone 1.5% of your assets to buy you ETFs but what about paying someone 2% of your assets and 20% of your profits?

Turns out that exactly what many hedge funds are up to but they're not too happy to tell you about it. In fact, way back in another lifetime when I was a head trader, ETFs were basically all we traded for our hedge fund customers.

Unless you personally know the manager and have complete confidence in his abilities, save yourself the egregious 2/20 fees, not to mention the zero transparency, and build an ETF portfolio on your own.

Hedge fund managers are right to love ETFs but, for the most part, have no reason charging you through the nose to own them.

Another Great Question

2012-03-07T02:00:00.000-08:00

I recently wrote about "my favorite question" but today I thought that there's a question I don't ask myself enough: "will this company be worth far more 10 years from now than it is today?"

This may be the most important question a long-term investor can ask because if the answer is not a resounding "yes!" then the company shouldn't even be considered. And when the answer is a resounding "yes!" then that should only be the beginning of your due diligence.

This question makes an ideal preliminary screen because it inspires so many other questions important to the research process like "what are the specific threats to the company's growth?" (competition, excessive compensation, executive hubris, etc.) and "at what valuation are these risks fairly priced in?," for example.

I guess that investing for me is not about having the answers. It's about asking the questions that, though they can't be answered definitively, inspire the dialogue that leads to a broader, if imperfect, understanding.

Bad Influence

2012-03-06T02:00:00.000-08:00

In "FIRE Wall Street," I wrote that investors' natural tendencies lead them to do, "the worst thing at the worst time." We're seeing something like this going on in the markets right now.

Despite the warnings from the likes of Warren Buffett and others individual investors have been pouring large amounts of money into bond funds for the past few months. It turns out last fall was a great time to be a buyer of stocks and individual investors were then pulling money out of stock funds at a frantic pace.

It's just this kind of decision making that leads individual investors to do far worse than the 3.5% lag behind the indexes I've written about. Recent studies suggest that, in practice, investors' realize about 6% less than whatever fund their investing in due to bad market timing and chasing performance

Add in those fund fees and adviser expenses and, all told, "the true cost of financial advice" may be close to 9%, which is basically what the indexes have averaged over the past 25 years. And they wonder why can't make any money in the markets.

This is why committing to an effective system and refusing to abandon it come hell or high water is essential to investing success.

"FIRE Wall Street" Now Available

2012-03-04T12:37:00.000-08:00

My eBook, "FIRE Wall Street" is now available for free as an eBook or in paperback from Amazon (all profits to charity).

Empower Yourself and Become Your Own Financial Adviser
Have you ever wondered why you own the investments in your retirement account? Or what they even really are? Or if you're really getting what you're paying for from your financial adviser? This simple guide explains why the vast majority of individual investors would do far better to fire their financial advisers and details precisely how simple it is for anyone to take control of their financial future.

Order paperback from Amazon.com (all profits to charity)
or
Download eBook for free

Coming Soon

2012-03-01T02:00:00.000-08:00

Round Numbers

2012-02-29T02:00:00.000-08:00

The Dow closed back over 13,000 yesterday. Apple's stock price is now well over $500 per share and its total market capitalization is $500 billion. The rate on the 10-year treasury bond is under 2% and Lady Gaga will soon hit 20,000,000 twitter followers.

I rate these numbers, in and of themselves, equally as important.

The Magic Indicator

2012-02-28T10:48:00.002-08:00

Traders are always in search of the magic indicator. A holy grail of the markets that will tell them precisely when to sell and when to buy for maximum profit from perfect market timing.

I don't believe human beings are capable of achieving or harnessing perfection nor should they strive to be perfect. Nor do I believe there is a single indicator out there that will ever work this way.

Having said that, I do believe the key is synthesizing the expert analysis of a variety of meaningful indicators to arrive at a unique understanding of the markets at a given point in time.

My Favorite Question

2012-02-24T02:00:00.000-08:00

'What's the most hated sector in the stock market right now?'

That's a question I like to ask myself from time to time. I find that the answer usually holds some of the best opportunities I can find. In fact, this year's best performers are a great example of this. Many were absolutely despised only a few months ago and have doubled in price since then.

In this same vein I also ask myself, 'what's the most hated asset class right now?'

Long-term bonds have been hated for quite some time. It was about a year ago that Bill Gross was loudly denouncing them. Despite putting in a stellar performance since then they're still hated today. None other than Warren Buffett and Leon Cooperman have taken up Gross' banner.

I'm not a buyer but this asset class may continue to make fools of the bears simply because it's so hated. 'The market can stay irrational...'

Improving Your Chances of Investing Success

2012-02-23T02:00:00.000-08:00

I read an interesting post over at the New York Times last night regarding dollar cost averaging. It suggests two rules that should apply when implementing the program:

1) Invest the money over six months or less. Don't drag this thing on forever. There is some evidence that six months or less accomplishes the benefit you're looking for and avoids keeping you out of the market for too long.
2) Have a written plan and stick with it, no matter what the market might do. The moment you start reacting to the market you'll get into trouble real fast.

These are both great points. I do think that for risk-averse investors a 12-month time frame is not too long for a DCA program but six months should probably be standard.

Additionally, having a plan is key. I wrote about this a while back - you can't do this right if you can't make a plan and then commit to it completely. I see folks all the time start out with all the right intentions and then the market spooks them and rather than falling back on the plan, trusting the plan, they change midstream. And they almost always do the wrong thing at the wrong time. So commit to your plan and implement it without wavering.

There's one more thing the post brings up that I want to share because it will only improve your results: start a "systematic investing" program.

...systematic investing is when you make regular contributions to a retirement or other investment account, like contributing a set amount of every paycheck. Making regular, automatic contributions is simple investing, and it’s a great way to automate good behavior.

Do this and you'll only improve your chances of investing success.

Is This Time Different?

2012-02-22T02:00:00.000-08:00

There's a question that has been floating around the back of my mind for the past couple of years: do we need to make another generational low and retest the 2009 bottom before a new super-cycle bull market can begin?

Personally, I won't consider this bear market that began in 2000 done until we make new, all-time highs in each of the major indexes. We may be getting pretty close to doing so right now.

The problem I have is that during this bear market of the past 12 years stocks never reached the levels of absolute rock bottom valuations that they did in previous major bear markets.

Either history will rhyme and stocks will go back to retest the 2009 lows sometime over the next couple of years or 'this time is different.'

And we all know too well the dangers of adopting the latter form of thinking.

Politics = Fast Food

2012-02-21T11:35:00.000-08:00

On the campaign trail politicians paint the picture of a big, juicy cheeseburger being eaten by bikini-clad super model on the bow of super yacht anchored in the Mediterranean on a gorgeous late Summer day.

Implied in all their slogans, speeches, commercials and campaigns is Pedro's promise: "vote for me and all your dreams will come true."

Once elected they become the sad, flattened piece of mystery meat you get a 2am at the drive through. When will voters ask, "where's the beef?"

The Case For Contrarianism

2012-02-20T14:18:00.000-08:00

I'm a natural born contrarian. My contrarianism comes from a strong belief in diversity. Let me explain:

As our society has gotten more and more specialized we have seen great benefits. Specialized medicine is probably the best example of this. It has lead to advances that have saved so many more lives than if we had only had just one type of doctor.

There is a major drawback, however, to this trend. Specialized thinking can too easily become narrow-minded thinking. Specialized knowledge nearly precludes the diversity of knowledge that is desperately needed to solve a great number of problems.

In finance, you find a large percentage of the professional population with experience and education that almost completely overlap. They share the same ideas and beliefs but also have the same blind spots. This is how you get a financial crisis: one major, common blind spot.

The contrarian, then, strives to attain a breadth of multidisciplinary knowledge and experience that will serve her in ways the specialized can only begin to understand.

Ultimately, we would do well to recruit fewer finance and economics majors into the finance industry. And other industries would do well to recruit these folks into theirs, ala Moneyball.

On Risk

2012-02-17T11:41:00.000-08:00

Warren Buffett recently said that bonds were, "among the most dangerous of assets." In contrast, I recently wrote that conservative investors should typically own more bonds in their portfolio than stocks. So where's the disconnect?

Well, it depends on what kind of risk you're talking about. I was writing mainly about market risk and volatility. Buffett is speaking to a different kind of risk, one that most investors don't give enough consideration, and that is the risk of inflation.

Should inflation increase over the next few years a buyer of long-term bonds today would get creamed. Over the short-term the value of her bonds would drop dramatically (bond prices move inversely to interest rates). Still, if she held them to maturity she would recoup her initial investment but the money would be far less valuable due to the ravages of inflation.

By buying shorter duration bonds or employing a dollar cost averaging program an investor could avoid an outcome so dire. Buffett, however, would prefer to own high-quality businesses that have the pricing power to keep pace with inflation. In terms of inflation risk, he would argue that this is even more conservative than owning any sort of fixed income.

His point is valid and something all investors should consider. Balancing your aversion to volatility while limiting inflation risk may be the biggest challenge facing individual investors today.

Are Stocks Still Cheap?

2012-02-16T16:02:00.000-08:00

Stocks have now run up about 25% over the past 4 1/2 months. Today I thought I'd just spend a little time looking at valuation to see if stocks are still attractive on an absolute and relative basis. The chart below shows the price to earnings ratio of the S&P 500 based upon the trailing 12-months earnings number:

On this measure stocks are just about in line with their average valuation over the past 100 or so years.

Another way to look at valuation is to use the index's price compared to peak earnings. This method is a bit smoother because we throw out the big valleys in earnings you get during a recession.

This perspective suggests stocks are slightly overvalued right now. However, we have recently made new all-time highs in the earnings number which is still growing so this ratio may soon change.

Finally, neither of the charts above consider stocks' relative valuation to bonds. Looking at earnings as a yield compared to the long-term Treasury yield suggests stocks are very cheap on a relative basis:

If interest rates begin to climb, though, stocks relative advantage will diminish. All in all, it looks like investors over the past few months have realized that stocks are the place to be. We'll keep our eyes open to see how this continues to develop.

Casualties of Facebook Fever

2012-02-15T15:10:00.000-08:00

A couple of weeks ago a little investment company called GSV Capital saw its stock price shoot up 50% or so in just a few days time. The reason for this was the news came out that Facebook was going public and GSV already owns a stake in the portfolio. Clearly investors were giddy to get piece of FB before the IPO.

The problem was that Facebook was a very small and very recently acquired position for GSV. Investors buying the stock at $20 were paying a very large premium to the fund's net asset value ($13 as of 9/30/11). I warned as much via StockTwits and Twitter:

Clearly $gsvc investors don't know that the fund's Facebook cost basis valued the company around $70B...
— Jesse Felder (@jessefelder) February 2, 2012

So buyers of $gsvc are essentially already paying $100B for its Facebook stake (and a 40% premium to its other investments).
— Jesse Felder (@jessefelder) February 2, 2012

No position in $gsvc #justsaying
— Jesse Felder (@jessefelder) February 2, 2012

At its current value, $gsvc buyers are also paying $35/share for its $grpn stake
— Jesse Felder (@jessefelder) February 2, 2012

Buyers are also paying $12B for $gsvc's Twitter stake, whose most recent round valued it at $8B
— Jesse Felder (@jessefelder) February 2, 2012

A few days later it seemed the fund's management saw things as I did and announced a secondary offering. The problem was rather than selling shares at $20 they announced the offering price would be $15.

I hope there were at least few folks out there that heeded my warning.