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Investment Research Since 1978

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Welcome to Stagnation

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I would scrap corporate taxes all together. It’s the fastest way to kick-start this economy. As Art Laffer and Nicholas Drinkwater point out at Investor’s Business Daily   According to Larry Gatlin of the legendary country group the Gatlin Brothers, the definition of bankruptcy is: "When your outgo exceeds your income, your upkeep will be your downfall." And boy, does Detroit fit that definition. But the origins of Detroit's bankruptcy are far from unique or exclusively Detroit's fault. And while Detroit's corruption-ridden city government and unfunded pension-fund … [Read more...]

Profits Looking Toppy: Will Margins Crumble?

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We've been pointing out for some time that after tax corporate profits as a percentage of GDP were much higher than their historical average, and that a mean reversion should be in the works. It does appear as though they're peaked out, as can be seen on our chart below. Justin Lahart says in The Wall Street Journal that, based on analysis by Brett Gallagher, the Fed’s artificially low interest rates are to blame for the run up in profit margins. He says that as rates rise, there could be winners and losers. But an analysis conducted by independent strategist Brett Gallagher shows that … [Read more...]

Summers: Best of the Bad Choices

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The top two candidates to replace the money printer in chief (Federal Reserve Chairman Ben Bernanke) next January are former Treasury Secretary Larry Summers and Fed Vice Chair Janet Yellen. Both would of course be low on our list, but all indications in our view are that the less bad and less dovish option is Larry Summers. Some quotes from Summers: “QE in my view is less efficacious for the real economy than most people suppose,” “If we have slow growth, we are not going to keep thinking that 5.5 per cent unemployment is normal. We are going to decide rightly or wrongly that the … [Read more...]

Pros vs. Joes Investing

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Are you a bearish pro or a bullish Joe? Last week we showed you a chart from BlackRock displaying just how poorly the average (Joe) investor's performance is. This week, as though to confirm that sad discovery, Bank of America Merrill Lynch has put out a chart showing that the bullish activity in stocks is being driven by average Joes. Meanwhile, the pros are heading for the exits in rapid fashion.   Chart via Zero Hedge … [Read more...]

Hedge Fund Ad Blitz

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Get ready for the hedge fund ad blitz because soon they'll be in your living room selling their wares. Don't believe the hype. You don't need to look too far to see the hot water some of them are in such as SAC. Former SAC employees have pleaded guilty and now regulators have accused its head Steven A. Cohen of ignoring "red flags" related to insider trading at his hedge-fund firm. Then you have the Raj Rajaratnam securities fraud and conspiracy. The SEC charges are part of a long-running probe of Cohen and his $15 billion hedge fund by regulators and federal investigators in which nine … [Read more...]

Regulation Doesn’t Prevent Bubbles

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For years Federal Reserve Chairman Ben Bernanke has been telling Americans that regulation can stem the growth of bubbles in an economy. China’s real-estate sector looks to be disproving that theory in real time. Just one more item on the long list of those about which Dr. Bernanke is wrong. China's real-estate sector showed strength in the first half of the year amid solid housing demand, despite government controls on the market and slowing economic growth. While the buoyancy in the housing market could lead to tighter market curbs in the months ahead, analysts said that for now, growth … [Read more...]

Average Investors Prone to Bad Decisions

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Current market volatility is creating a moment ripe for bad decision making on the part of the average investor. An interesting chart (below) published by BlackRock at the end of 2012, but no less pertinent today, shows that the average investor didn't even keep up with inflation from 1992-2011. Rash decision making is likely at fault. … [Read more...]

Bhidé and Phelps: Benefits of QE Doubtful

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Economists Amar Bhidé and Edmund Phelps excoriate the Fed for its handling of the recovery in a recent Wall Street Journal editorial. Bhidé and Phelps say that neither of the Fed's intended goals of boosting wealth or confidence have likely been achieved. [I]n late 2008 the Fed began its policy of "quantitative easing"—repeated purchases of billions in Treasury debt—aimed at speeding recovery. "QE2" followed in late 2010 and "QE3" in autumn 2012. Fed Chairman Ben Bernanke said in November 2010 that this unprecedented program of sustained monetary easing would lead to "higher stock prices" … [Read more...]

Where are the Jobs?

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Mort Zuckerman's editorial in The Wall Street Journal outlines the feeble jobs recovery in America. Americans are facing fewer hours, lower pay, and less work in general after the financial crisis. The jobless nature of the recovery is particularly unsettling. In June, the government's Household Survey reported that since the start of the year, the number of people with jobs increased by 753,000—but there are jobs and then there are "jobs." No fewer than 557,000 of these positions were only part-time. The survey also reported that in June full-time jobs declined by 240,000, while part-time … [Read more...]

Annuity Guarantee “WILL BE REVOKED”

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I've been warning investors about variable annuities for a long time. Hartford Insurance has issued a letter to its variable annuity investors warning that the guarantee will be revoked if they don't have 40% in bonds. Apparently Hartford has a contractual right hidden within the pages of the prospectus. Most investors need a doctorate to understand what they're signing up for with variable annuities. In this case, as is most often the case with variable annuities, the investor loses. Hartford is one of many insurers seeking to reduce exposure to what have turned out to be costly guarantees … [Read more...]