The Independent Market Observer

11/29/13 – The Parable of the Turkey

November 29, 2013

Once upon a time, a turkey hatched in the dead of winter. He lived in a nice warm coop, had plentiful corn and seeds to eat, and spent much of his poult-hood playing with all of the other little turkeys. When spring came, he and his friends ventured out into the yard and played some more; they continued to have corn and seeds to eat and shelter from the rain. The summer brought more of the same, along with nice people who regularly cleaned the coop, refilled corn and seed stores after the turkeys gobbled it all up, and chased away scary critters like foxes and cats when they got too near.

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11/27/13 – Asia Heats Up Again

November 27, 2013

One more reason to be grateful we live in the U.S. is the peaceful nature of our geopolitical neighborhood. With Canada and Mexico as our major neighbors, we really don’t have to worry about facing a local war—something Americans don’t appreciate enough. The fact that the Cuban missile crisis continues to resonate suggests what an exception it was. Other countries aren’t nearly so fortunate.

In several posts last year, I wrote about the increasingly serious face-off between China and Japan—with Taiwan and Korea also in the mix—over territorial claims in the local seas. Although the problem hasn’t gone away, it’s been subsumed in other, more urgent news since then. Recent events suggest it’s time to take another look.

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11/26/13 – It’s All Good: Things to Be Thankful For

November 26, 2013

I spend quite a bit of my professional life looking for things to worry about, to the extent that I’ve been referred to as “Eeyore.” There’s certainly some justice to this, but I do recognize good things when they happen. For example, I turned bullish on the U.S. economy about two years ago, well ahead of the crowd. That has played out well.

While I do have a bit of bias to the downside, in the spirit of the season (and because I haven’t done it in a while), let’s look at some of the many things we have to be thankful for.

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11/25/13 – What Does “Risk” Mean, and How Can We Match It to Clients?

November 25, 2013

A great comment came in recently from Commonwealth advisor John Smallwood. He writes: “My problem is that it is difficult to match a client’s risk profile with a model, since modern portfolio theory has been shown to be invalid and cannot measure risk, as we saw in 2008.”

I actually think there are at least two issues there, along with an assumption, so let’s unpack this a bit. To start, the fundamental question here seems to be “What is risk?” If we haven’t properly defined risk, at least in our own minds, then the rest of the investment process becomes guesswork.

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11/22/13 – A Trip into the Matrix

November 22, 2013

In many respects, cyberspace seems like old hat today. The ironic Onion article about the man who lives in cyberspace, basically buying books on Amazon and checking his friends on Facebook, sums it up nicely. William Gibson’s seminal novel Neuromancer, which introduced the term cyberspace, holds up pretty well, and The Matrix remains entertaining.

My experience yesterday at the Markets Media Global Markets Summit, however, really brought home for me how technology continues to evolve and affect what we do, as investors, on a daily basis. By and large, the panels were concerned with the changes in the trading infrastructure—legal, technological, and institutional—that underlie the financial system.

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11/21/13 – Margin Debt Versus Cash on the Sidelines

November 21, 2013

Bob Mestjian, one of our advisors and a fellow resident of Melrose, Massachusetts, wrote in with a very good question, to wit: “At the National Conference, you mentioned margin debit balances skyrocketing. However, I'm trying to reconcile skyrocketing margin debt with what I keep hearing about record levels of cash on the sidelines. Is there cash on the sidelines? Are there select investors who want to take risk ‘all in,’ using margin, while others are in cash and want nothing to do with stocks?”

Good question. First, let’s look at the concept of “cash on the sidelines.” This is a commonly used phrase, but unless the cash is actually stuffed in a mattress, it has to be somewhere in the financial system, where its removal—or relocation, really—would have effects. The phrase is usually a misnomer, as it reflects an investor preference for other asset classes over stocks.

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11/20/13 – New Stock Market Records: Signs of a Bubble?

November 20, 2013

I’ve been doing a number of interviews recently, and the one thing everyone wants to talk about is the new records being set by the market. With the S&P 500 touching 1,800 and the Dow touching 16,000, the question is whether this is the start of another upward run or whether it marks the peak.

There’s something about round numbers that gets people going. The end of the world in 2000, the hype over Dow 10,000 (both ways), and the repeated questions at every 1,000 mark suggest that somehow this number is different.

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11/19/13 – The Problem of Money, Part 6: Some Thoughts about Washington, DC

November 19, 2013

The photo below comes from an old B movie called Independence Day that I’ve always enjoyed. The plot is pretty simple: A race of space aliens shows up in orbit around the Earth and utterly destroys Washington, DC. Later on, though, it turns out the aliens are actually hostile.

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11/19/2013 – Interview on Reuters TV

November 19, 2013

Watch Brad’s interview on Reuters TV, where he discusses the Dow hitting a historic high of 16,000 and what this means for the markets going forward.

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11/18/13 – The Problem of Money, Part 5: Will the Dollar Collapse?

November 18, 2013

In the previous four posts in this series, we focused on the role of the dollar in the U.S. economy. We found that the money supply has actually been growing more slowly than the economy as a whole, and that, for most sectors, credit isn’t a problem either. In fact, scarcity—one of the two key properties of money—is being maintained at reasonable levels. We also looked at how that might change in the future, and what to watch for.

Now, let’s move on to the role of the dollar in the international system—specifically, the question of whether the dollar will collapse or at least lose its role as the world’s reserve currency. In this discussion, our conclusions about scarcity remain, but an added dimension must be considered: how scarcity has been maintained for the dollar, not just in absolute terms but also in relative terms, compared with other currencies. Next, we have to reintroduce the concept of exchangeability, which, besides being a fundamental characteristic of money, is also key in analyzing the future of the dollar.

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11/15/13 – The Problem of Money, Part 4: Asset Price Inflation

November 15, 2013

We talked yesterday about how consumer price inflation has been pretty moderate, and why that is. To recap: The speed at which money circulates has declined, even as the Fed forces bank reserves into the financial system, meaning that when the economy recovers, when the banking system gets its mojo back, and when lending starts to take off again, we can expect inflation to accelerate—potentially very much so.

A point worth mentioning here is that the Fed does have tools it can deploy to help limit inflation. And although the Fed has said it will wait to do so, inflation is actually a problem we know how to solve. This is something to watch, therefore, but shouldn’t become a long-term systemic problem.

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11/14/13 – The Problem of Money, Part 3: Inflation Today and Tomorrow

November 14, 2013

Yesterday, we talked about how the money supply has not expanded unduly, given the level of economic growth. We also looked at credit growth and found that it too was running at or below the levels expected, considering the level of economic growth. There appears to be no sign of the Federal Reserve’s stimulus in these measures.

Does that mean we’re off the hook on inflation? The short answer is no, and the reason is interesting. First, though, a bit of background.

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11/13/13 – Question and Answer

November 13, 2013

I have to apologize to Micah Crabdree, who posted a question on Halloween. Since then, I’ve either been preparing for our National Conference or attending it, and I meant to respond earlier. Sorry, Micah, but here you go . . .

The question concerned when the Fed was going to start the taper process—specifically, wouldn’t it be better to do so in a strong market environment, when the possible negative market effect would be limited, as opposed to a weaker environment, when the Fed’s action might serve to weaken it further?

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11/13/13 – The Problem of Money, Part 2: Today’s Monetary System

November 13, 2013

Yesterday, we talked about the two fundamental requirements of money: scarcity and exchangeability. Today, we’ll focus on how those elements work in the current monetary system.

Money today is almost exclusively fiat currency, with no underlying assets behind it. Dollars, euros, pounds, and the yuan/renminbi all have value because their governments say so. “Money” that has no governmental backing, such as gold or bitcoins, is a fringe player right now.

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11/12/13 – The Problem of Money, Part 1: What Is Money?

November 12, 2013

“It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so.” — Mark Twain

What is money?

At first blush, the question either sounds pretty obvious or like a Zen koan. I think it’s worth asking, though, for the same reasons it was worth asking “What is a house worth?” in 2007. Although everyone thought they knew all about the real estate market, it turned out we didn’t. In the same vein, I think there’s a real benefit to taking a deeper look at exactly what money is, and has to be, to determine if what we think we know about it (and about current economic conditions) actually makes sense.

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11/11/13 – Back from National and Thoughts About the Stock Market

November 11, 2013

Hanging out in planes and in airports yesterday, I was prepared to write something fairly caustic about US Airways. But I have to say, at the end of the day, they did a pretty good job.

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11/8/13 – Will More Jobs Mean Less Stimulus?

November 8, 2013

Looking at yesterday’s post, it is clear that there’s a disconnect between consumers and business again—but in the opposite direction from what’s been happening recently. Over the past couple of years, consumers have spent while business sat on its cash, refusing to invest or, more particularly, hire. While consumers had led the recovery thus far, it was apparent that, to take the next step, business had to start to hire and invest.

I mentioned yesterday that consumer confidence had declined since the shutdown, while business surveys had come in much more strongly, indicating that this transition might be starting. Today’s data points suggest that, while consumers are closing their wallets somewhat, businesses are beginning to open theirs.

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11/7/13 – Economy Showed Signs of Slowing Last Quarter

November 7, 2013

Today’s news included a stronger-than-expected growth figure for the U.S. economy, which expanded 2.8 percent in the third quarter. Before we get too excited, though, we have to note that the increase came from inventory buildup—not exactly a sustainable growth engine. In fact, you can argue that the reason inventories increase is because sales are less than expected. If you take away the inventory effect and net foreign trade, you end up with a 1.7-percent growth rate for sales to domestic purchasers for the quarter, down from 2.1 percent in the previous quarter, which supports this argument.

Unfortunately, other data points confirm a slowdown last quarter. Personal consumption grew more slowly, at 1.5 percent (down from 1.8 percent the previous quarter), while business investment dropped from a growth rate of 4.7 percent to 1.4 percent.

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11/6/13 – Off to National

November 6, 2013

This will be a very short post as I’m off to Commonwealth’s National Conference in Phoenix. It’s always a great week—with a wide range of interesting content, wonderful events, and even better people—and I’m excited for it.

I’ll try to post something else later this afternoon, but for the moment, the interesting story of the day appears to be politics. The reelection of Chris Christie in New Jersey and the defeat of the Tea Party candidates in Virginia and Alabama suggest that the center may be getting some traction. Hopefully this will translate to a more businesslike, less confrontational environment in Washington.

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11/5/13 – Obamacare’s “Yes I Can” Becomes “I Think I Can”

November 5, 2013

I have been shamelessly avoiding writing about the Affordable Care Act, better known as Obamacare, because it was both inherently too political and economically too nebulous to really get my hands around. Apart from noting that it would inevitably create additional headwinds to growth and job creation—which isn’t a value judgment, but an economic fact—I haven’t weighed in on the law itself. An opinion on the law has to be a value judgment between competing goods, a relative cost-benefit analysis that everyone has to do for himself or herself.

Now, however, we’re at a place where the law itself is not at issue, but the implementation is, and that is having (and will continue to have) economic and market implications that we should be aware of.

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Market Thoughts for November 2013 Video

November 5, 2013 

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11/4/13 – Interview on Bloomberg TV's "What to Watch This Week"

November 4, 2013

Watch Brad's interview on Bloomberg TV here, where he responds to the question, "Will the rally continue?"

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11/4/13 – Change in the Weather: Colder Outside, Hotter in the Stock Market

November 4, 2013

I took down a tree over the weekend, using a handsaw, branch cutters, and a ladder. I had to do it piecemeal, one branch at a time, as it was right next to my house. That’s a lot of work, and I was sweating hard by the time I got down to the main trunk and had dragged the rest of the tree to the back yard. Yesterday, when I was cutting down the remains for disposal, the weather was a lot colder. A sweater, a fleece, and gloves weren’t keeping me warm. It was a big shift from one day to the next—but hey, I live in New England.

The change in the market weather hasn’t been nearly as quick, but it has been even more pronounced. Taking a look at the market over the past couple of months, it’s clear that the narrative has changed, which probably portends continued strong performance.

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11/1/13 – Success Is Easy, If You Lower Your Standards

November 1, 2013

That headline should give you a hint about the contents of this post. Now that we’re well into earnings season, I thought I’d take a look at how we’re doing and what that might mean going forward.

First, a bit of context. Earnings estimates, being estimates, change over time—usually downward. Dr. Ed Yardeni, a terrific economist and market analyst, regularly presents charts like the one below on his blog. You can find the original here.)

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