Early Riser

VA Land Tax Credit

2008-06-11T14:56:00.002-05:00

This is really a great idea. The guys at DT Enterprises really have it figured-out.

Piece-Out!

Eric Cantor & Pork

2008-02-16T10:43:00.002-05:00

I was disgusted to see that the Republican Leadership failed to appoint anti-pork Rep. Jeff Flake to the open seat on the Appropriations Committee. Here's my letter to my Rep., Eric Cantor:

I was very disheartened to learn that the Republican leadership in the House chose Jo Bonner over Jeff Flake for the open seat on the Appropriations Committee. Rep. Bonner has a very low rating on the Club For Growth's RePork Card (2% rating!) and I believe the Party missed an ideal chance to prove it's commitment to eliminating wasteful spending by nominating Rep. Flake.

The Party's lack of leadership on this issue has been nothing short of embarrassing and I expected more of you as my Representative. You'll have my vote, but you have failed to capture trust & respect.

Disappointed,

(my real name)

Recession Risk

2007-11-19T07:41:00.000-05:00

John Hussman runs a mutual fund (Hussman Strategic Growth) that I own. He's an Economist by training and he's proven to be a very good fund manager. The best thing about John is that he publishes a weekly market commentary that explains his current take on the market and the economy as a whole.

In the last 18 months he's been pretty cautious due to high equity valuations. That said, his weekly columns are always quick to point out that his observations are not predictions and he's very good about disclosing the futility of short-term market forecasts.

Not anymore (emphasis added by me)...

In short, the financial markets are at a critical point. It's possible that investors will somehow adopt a fresh willingness to speculate, but my impression is that in the weeks ahead, investors will be forced to recognize that recession risk has tipped. That's not to say that this realization will produce one-way market movements. Seasonal factors tend to buoy the market a few trading days before holidays and a few days around the turn of each month, and as I noted last week, oversold conditions lend themselves to “periodic short squeezes and spectacular but short-lived rebounds” (which we observed on Wednesday before quickly eroding). So we will almost certainly observe advances driven by investors frantic to “buy the dip” and “catch the rebound.” Overall, however, the return/risk profile on both stocks and the economy as a whole appear increasingly lopsided toward bad outcomes.

As I emphasized last week, my intent here is not to encourage investors to depart from carefully considered investment strategies. The real issue is that investors tend to overestimate their ability to stick with large (often inappropriate) exposures to equities during significant market downturns. I hope to encourage investors to carefully consider their ability to withstand a standard, run-of-the-mill 30% bear market loss (which has historically occurred once every 5 years or so) without deviating from their investment plan. Investors who can't believe that that sort of decline is, in fact, standard and run-of-the-mill are probably already in trouble because they haven't bothered to look at the data. None of this requires that we forecast or necessarily expect such a decline. But investors emphatically should not rule out such a decline in considering their investment exposure.

Run away!

Income Inequallity & Twisted Ankles

2007-11-18T19:02:00.000-05:00

For example, the most frequent solution to income inequality, and the one advocated by Krugman in nearly every interview about his book, is higher taxes on those at the top of the income scale.

While this may give the appearance of lessening inequality, in actuality it does very little. Essentially, it is equivalent to twisting
the ankle of the fastest runner in the world in an attempt to make other runners faster. In no way does this make other runners faster.

Indeed. Read the whole article

Africans join lobby for lower farm subsidies

2007-11-15T13:12:00.000-05:00

More greedy corporate stooges shilling for free trade.

Africans join lobby for lower farm subsidies

When Good News is No News

2007-11-15T07:36:00.000-05:00

Where has all the Iraq news gone? Hmm... could it be that the media has no interest in positive news from the front lines?

When Good News is No News

The Great Elite Back-Down

2007-11-15T07:32:00.000-05:00

The Corner on National Review Online

It's us, buddy, the great unwashed. This is still a democracy we have here. Try to keep that in mind, eh?

Heh.

The Skeptical Optimist: Deficit Watch thru Oct 2007

2007-11-14T08:44:00.000-05:00

The Skeptical Optimist: Deficit Watch thru Oct 2007

The total 12-month deficit is a 1.2% of GDP and revenue is still growing at a faster pace than federal outlays (yes, my friends on the left, even including the GWOT).

Where's the huge deficits predicted by the Dems? Bush cut taxes, the economy has flourished and tax receipts are up. The Left often miss the fact that tax revenues are based on two factors... the tax rate and the tax base. Isn't it better to spend our time focused on the base?

Cash Flow, Credit Cards and Pay Day Loans

2007-11-12T11:13:00.001-05:00

Cash flow is often the difference between solvency and bankruptcy for many businesses... especially small ones. You can have a great product, excited customers and even fantastic sales - but if the cash is leaving faster than it's coming in, most businesses either pack-up or go to a commercial bank for a line of credit. This line of credit allows them (for a cost) to smooth-out the differences between expenses and cash income. Very few businesses could survive without this assistance.

When we look at the smallest of businesses, the household, this same cash flow issue arises more often than most of us would prefer. For higher-income folks like me, we can simply use credit cards and cash savings. For those on the lower end of the income spectrum, however, credit cards and big savings accounts are a non-starters. What's left? Pay-day loans! Hooray! Yes... yes... I know... these high interest loans are one of the favorite punching-bags 'consumer-protection' advocates and journalists. I would argue, however, these negative feelings are misplaced.

Pay-day loans, much like credit cards, HELOCs and alcohol, are best used in moderation. Most critics point to two separate issues: 1) the high interest rates and 2) some borrowers who take multiple loans from multiple lenders and enter into a debt death-spiral. As for the interest rates, they are driven by the high risk nature of the loans. Having had several sub-prime Prosper.com loans default, I can personally testify to the likelihood of loss. Note to all my lefty readers: if you don't like the interest rate, I suggest you loan some money to folks living paycheck-to-paycheck and let me know how it turns out.

The second concern, the debt death spiral, is more of a comment on the poor level of financial education in the US than on the pay day loan folks. There are a whole host of personally destructive activities that negatively impact both the rich and the poor. A dynamic and free society carries with it both the freedom to succeed and the freedom to fail.

Magnifying the Trivial

2006-09-11T05:15:00.000-05:00

Hussman continues to be bearish or, at the least, hes not convinced there is any compelling reason to have market risk in is holdings.

Hussman Funds - Weekly Market Comment: September 10, 2006 - Magnifying the Trivial: "Think of it this way. Suppose that there was a high 80% chance that the market will rise 10% over the coming year, and just a small 20% chance that it will decline 15% over the coming year. Sound like good odds? Well, given those odds, the expected return would be [.80(10%) + .20(-15%) = ] 5%, which is the same as you'd get in risk-free T-bills. A risk-averse investor wouldn't take the bet. "

Time to check your credit... for free

2006-09-01T05:50:00.000-05:00

The three big credit reporting agencies are required by law to let you see your credit report once every 12 months for no charge. You can turn this law into a free credit monitoring service by spacing-out your requests on a schedule. Since I'm married, I alternately check my wife's and my credit every two months.

This morning, I checked my Equifax report. Here's the remainder of the schedule...

11/1 - check wife's TransUnion
1/1 - check my Experian
3/1 - check wife's Equifax
5/1 - check my TransUnion
7/1 - check my wife's Experian

This schedule allows me to stay on-top of the three credit agencies and each of our credit histories. Here's the link to the free on-line service: AnnualCreditReport.com

Bend It Like (Yogi) Berra

2006-08-30T07:11:00.000-05:00

Nice analysis of soccer and it's lack of popularity in the US (hat tip to my friend Scott)...

Allen R. Sanderson, Bend It Like (Yogi) Berra: Library of Economics and Liberty: "Throughout the entire 2+ hour ordeal, I kept asking myself: Why would anyone waste good time or money watching this sport? Ignoring for a moment the lack of scoring, the ubiquitous flops that would make an NBA player jealous or incredulous, and 'unnatural acts' such as not being able to touch the ball with your hands or arms, I began to apply basic economic principles to the sport, and tried to understand why 6 billion people, including my graduate teaching assistants from Milan, Rio and Barcelona, seem to care passionately and a few hundred million, mainly in the United States, don't. "

The Skeptical Optimist: Trade deficit? Or trade surplus?

2006-08-24T13:17:00.000-05:00

Great post from the Skeptical Optimist... read the whole thing and then read the research paper (don't worry... it's short and easy to read).

The Skeptical Optimist: Trade deficit? Or trade surplus?: "Ever wonder why economic doomsday hasn't arrived yet? I've been hearing that economic calamity or collapse is only a decade away - for at least the forty years I've been paying attention, anyway. Fifteen years ago was when I started looking at the other, more optimistic side of the argument (...the side that still never gets any airtime), and started finding the growth and prosperity arguments that predicted economic outcomes far better than the doomsday folks had.

Specifically, why hasn't the trade deficit cratered our economy and standard of living yet? Is all that survival gear, canned food, and bottled water we were supposed to sock away going to rot, while doomsday keeps us waiting, waiting, waiting? "

Hussman Weekly Commentary: Data Dependent

2006-08-21T07:43:00.000-05:00

Hussman Funds - Weekly Market Comment: August 21, 2006 - Data Dependent: "Despite the market's reaction, the hope that inflation is slowing is hardly supported by the data. The 'great news' on the CPI wasn't even outside the bounds of rounding error, while the PPI figures were actually of significant concern. Sure, the prices of some volatile items like eggs and fish fell steeply, but the improvement in the PPI for 'finished goods' was overshadowed by continued pressure in the PPI for 'intermediate goods.' Here's the picture that concerns me.

Over the past year, consumer price inflation has clocked in at 4.15%. Producer price inflation (finished goods) has been a similar 4.12%. But if you look at intermediate goods, we're currently at an inflation rate of 8.83%. That's the most abrupt widening in the spread between intermediate and finished goods since the 1973-74 oil crisis. Moreover, if we look at points in history when prices for intermediate goods have outpaced prices for finished goods over a 6-month period, we've also seen, on average, an acceleration in the PPI finished goods inflation rate over the following 6 months."

Hussman Weekly Commentary:Premises & Implications

2006-08-07T08:11:00.000-05:00

Yikes!!

Hussman Funds - Weekly Market Comment: August 7, 2006 - Premises & Implications: "In short, we should not be surprised to observe stagflation, falling stocks, weak profits, flat bonds, and a dollar crisis in the months ahead."

Hussman Weekly Commentary: Anatomy of a Punch Line

2006-07-31T06:40:00.000-05:00

The punchline is that the economy and the market are due for a sustained downward trend. Hussman is bearish and, once again, I hope he's wrong.

Read the whole thing.

Hussman Funds - Weekly Market Comment: August 31, 2006 - Anatomy of a Punch Line:

"As of last week, the Market Climate for stocks remained characterized by unfavorable valuations and unfavorable market action, holding the Strategic Growth Fund to a fully hedged investment stance. On a shorter term basis, the market is again overbought. There are few times that I have any sort of opinion about short-term market action, but overbought conditions in unfavorable Market Climates (and oversold conditions in favorable Market Climates) are among the exceptions.

Some of the worst market outcomes on record have followed on the heels of overbought rallies in periods when both valuations and the overall quality of market action have been unfavorable. In my view, Friday's rally on a distinctly stagflationary GDP report represented a good opportunity to do some lightening up of stock market exposure for investors who have not already done so, and would not easily tolerate a decline of 30% or so in the major indices."

Hussman Market Commentary: Independent Thought

2006-07-23T17:16:00.000-05:00

Hussman Funds - Weekly Market Comment: July 24, 2006 - Independent Thought: "It continues to astonish me how much power investors appear to ascribe to the Federal Reserve. The institution can do nothing but purchase debt (mainly U.S. Treasuries) and pay for it by creating bank reserves, or sell debt and receive payment by reducing bank reserves. When you realize that the total volume of bank lending has virtually no link at all to bank reserves (since the majority of monetary aggregates other than checking accounts have had zero reserve requirements since the early 1990's), and that foreign purchases of U.S. Treasuries have swamped Fed activity in Treasuries three-to-six times over in recent years, this whole focus on every word, syllable, and inflection from the Federal Reserve is just preposterous."

Hussman Weekly Commentary: Tornado Warnings

2006-07-17T06:13:00.000-05:00

Hussman Funds - Weekly Market Comment: July 17, 2006 - Tornado Warnings:

"In short, until we observe an improvement in the quality of internal market action (which we don't observe here) we shouldn't be surprised to see news - economic as well as political - having a generally negative tone.

For example, since the 1960's, when our measures of market action have been favorable on balance, the ISM purchasing managers index has increased an average of +0.46% over the following month. In contrast, when market action has been unfavorable, the index has declined an average of -0.68% over the following month. Likewise, surprises to the prevailing inflation rate have averaged -0.23% when market action has been favorable, and +0.30% when market action has been favorable. Similar results hold even if we lag the news by an extra month to ensure non-overlapping periods.

We also know that news affects sentiment measures such as consumer confidence and the percentage of bearish investment advisors. These measures give us "summary statistics" of the various concerns influencing consumers and investors in a given month. Historically, when internal market action has been favorable, consumer confidence has increased by +0.64% over the following month, while unfavorable market action has been followed by an average decline of -0.84% in consumer confidence. Similarly, favorable market action has been followed by a contraction in the bearish percentage by -0.38% during the following month, while unfavorable market action has been followed by an average increase in the bearish percentage by +0.46%. Again, similar results hold even if we lag the data."

Hussman Weekly Commentary: There's No Such Thing as Idle Cash on the Sidelines

2006-07-10T06:30:00.000-05:00

Hussman dispels the often used case for an impending bull market: there's so much cash on the sidelines. Once again, Hussman presents a compelling case...

Hussman Funds - Weekly Market Comment: July 10, 2006 - There's No Such Thing as Idle Cash on the Sidelines: "One of the hurdles in thinking properly about the financial markets is to understand the idea of "equilibrium" - that all securities issued must be held; that savings must equal investment; that every share bought by someone must be sold by someone else.

... and that there's no such thing as "idle cash on the sidelines."

Prosper.Com Review

2006-07-08T06:25:00.000-05:00

I have been playing around with Prosper.Com in the last few months and I want to give my initial impressions. First, Prosper.com is a peer-to-peer lending company... think eBay for unsecured lending. Borrowers submit their loan requests including: amount ($1k - 25k), maximum interest rate (up to 29% or state maximums) and various auction variables. Prosper takes their loan application, runs a credit report and assigns a 'credit grade'.

Lenders, such as me, deposit money into Prosper and then 'bid' on different people's loans by specifying how much they want to lend (from $50 up to the total loan amount) and the minimum interest rate they are willing to accept for that particular loan (every funded loan is comprised on one borrower and many lenders). As lenders bid on the loan, the interest rate stays at the borrowers maximum interest rate until enough money has been bid to fully fund the loan. Once fully funded, the auction starts... as new lenders bid, the interest rate starts dropping until the time limit of the auction expires.

Once the loan is funded and the auction is over, Prosper manages the receipt of monthly payments for borrowers (all loans are amortized over 36 months) and credits each lender's account with their fractional share of the payment.

Here's my editorial...

Pros

Great business model
There's a pretty tight and cooperative lender community
Website is well designed
My returns, so far, are exceeding my expectations. I am a lender participating in 107 loans with an average interest rate of 18.3%. I have received payments on all of the loans (87) where a payment has come due.
I should expect a 5% default rate based on the credit ratings of my loan portfolio. No defaults so far... but time will tell.

Cons

Prosper does not pay you interest on your unloaned money sitting in your Prosper account.
The cycle time to deposit money to my prosper account (both for my deposits and loan payments) is gut wrenchingly slow.
Once you win a loan bid, Prosper goes through a rather slow verification process that should take place before the loan gets listed.
Borrowers have complained about Prosper making various mistakes with payment posting.

Overall, I'm cautiously optimistic. Making 13-18% on my money while participating in a pretty interesting internet start-up is pretty exciting (yes, it doesn't take much to make me happy).

Please join my group on Prosper...

Here's a link to my loan portfolio. (Not completely accurate, but it's directionally correct.)

Hussman Commentary: July 3, 2006 - Fedwatching - Just Say No

2006-07-03T07:20:00.000-05:00

Hussman Funds - Weekly Market Comment: July 3, 2006 - Fedwatching - Just Say No: "The financial markets continue to have what I view as an unhealthy and pointless obsession with the Federal Reserve. Unhealthy because it detracts attention from the significant risks posed to the stock market from rich valuations, and to the economy from an enormous current account deficit, weakening housing, and flattening employment conditions. Pointless because the monetary policy is now, and always has been, the gopher of fiscal policy. The Fed can do nothing but decide whether government liabilities held by the public take the form of money (currency and reserves) or Treasury securities. It has no power to determine the total quantity of those liabilities (Congress does that). Whatever influence the Fed ever did have was largely removed in the early 1990's (see Why the Fed is Irrelevant)."

Hussman - Recession Risks are No Longer Dormant

2006-06-27T09:11:00.000-05:00

Hussman Funds - Weekly Market Comment: June 26, 2006 - Recession Risks are No Longer Dormant: "In the context of slowing employment growth, a stall in aggregate weekly hours, an emerging widening in credit spreads, and other factors, my impression is that recession risks have increased considerably.
That said, we are still not at the point where I would view a recession as imminent. The main factors that would create that expectation would be a further flattening in employment growth (not necessarily a downturn, just growth in non-farm employment of less 0.5% on a 6-month lookback - which would require employment growth to average about 100,000 jobs per month or less over the next quarter or so), a weakening of the ISM figures toward or below 50 (not all declines below 50 indicate recession, but at present, such a decline would be a strong confirmation of negatives in other indicators already suggesting caution), and a further widening of credit spreads, particularly between 6-month commercial paper and 6-month Treasury bills.
For now, suffice it to say that recession risks are no longer dormant, but aren't yet acute. While we don't yet have enough evidence to anticipate a significant and impending economic downturn, the trends are continually turning in that direction, so it is becoming more a question of 'when' than 'if'."

Hussman Weekly Commentary: Recession Risks are No Longer Dormant

2006-06-26T07:27:00.000-05:00

Hussman's Weekly Market Commentary - S&P 500 Fair Value Below 800?

2006-06-19T06:38:00.000-05:00

As I watched a 10% decline in my wealth over the last few weeks, I was reminded that Hussman has been 'spot-on' in his analysis of the market. I'm seriously considering putting some of my Domestic Equity holdings into Hussman's fund.

Read the whole thing!

Hussman Funds - Weekly Market Comment: June 19, 2006 - S&P 500 Fair Value Below 800?: "Sometimes, there is simply no point to retaining an exposure to market fluctuations at all. When valuations are rich, interest rates are rising, and internal market action displays wide divergences and 'heavy' price/volume action (indicative of waning sponsorship and a deteriorating willingness of investors to accept market risk), there has been no benefit historically in maintaining even a speculative exposure to market risk. During such periods, hedging against the impact of market risk actually reduces volatility while typically increasing long-term returns (though not necessarily short-term returns since one will tend to miss periodic short-term rallies)."

Hussman Weekly Market Commentary: BEAR

2006-06-12T07:06:00.000-05:00

Hussman has been spot-on in his analysis of the markets. Today he utters the B word... Bear.

Read the whole thing.

Hussman Funds - Weekly Market Comment: "As usual, our own investment approach doesn't focus much on identifying bull or bear markets (which can only be identified in hindsight), but instead focuses on prevailing, identifiable conditions of valuation and market action. For what it's worth, unfavorable Market Climates have a clear, but far from perfect overlap with periods that turn out to be "bear markets" in hindsight. Unfavorable Market Climates do tend to cover the worst portions of most bear markets, as well as periods within bull markets that were negated by abrupt weakness, which is important.

Given the present constellation of market and economic conditions, if I was to venture a guess, I'd guess that stocks have entered a bear market here. That opinion doesn't drive our actual investment stance, and we'll accept an exposure to market fluctuations on any significant improvement in valuations or market action, but I certainly would not rule out the potential for substantial further market weakness just because stocks are down a little bit from their highs. Nor, however, should we be surprised by a "fast, furious, prone-to-failure" rally to boost short-term hopes to the contrary. We're fully hedged regardless."

Hussman Weekly Market Comment: Apples to Elephants

2006-05-30T07:22:00.000-05:00

Hussman Funds - Weekly Market Comment: May 30, 2006 - Apples to Elephants: "As for the long-term picture, the current reality is that stocks remain priced to deliver fairly unsatisfactory long-term returns to buy-and-hold investors in the major indices.
What is the long-term? Well, one way to think about that is to think about stocks as a claim on a long-term stream of future cash that will be delivered to investors. In the fixed-income market, a bond might deliver some of its interest payments in the early years, some in the later years, and finally a lump sum at maturity. The "duration" of a bond is basically the "average date" at which those payments come in (weighted by the proportion of the total bond value that's delivered at any given point). So a 10-year zero-coupon bond would deliver it's whole value at year 10, and so would have a duration of 10 years, while a 10-year, 6% coupon bond priced at par would have a duration closer to 8 years.

What's interesting about duration is that it's also the horizon over which you can best predict your future wealth (assuming you reinvest your interest or dividends), regardless of where the stock or bond market goes over time. That's why buy-and-hold investors should generally try to match the duration of their investments to the duration of their obligations. In effect, duration is the most appropriate definition of "long-term" in the sense of making the final value of a buy-and-hold investment relatively independent of the path that the market takes over time.

As it turns out, a good estimate of stock market duration is simply the price/dividend ratio of the S&P 500. That sounds like an implausibly magical fact, but there's a good amount of mathematics behind it (the February 23, 2004 weekly comment includes a detailed discussion on duration in the stock and bond markets).

Read the rest to find out the market's current 'duration'.

Hussman Weekly Market Commentary: Textbook Warnings

2006-05-22T08:07:00.000-05:00

Hussman's dire warnings of the past two months certainly played themselves out last week. My portfolio dropped about 5% and it may be time to get defensive with respect to US equities.

Hussman Funds - Weekly Market Comment: May 22, 2006 - Textbook Warnings: "Among the simplest truths is that market risk tends to be unusually rewarding when market valuations are low and interest rates are falling. For example, since 1950, the S&P 500 has enjoyed total returns averaging 33.18% annually during periods when the S&P 500 price/peak earnings ratio was below 15 and both 3-month T-bill yields and 10-year Treasury yields were below their levels of 6 months earlier. Needless to say, there are a variety of ways to refine this result based on the quality of other market internals, but it's a very useful fact in itself.

The "canonical" market bottom typically features below-average valuations, falling interest rates, new lows in some major indices on diminished trading volume, coupled with a failure of other measures to confirm the new lows, and finally, a quick high-volume reversal in breadth (usually with an explosion of advances over declines very early into a new advance).

Similarly, market risk tends to be poorly rewarded when market valuations are rich and interest rates are rising. Since 1950, the S&P 500 has achieved total returns averaging just 3.50% annually during periods when the S&P 500 price/peak earnings ratio was above 15 and both 3-month T-bill yields and 10-year Treasury yields were above their levels of 6 months earlier. Again, there are a variety of ways to refine this result, but note that anytime the total return on the S&P 500 is less than risk-free interest rates, a hedged investment position increases overall returns (since hedging instruments are priced to include implied interest)."

Hussman Weekly Market Commentary: Stagflation!?!?

2006-05-15T08:16:00.000-05:00

Hussman is fully hedged and worried about stagflation... read the whole thing.

Hussman Funds - Weekly Market Comment: May 15, 2006 - Yet: "The broad fundamentals - particularly an enormous current account deficit and reasonable prospects for stagflation - continue to be favorable for this group.

That reference to stagflation is based on two factors. First, historically, and internationally, it's not the rate of money growth per se, but the growth of government spending as a share of GDP (particularly spending that doesn't add to the productive capacity of a nation), that drives inflation pressures. Second, the enormous current account deficit means, by definition, that a substantial portion of U.S. gross domestic investment is currently being financed by foreign capital inflows. There are only two ways out of this deficit - invest less domestically, or save more domestically. Given a profligate fiscal policy and a low propensity to save among U.S. households (saving more requires income growth to outpace consumption growth), "saving more" is probably not a likely source of adjustment. More likely, we'll adjust a good part of the current account deficit through weakness in U.S. gross domestic investment (mostly via a housing slowdown, in my estimation). In any event, the U.S. has virtually zero likelihood of enjoying a sustained "investment boom" anytime soon - whatever growth we observe in capital spending is likely to come from a contraction in housing investment, leaving gross domestic investment relatively flat."

Doom and Demography

2006-05-09T15:15:00.000-05:00

Doom and Demography: "For decades, the world has been haunted by ominous and recurrent reports of impending demographic doom. In 1968, Paul Ehrlich's neo-Malthusian manifesto, The Population Bomb, predicted mass starvation in the 1970s and 80s. The Limits to Growth, published by the global think tank Club of Rome in 1972, portrayed a computer-model apocalypse of overpopulation. The demographic doom-saying in authoritative and influential circles has steadily continued: from the Carter administration's grim Global 2000 study in 1980 to the 1992 vision of eco-disaster in Al Gore's Earth in the Balance to practically any recent publication or pronouncement by the United Nations Population Fund (UNFPA).

What is perhaps most remarkable about the incessant stream of dire - and consistently wrong - predictions of global demographic overshoot is the public's apparently insatiable demand for it. Unlike the villagers in the fable about the boy who cried wolf, educated American consumers always seem to have the time, the money, and the credulity to pay to hear one more time that we are just about to run out of everything, thanks to population growth. The Population Bomb and the Club of Rome's disaster tale both sold millions of copies. More recently, journalist Robert D. Kaplan created a stir by trumpeting "the coming anarchy" in a 2000 book of the same name, warning that a combination of demographic and environmental crises was creating world-threatening political maelstroms in a variety of developing countries. Why, of all people, do Americans - who fancy themselves the world's pragmatic problems-solvers - seem to betray a predilection for such obviously dramatic and unproved visions of the future? "

Hussman Weekly Market Commentary: Avoiding the Big Loss

2006-05-08T07:13:00.000-05:00

Hussman Funds - Weekly Market Comment: May 8, 2006 - Avoiding the Big Loss: "Here's a historical fact that I don't recommend as a timing tool or investment strategy, but is true nonetheless. Had an investor sold the S&P 500 index anytime it reached a price/peak earnings ratio of 19 (i.e. 19 times the highest level of earnings achieved to-date), and then simply sat in Treasury bills, possibly for years, reinvesting in stocks only when the S&P eventually declined to 14 times earnings, that investor would have captured the entire historical return enjoyed by S&P 500, with substantially lower volatility and risk exposure.
Even easier, suppose that an investor sold the S&P 500 at 19 times record earnings, and just sat out of the market until the S&P 500 eventually dropped 30% from its prior highs (say, on a weekly-closing basis). Nothing more. Just sell at the first point of overvaluation and then sit around waiting for a plunge. That strategy would have placed an investor out of the stock market nearly 30% of the time, yet would have produced total returns of 13.03% annually since 1940 (versus 11.90% for a buy-and-hold approach), and 13.67% since 1970 (versus 12.96% for a buy-and-hold).
Now, one might say sure, but that's because you've eliminated several deep, unusual �outliers� like the �69-70 decline, the �73-74 plunge, the �87 crash, and the 2000-03 bear market. But that's exactly the point. All of those plunges had their origins in rich valuations."

New York TImes Standing-Up for Zarqawi's Self Esteem

2006-05-07T09:00:00.000-05:00

Why is the New York Times bothering to discredit the video showing Zarqawi as a bumbling soldier in New Balance shoes?

Not All See Video Mockery of Zarqawi as Good Strategy - New York Times: "The weapon in question is complicated to master, and American soldiers and marines undergo many days of training to achieve the most basic competence with it. Moreover, the weapon in Mr. Zarqawi's hands was an older variant, which makes its malfunctioning unsurprising. The veterans said Mr. Zarqawi, who had spent his years as a terrorist surrounded by simpler weapons of Soviet design, could hardly have been expected to know how to handle it."

Why Isn't Socialism Dead?

2006-05-05T09:37:00.000-05:00

Great article on Socialism... read the whole thing.

TCS Daily - Why Isn't Socialism Dead?: "Thus, in the coming century, those who are advocates of capitalism may well find themselves confronted with 'a myth gap.' Those who, like Chavez, Morales, and Castro, are preaching the old time religion of socialism may well be able to tap into something deeper and more primordial than mere reason and argument, while those who advocate the more rational path of capitalism may find that they have few listeners among those they most need to reach -- namely, the People. Worse, in a populist democracy, the People have historically demonstrated a knack of picking as their leaders those know the best and most efficient way to by-pass their reason -- demagogues who can reach deep down to their primordial and, alas, often utterly irrational instincts. This, after all, has been the genius of every great populist leader of the past, as it is proving to be the genius of those populist leaders who are now springing up around the world, from Bolivia to Iran.
This is why socialism isn't dead, and why in our own century it may well spring back into life with a force and vigor shocking to those who have, with good reason, declared socialism to be no longer viable. It is also why Georges Sorel is perhaps even more relevant today than he was a hundred years ago. He knew that it was hopeless to guide men by reason and argument alone. Men need myths -- and until capitalism can come up with a transformative myth of its own, it may well be that many men will prefer to find their myths in the same place they found them in the first part of the twentieth century -- the myth of revolutionary socialism. "

State sues feds, saying SUV mileage standards should be raised

2006-05-02T18:34:00.000-05:00

Why don't these nanny states just outlaw SUVs altogether? Do they fear that their citizens might be a bit perturbed? "Let's just make the Feds do it... they'll do anything!"

State sues feds, saying SUV mileage standards should be raised: "California today launched its latest skirmish with the Bush administration over environmental rules, suing the federal government over SUV gas-mileage standards that the state considers too lax. "

2006 Annual May Day Communique From Laika

2006-05-01T13:33:00.000-05:00

From the best satire site on the web... The People's Cube

Cube :: 2006 Annual May Day Communique From Laika: "Today Comrades, millions of socialists are taking to the streets of Amerika to advance the cause of the Welfare State! All borders shall be removed! The Mexicomintern Council has been working very hard with La Raza these past few months, blending fascism and socialism to come up a unique brand of progressive thought which is bound to destroy the Evil Gringo Bush and his capitalist knaves. Assimilation? No! Domination? Yes! Free stuff (hospital care) for everybody! We'll march today and get drunk on Friday, Cinco de Mayo! Even the Mexicans have kicked French Ass!"

ER Portfolio Performance - April 2006

2006-05-01T06:09:00.000-05:00

April was a great month...

April 2006 Return - 3.11% (versus 1.08% for the Russell 3000)
Year To Date Return - 9.61% (6.45%)
Last 12 Months Return - 18.50% (18.09%)
12 Month Standard Deviation - 2.3% (2.2%)
2/1/2001 through 4/30/06 Cumulative Return - 36% (11%)
2/1/2001 through 4/30/06 Annualized Return - 6.1% (2.1%)

My annualized compounded return of 6.1% is OK but my retirement nest egg isn't going to meet my needs on investment growth alone. What, you ask, could be more important than high investment returns? Well, if you're a working stiff like me and you don't have a trust fund, it's all about your propensity to save versus spend.

I looked at my net worth growth over the last 5+ years (the same period of the long term calculations above) and calculated its annualized compounded growth. I excluded any rise is the value of my home because I really didn't have anything to do with that... don't get me wrong... it's great - I just want to look at actual savings.

Here are the numbers:

Total 63 month increase in net worth: 177%
Annualized increase: 21.4%

So my investments returned 6.1% annually but my net worth increased 21.4% annually! The 15.3% difference is my ability to save. As my net worth grows, I doubt I'll be able to keep this frenetic savings rate at the 15+% level. It is, however, pretty compelling evidence that savings (at least for me) is dramatically more important that investment return when you are in the first 15 years of our earnings life.

ER Portfolio Allocation - April 2006

2006-04-29T08:09:00.000-05:00

Here's my latest asset allocation (click for a larger image)...

Not too different from my March allocation... I did reduce my cash position from 5.1% down to 2.1% by purchasing EFV (Foreign Value Index) and EWU (UK Index). This move also brought by foreign equity position from 2.3% up to 4.9% - close to my policy target.

I am still a bit overweight in Emerging Equity and I'll probably end up selling AUO (an Emerging Equity Prudent Speculator pick) this coming month. I've got a 32% return and I really have no business owning any single emerging equity stock.

I'll be compiling my portfolio performance this weekend and I'm guessing April will be another good month.

Oil Companies & Windfall Taxes

2006-04-27T06:03:00.000-05:00

I have a tale of two companies for you today. One is known for it's 'obscene' profits and the other is known for it's hip technology and coolness. I took a look at the latest financials for these companies...

Income Statement	Company 1	Company 2
Pre-Tax Profit Margin	17.8%	14.5%
Income Tax %	41.1%	32%
Post-Tax Profit Margin	10.5%	9.8%

So both companies have net after-tax income of about 10% of sales. Is either company under-taxed? Is either company on 'Corporate Welfare'? Which company should be investigated by congress?

Exxon-Mobile is Company 1 and Apple Computer is Company 2. Still think we should levy a tax on Exxon? What if I told you that CalPERS (the California Public Employee Pension Fund) owned $1.7 billion of Exxon stock?

The Left loves to demonize corporate profits but they often neglect the fact that normal people like you and I are the owners and beneficiaries of those supposedly obscene profits. Furthermore, those companies employ a bunch of people (106,000 for Exxon) with good, high-paying jobs. If you punish profitable companies with extra taxes, all you're really doing is extracting more money from tax-paying citizens so that Congress can build more Bridges To Nowhere.

Morningstar X-Ray

2006-04-25T07:15:00.000-05:00

My broker (E*Trade) had a recent promotion that if you deposit $25k into an existing account, you'll receive a free 12 month subscription to Morningstar Premium. For those of you who are unfamiliar with Morningstar, they are best known for their ratings (mostly useless) for mutual funds on a scale of 1 to 5 stars.

One of the best Morningstar features is their Portfolio X-Ray function. You simple download or key-enter all of your stock and mutual fund holdings and their system tells you all sorts of compelling information. Here are some key insights from my portfolio...

Stock Sector: as compared to the S&P 500, I'm underweight on IT and overweight on Manufacturing
Stock Type: underweight on Cyclical and Classic Growth while overweighted on High Yield and Hard Asset
Style: my portfolio is tilted toward mid/small-cap value
Fund/EFT Expense: I pay a weighted average annual expense 0.76% on my EFT and Mutual Fund holdings
Unknown Big Holdings: I own significant amounts of Mitsui Fudosan, Land Securities and Mitsubishi Estate. None of these are even listed in the US but Fidelity's International Real Estate Fund (FIREX) owns them all in large quantities.
Largest Holdings: PVX (2.9%), MO(2.6%) and AEE (2.2%)

Pretty cool.

Hussman Weekly Market Commentary: Hostile Trends

2006-04-24T12:23:00.000-05:00

Last week was a very good week to be in the market. Today... well... not so good. My investment with Hussman was the only one of my investments that didn't soar last week but I'm still convinced the guy knows what he's talking about.

Here's this week's installment:

Hussman Funds - Weekly Market Comment: April 24, 2006 - Hostile Trends: "Simply put, the stock market has generally not rewarded risk-taking when interest rates, commodity prices, and consumer confidence have been trending higher. That's not a huge surprise to data monkeys who spend their time analyzing such historical outcomes. Still, my hope is that these simple observables will provide some understanding of why I believe that a fully hedged investment position is appropriate here, despite hopeful consumers, optimistic investors, and even the occasional marginal new high."

Hussman Weekly Commentary: Rich Valuations and Rising Yields are a Dangerous Combination

2006-04-10T06:58:00.000-05:00

More well-reasoned doom & gloom from Hussman. I certainly hope he's wrong, but I cannot find a flaw in his reasoning. The best case scenario is that earnings turn out to be very positive for the 1st Quarter and the inevitable correction is delayed.

Hussman Funds - Weekly Market Comment: April 10, 2006 - Rich Valuations and Rising Yields are a Dangerous Combination:

"I won't bother mincing words. Given rich global stock market valuations, slumping quality of internal market action, and rising global interest rates, this is not an appropriate time to accept significant market risk. There is no assurance that stock prices will fall, and no assurance that they might not instead rise further. But from the standpoint of a long-term investor, it's useful to look over the past 7+ years of profitless excitement in the stock market and ask whether tracking every fluctuation in the market - even participating in periodic, marginal new highs - is a necessary objective. In my view, the necessary objective is to accept market risk when the likely return/risk profile is attractive, based on observable measures of valuation and market action, and to avoid, hedge, or diversify away those risks that don't carry attractive return/risk profiles on average."

ER Portfolio Return - March 2006

2006-04-07T07:38:00.000-05:00

I had a good month for my investments...

2.82% return for March (versus 1.73% for the Russell 3000)
2.3% standard deviation - a new 5 year low (2.2% for Russell 3k)
6.3% year to date return (5.3% for Russell 3k)

Here's the long view...

ER Portfolio Allocation - March 2006

2006-04-07T06:54:00.000-05:00

Here's my latest portfolio allocation...

Not too much to report... except my cash position is a bit too big. I've been considering adding to my commodities position with some gold or silver but the recent & dramatic increases in their prices have spooked me a bit.

My foreign equity position needs some help. I'm not only underweight, but my positions are not very diversified...

DryShips (DRYS) - A Prudent Speculator pick that yields over 7%... pretty nice and I don't plan on making a change here.
iShares Singapore Index Fund (EWS) - I bought this before I really committed to my asset allocation. It's done pretty well... it's up 23% in 15 months and it pays a 3.2% yield. No need to sell this one either.

I think I'll buy an overall Developed Equity Index fund... either EFA or EFV. Index Investor thinks that the UK is undervalued... maybe a UK play like EWU would be in order. I'll let you know what I do.

Sold UTEK - 2 Years... 57% Gain

2006-04-04T13:57:00.000-05:00

I just sold one of my Prudent stocks today... Ultratech Stepper (UTEK). I bought this about two years ago for $15.70 and I just sold it today for $24.70. The folks at Prudent believe it could go to $35 or $36, but I've had enough... too much volatility. Just look at a two year chart:

A chart like this gives me heartburn and it's not worth the potential upside. I'm taking my annualized return of %25 and running to the nearest value stock or ETF.

Hussman's Weekly Market Commentary - Garbage Stocks

2006-04-03T05:03:00.000-05:00

This week Hussman writes about how lower quality stocks have been fueling the market in the past months and that we're near a market top.

Hussman Funds - Weekly Market Comment: April 3, 2006 - Garbage Stocks:

"As of last week, the Market Climate for stocks remained characterized by unusually unfavorable valuations and relatively neutral market action. At present, risk-free interest rates near 5% represent a substantial hurdle for stocks to compete with over the coming, say, 5 year horizon. Even assuming continued earnings growth along the peak 6% trend for the S&P 500, a price/peak-earnings multiple of just under 16 at the end of that 5-year horizon would be sufficient to hold the total return on the S&P 500 below 5%. It would be dangerous to assume that rates need to rise much further to draw demand away from stocks."

UU's of the World Unite (well... at least against the stupid new logo)

2006-03-29T06:15:00.000-05:00

Let's take a little test...

Look at the logo below and tell me what religious symbol this reminds you of...

Hmmm... let's see... could it be a freakin' cross!?!?!

Bill Sinkford, our denomination's fearless leader, continues his attempts to lurch UUism toward Christianity with this new logo. He has injected overtly Christian imagery (I'm still trying to understand this whole Good News crap is about) and made several comments to the press that lead me to believe he would be better suited to run the Presbyterians.

The lack of cross-like imagery is one of the reasons I (an atheist raised in a Jewish household) chose UUism several years ago. I'm thinking about getting my congregation to officially rebuke this this change to send a message to Boston... I doubt they care, but it would make me feel better.

Anyone else interested in supporting an effort to rollback the logo change?

UPDATE: The ChaliceChick has a great post about this development (it looks like I'm a bit late to the discussion)

Europe's Ailing Social Model: Facts & Fairy-Tales

2006-03-28T10:08:00.000-05:00

Great article on the result (guess what... it's negative) of socialist-leaning economic models. The article does a great job explaining how Ireland's move to lower-flatter tax policy has driven explosive growth.

Europe's Ailing Social Model: Facts & Fairy-Tales The Brussels Journal

"Europe's well-intentioned model is not working because it does not pay to work after the taxman has taken his share. Europe is not innovating because it does not pay to innovate after the huge costs of complying with all the prescriptions, limitations and restrictions in all Europe's overabundant licences and autorisations. Demoralization is the real cause of Europe's stagnation. Europe's workforce is tired of being incessantly hindered in its task of producing wealth. Demoralization is the reason why ever more engineers, scientists and entrepreneurs flee Europe's tax misery. Paradoxically, the Old Europe of the West must now learn from the New Europe of the East, where after years of disastrous socialism, low and simple flat taxes are being introduced, luring investors from all over the world."

Hussman's Weekly Market Comment - Still Overvalued

2006-03-27T08:11:00.000-05:00

Hussman remains bearish...

Hussman Funds - Weekly Market Comment: March 27, 2006 - The Big Chair:

"In short, the S&P 500 is richly valued on the basis of nearly every fundamental measure, including earnings when those figures are properly considered. The point is not to predict a near-term decline in stocks, but rather to emphasize that the long-term returns priced into stocks here are likely to be disappointing. Given that stocks are unlikely to produce much, if any, risk premium versus risk-free Treasury yields, it follows that a hedged investment position is unlikely to diminish long-term returns, though hedging is clearly likely to reduce risk. The case for risk management here continues to be compelling - perhaps not from a short-term trading perspective, but comfortably for longer term investors."

I wish I could find a flaw in his rationale... unfortunately, I cannot. We can only hope that any eventual correction will be mild in both duration and depth.

Hussman's Weekly Market Commentary - Thinking About Risk

2006-03-20T08:18:00.000-05:00

Hussman Funds - Weekly Market Comment: March 20, 2006 - Everything Looks Good at the Top of the Channel:

"There's a quaint idea that has emerged in analyst talk these days, which basically goes - concerns about valuations, the current account deficit and other things aren't really important, because everyone has already looked at them, and markets don't usually respond to things that investors have already considered.

It's a nice idea, but it's preposterously wrong. It isn't the mere consideration of a risk that makes it benign. Rather, risks become benign only when investors have already acted on them. Anyone who remembers the 2000 market peak (from which, as it happens, the S&P 500 has still earned a zero total return after 6 years) will recall that rich valuations were very well recognized, but investors suspended or delayed acting on those valuations by reducing their speculation. For a known risk to become benign, you have to act on it and price it in. It's not automatic. Thought is not action.

Simply put, the main risks to the market generally are ones that investors have considered, but are also ones that they have not acted on. If you're a window-washer and know that your platform is slippery, thinking about it isn't enough to eliminate the risk. What makes the risk benign is that you tie a rope around your waist. The fact that investors have considered valuations, the current account deficit, and other matters doesn't in the least make those risks less important, because investors have not acted on those risks in any meaningful way."

Bill Gross's Dire Predictions For The Economy

2006-03-14T17:05:00.000-05:00

Bill Gross is the Bond guru from PIMCO. Here are his latest thoughts on the US economy...

PIMCO Bonds - IO March 2006:

"If pensions, healthcare, (and defense), are going to drain such an increasingly significant share of GDP in future years, where does the money come from to promote economic growth of the sort that will pay for all of this? And how can we believe that America's value added/productivity advantage in the one sector where we remain competitive - technology - will continue if our math and science report card keeps getting a D+? Let's talk turkey; let's shoot straight, folks, without the requisite hyperbole that seems to define America�s modern age and current politics. We can't do it all - not just because our reach constantly exceeds our grasp but because this time we have exhausted our savings, lost our competitive edge and squandered our educational heritage. We have grown soft - THEY have grown stronger. We have lost a sense of why we have prospered - THEY have learned to replicate our work ethic of yesteryear. The solution as the Council rightly suggests, is to save more, get smarter, trade more freely and to maintain a competitive tax base. Well yes - thanks for the straight talk after all - but that is a plateful and it will require the long-term acquiescence of those strangers who will wish nothing more than to supplant us at the top of the economic/geopolitical totem poll. Instead, our solutions more likely will pursue an easier trail, characterized by currency devaluation, the inflating away of long-term pension liabilities, and the payment of rising healthcare expenses via higher personal and corporate taxes. Investment markets in the United States will not ultimately prosper under such an increasingly odorous environment. It is only sensible, therefore, to diversify globally. Sorry for the straight talk folks, but don't you think it's about time?"

Hussman's Weekly Market Comment - Reversal of Fortune

2006-03-13T09:18:00.000-05:00

Hussman Funds - Weekly Market Comment: March 13, 2006 - Reversal of Fortune: "In March 2000, near the stock market's bubble peak, the median price/earnings ratio on the largest 50 S&P 500 stocks was 35.6, while the median P/E on the smallest 50 S&P 500 stocks was just 10.1. Currently, the median P/E ratios on the largest and smallest 50 stocks in the S&P 500 are 17.3 and 20.3, respectively. So while the valuation multiples of the largest stocks have dropped by over 50%, the valuation multiples of the smallest stocks have more than doubled. The same is true if we examine price/book and price/revenue ratios."

Closed-End Fund Arbitrage

2006-03-09T06:19:00.000-05:00

I ran across an article that mentioned an idea to arbitrage closed-end fund discounts against their ETF counterparts. Huh?

OK... let me break-down what I mean. Arbitrage is an investing behavior where you try to earn extra dollars by exploiting a market inefficiency while, at the same time, not taking-on any more 'market risk'.

Closed-end funds (CEF) are fixed (unlike ETFs and normal mutual funds that grow and shrink as investors enter and exit the fund) investment pools that trade like stocks. Their market price rarely equals their Net Asset Value (NAV) and, several months after a CEF launch, most trade at a discount to their NAV. One of the neat things about CEFs is that once they launch, their managers can invest without being burdened by money inflows or outflows - they managed a fixed pool of funds.

So the idea is to reduce your ETF or normal mutual fund holdings in an asset class where you can buy a deeply discounted CEF. This way, you keep your market exposure steady while looking to juice your returns by betting that the CEF discount will narrow as the market becomes more efficient.

Right now, Real Estate CEFs are trading at pretty big discounts (14-16%) to NAV. Here's a screen to see CEF discounts. Do you see NRI? It's one of the largest real estate CEFs and it's trading at an attractive discount. Remember, if the Board of NRI decided to liquidate or concert the fund to a normal mutual fund (two things that can happen when investors get ancy about big discounts) the fund's price would jump 17.6% (1/(1-discount)). I sold half of my IYR and invested it into NRI... same asset class risk + possible arbitrage earnings.

What are the risks?

CEF's are often thinly traded so liquidity can be a problem if you want to get in or out of the investment quickly... not an issue for me - I want exposure to this asset class long-term.
The CEF discount could reflect the illiquidity or poor valuation of the CEF's holdings. CEFs can hold non-traditional investments that may be difficult to sell and/or accurately value.
The CEF discount could be due to poor management of the fund.
The CEF discount could widen - for NRI, I'm hard pressed to believe that the discount could get much bigger than it currently is... I guess we'll see.

Note: this is not for the timid or the uninformed. Most importantly - this is not investment advice!

Hussman's Market Commentary: Cost of Hedging

2006-03-06T11:07:00.000-05:00

Here's a passage from Hussman's latest...

Hussman Funds - Weekly Market Comment: March 6, 2006 - Cost of Hedging

In general, the total return on a fully hedged investment position is: the total return on the stocks owned in the portfolio, minus the total return on the indices used to hedge, plus the short-term interest rate implied in the hedging instruments. In other words, hedging only reduces returns by the amount that the major indices outpace short-term interest rates. (If say, 70% of the portfolio is hedged, you get the total return on the stocks in the portfolio, minus 70% of the index total return, plus 70% of the interest rate).

This is important, because based on the latest record level of S&P 500 earnings, the S&P 500 currently sports a price/earnings ratio of about 18 (the historical average multiple on fresh record earnings is about 12). Even if we assume that 5 years from now, the index merely touches a multiple of 16, and we also assume that earnings continue to grow along the peak of their 6% long-term growth channel, the 5-year average total return on the S&P 500 would only be about 5.44%. The implication here is even if the market continues to deliver positive returns in the coming years,
it would take only a modest normalization in valuations to make full hedging entirely costless. That is, it would be possible to entirely hedge the impact of market fluctuations without sacrificing anything in terms of total returns.

Tom McMahon: What I Have Learned In 15 Years

2006-03-02T07:27:00.000-05:00

Feeling sorry for yourself today? Tom McMahon isn't and I bet he has more daily struggles than most of us have over an entire year. Read the whole thing and be thankful for your life.

Tom McMahon: What I Have Learned In 15 Years:

If you search for The Stupid, you'll find The Stupid. If you search for The Worthwhile, you'll find The Worthwhile. If you don't get that, then it means that I've found The Stupid while looking for The Worthwhile. But you're The Exception, Bucko.

ER Portfolio Allocation - February 2006

2006-03-02T06:00:00.000-05:00

As promised, here is my current asset allocation...

(click for larger image)

Overall, I'm pretty happy with the allocation and weights. Here are my thoughts on several of the assets:

Commodities - I'm pretty weighted toward oil due to my investments in HTE, PVX and PSPFX and I'm not aware of any instruments to get non-energy commodities into my portfolio. Even though I'm under my policy weight, I won't be adding more investment dollars to this asset class anytime soon.
Domestic Equity - I'm light here but since I haven't included my company stock options in this allocation, I'm not going to make any changes.
Timber - Once again, I'm light but I'm still a bit skittish on putting more money into a single investment like this. I may buy some more on a market dip.
Emerging Equity - I'm running heavy and I have one particular investment (SDA) that I should sell but it's got a sizable ($4k) short-term capital gain. It also happens to be in one of my kiddie accounts which makes my decision making even more difficult.
Equity Market Neutral - All of my EMN holdings are in Hussman's Strategic Growth fund (HSFGX). Even thought I'm over weighted, I'm really enamored (usually a bad thing when your talking about an investment) with this fund and I'm going to 'stay put'. I may even adjust my policy allocation to match my holdings.

This allocation is comprised of 26 stocks, 9 ETFs and 6 mutual funds. I'll detail my investments and their respective asset classes in future postings.

ER Portfolio Return - February 2006

2006-03-01T06:26:00.000-05:00

Well... February wasn't a great month from a return perspective but I did accomplish a great deal toward my goal of getting to a more rationalized asset allocation. First, here are the stats for February:

February Return: -0.76% (Russell 3000 returned 1.27%)
2006 YTD Return: 3.4% (4.65%)
Trailing 12 Month Return: 11.5% (14.1%)

Here's the long view...

I'll post my current allocation and major holdings in a follow-up post.

Great Tax Reference

2006-02-27T11:26:00.000-05:00

Check-out this 2 page tax summary. It will answer most of your tax questions for this coming year.

Tax Guide

Hussman's Semi Annual Report

2006-02-27T11:12:00.000-05:00

No Hussman commentary this week... they published their semi-annual report on their funds. Here's a tidbit...

Although the Strategic Growth Fund outperformed the S&P 500 in 2005, it is generally not useful to evaluate Fund returns over such short performance periods, nor over periods restricted to rising-only or falling-only markets. For long-term investors, I believe that an appropriate goal is to achieve strong returns measured over the complete market cycle (bull markets and bear markets combined), while defending capital in market conditions that have typically been unfavorable for stocks. Accordingly, a reasonable way to measure investment performance is to examine periods that include some portion of both bull and bear markets. Evaluating performance between two separate market peaks, including an intervening bear market decline (such as the period from 2000 to the present), provides useful information that is oftenobscured by the use of exact calendar periods.

Personal Financial Ratios from the FPA Journal

2006-02-22T14:04:00.000-05:00

I recently read an interesting article from a professional financial planning journal that used three relatively simple ratios to diagnose your financial health. Here's a link and their executive summary...FPA Journal - Personal Financial Ratios: An Elegant Road Map to Financial Health and Retirement:

"Investors commonly use stock ratios such as the price to earnings, price to book, and dividend yield to assess the financial health of a company because the ratios concisely benchmark a company's financial status.

Clients and their financial advisors have no comparable ratios that would allow investors to conduct a similar analysis of their personal financial circumstances. This article establishes a set of personal financial ratios that individuals can use to analyze their financial standing. Just as stock ratios are primarily based on a company's earnings, the personal financial ratios are based on an individual's income. There are three ratios: savings to income, debt to income, and savings rate to income.

The ratios are derived from a series of assumptions including household budgets, post-retirement income replacement, rates of return, and retirement distribution rates.

The ratios are designed to serve as a road map so that investors can compare their individual ratios against the benchmarks to determine whether they are on track to retire by age 65. The ratios serve as a practical tool for advisors to help convey to their clients the fundamental relationship between one's income, debt, and savings rate, and how those relationships must change over time."

The ratios are pretty straight-forward...

S/I - Savings to Income - savings is defined as all of your assets EXCEPT your primary residence and income is your gross annual income from employment
D/I - Debt to Income - debt includes mortgage, car loans / leases, educational loans, etc.
SR/I - Savings Rate to Income - savings rate is the annual amount you are saving including employer match for 401k. It should not include the earnings on those savings.

The author constructed two guideline tables based on age, expected real returns and retirement withdrawal rate. The first one is his recommendation:

Here's a (much) more conservative table assuming lower market returns and a lower withdrawal rate...

Here are my ratios and my financial age based on the more conservative table:

S/I - 3.9 - 44
D/I - 1.7 - 30
SR/I - 30% - ??

I have a small beef with the author's separation of assets and debt into to separate ratios. I would suggest that you could combine them into: INW/I - investable net worth to income. Simply subtract your D/I from your S/I. My INW/I is 2.2 which would translate to a financial age of 42 or 43.

It looks like I'm on track to hit my magic number (i.e. have enough money to live Harry Newton's life of managing my investments full-time) before I reach 65. I like the simple-to-track goal of accumulating 15 times your salary. I was just commenting to my wife that we're doing well financially but that we really don't have any concrete goals.

I'll continue to watch my ratios and I encourage you to calculate yours and share them with my readers.

Gods & Morals

2006-02-21T14:13:00.000-05:00

Found this great post about religion and morality. It doesn't contain any Earth-shattering revelations and it's a bit harsh on believers. That being said, it's quite funny and clever. Here's an excerpt:

"It's worth pointing out here that the Ten Commandments, which are touted by fundamentalist Christians as some sort of ultimate moral anchor, are not all that moral. The commandment to honor your mother and father is probably universally seen as a good thing, but what can an outsider make of the commandment to 'have no other gods before me,' or the one to 'remember the Sabbath and keep it holy'? These are sheer sectarian huckstering, as are one or two others -- depending on which Ten Commandments you're reading -- and have no bearing at all on moral behavior in a culturally-complex society.

And besides, if you're going to have only ten ultimate moral statements you hope to share with your entire society, why waste three or four of them on the equivalent of 'Go Niners!' or 'Dale Earnhardt Forever!'"

Read the whole thing.

Hussman Weekly Market Comment: Very Nicely Swept!

2006-02-21T08:19:00.000-05:00

Hussman Funds - Weekly Market Comment: February 21, 2006 - Very Nicely Swept!:

"The same is true of investing. To the casual observer, investing seems to be about finding the next Microsoft or Google (assuming that Google doesn't suddenly find itself looking like the tech-wrecks of several years ago, which I suspect is a poor assumption). The apparent skill seems to be finding the next great growth story, getting an inside line on future earnings prospects, or timing the next market move.

In truth, to my knowledge, skills like that are both unreliable and unnecessary for investment success. They require success to be far, far too specific. Instead, effective long-term investing requires the 'averages' to work out well - not only the average performance of the stocks in a diversified portfolio, but also the average performance of the portfolio over a series of investment horizons.

The key skill required for good investing, in my view, is the willingness to abandon the specific in favor of the average. That means abandoning the attempt to find one or two 'special' and unique stocks, and instead applying a careful stock-selection discipline in order to create a whole portfolio with certain 'average' characteristics of valuation, market action, financial strength, and so forth. It also means abandoning the attempt to forecast the market's direction over some specific period ahead, and instead aligning the investment position with the 'average' return/risk profile that stocks have experienced when historical market conditions have matched prevailing ones.

So winning depends on a specific skill that might not be immediately obvious. That skill is the willingness to focus on average outcomes, and to ignore specific ones. It's a quality that's commonly called 'patience', and it's rewarding precisely because it is rare."

Early Riser Milestone - 5,000 Visitors

2006-02-20T06:52:00.000-05:00

Well kids... I've been blogging for about 2 1/2 months and I recently passed 5,000 visitors and 9,000+ page views. I'm not sure if that's anything to write home about, but I'm going to shamelessly use this occasion to highlights some of my better posts. Enjoy...

Employee Stock Options
Should you sell your options? Part 1, 2, 3, & 4
Options and Diversification

Investment Newsletters
Roger Conrad's Canadian Edge
The Prudent Speculator
Index Investor

Some Of My Favorite Investments
PML
CanRoys
I Love Dividends
DRYS
TRFX

Politics & Religion
On Being a Capitalist UU
Coming To Terms With Christmas
Intellectual Honesty
Religion & Politics
Why I'm a Republican

That was pretty easy... I now know why tired musicians put out greatest-hits albums.

FPA Journal - Post-Modern Portfolio Theory

2006-02-16T08:50:00.000-05:00

Interesting read on using 'down-side' deviation versus the standard deviation as a truer measure of investment risk.

FPA Journal - Post-Modern Portfolio Theory:

Modern portfolio theory (MPT) and its mean-variance optimization (MVO) model for asset allocation are Nobel Prize-winning theories of global equilibrium, but are unreliable for the primary task to which the financial services industry applies them - building portfolios.

Post-modern portfolio theory (PMPT) presents a new method of asset allocation that optimizes a portfolio based on returns versus downside risk (downside risk optimization, or DRO) instead of MVO.

The core innovation of PMPT is its recognition that standard deviation is a poor proxy for how humans experience risk. Risk is an emotional condition - fear of a bad outcome such as fear of loss, fear of underperformance, or fear of failing to achieve a financial goal. Risk is thus more complex than simple variance but can nonetheless be modeled and described mathematically.

Downside risk (DR) is a definition of risk derived from three sub-measures: downside frequency, mean downside deviation, and downside magnitude. Each of these measures is defined with reference to an investor-specific minimal acceptable return (MAR).

Portfolios created using MVO and DRO are often similar and the differences in absolute risk and return values small-diversification works regardless of how you measure it. Yet DRO seems to avoid the known errors of MVO and provide a more reliable tool for choosing the 'best' portfolio.

PMPT points the way to an improved science of investing that incorporates not only DRO but also behavioral finance and any other innovation that leads to better outcomes."

5 year Early Riser Portfolio Performance

2006-02-15T07:01:00.000-05:00

I got some pretty compelling information from Quicken last night. I looked at my portfolio's performance for the past 5 years and how it compares to the Russell 3000 (I had to pull the Russell information from here). The key statistics:

Annualized Return: 5.3% (1.6% for Russell 3k)
Average Annual Return: 7.3% (3.7%)
Compounded Monthly Return: 0.434% (0.13%)
Average Monthly Return: 0.55% (0.22%)
Monthly Return Standard Deviation: 4.83% (4.37%)
Correlation to Russell 3000: 0.794

Looks pretty good to me. I beat the market return by 130% (Russell 3000 being a pretty good benchmark) and with only a 10% increase in risk. A few other ratios can tell us if I'm ready to quit my job and become a hedge fund manager...

Information Ratio: 0.108
t-Statistic (60 periods): 0.839

Not too bad, but I think I'll keep my day job. I graphed my monthly return, a 12 month trailing standard deviation, growth of $1 invested and the growth of $1 in the Russell 3000. Click the image to see a readable image.

Hussman's Weekly Market Commentary - The Information is in the Divergences

2006-02-14T08:24:00.000-05:00

Hussman Funds - Weekly Market Comment: February 13, 2006 - The Information is in the Divergences:

"Though the general character of market action in recent weeks has not been too bad, the NYSE advance-decline line (a running tally of daily advancing issues on the NYSE minus declining issues) has appeared out-of-place in the context of other measures. To get at what's happening internally, it's instructive to compare the overall NYSE advance-decline line with the advance-decline line of the 30 stocks in the Dow Jones Industrial Average, as well as the largest 30 stocks in the S&P 500 Index...

Notice the divergence that's been developing since last November. For the past several months, we've been seeing fairly persistent distribution in the largest, most highly capitalized stocks in the market, with trades in these large-cap stocks occurring on weak or subdued breadth. Evidently, the enthusiasm of investors for more speculative, smaller capitalization stocks is not reflected in the core issues that comprise the stock market."

ER Portfolio Performance: 2/2005 - 1/2006

2006-02-13T07:04:00.000-05:00

I'm going to start publishing my portfolio's monthly performance. The blue bars represent the portfolio's monthly return and the line is the theoretical growth of $1 from the beginning on the period (click the graph to see a full size image).

My average monthly return for this period is 0.86% with a standard deviation of 2.4%. I'm interested to see if my recent asset class diversification will reduce the variability of the portfolio.

DryShips - A new ER investment

2006-02-11T07:55:00.000-05:00

I purchased some shares of DryShips (DRYS) this past week. DRYS is a dry bulk ocean shipping line operated out of Greece. This is another Prudent Speculator pick that I found quite compelling...

I think the shipping industry is pretty recession proof as global trade continues to expand
Their forward P/E is less than 5
Their latest quarterly dividend of $0.20 translates to a yield of 7.5% & you know how much I love dividends
The dividend appears to be pretty safe since they are only paying-out 28% of their forward earnings
The stock is trading near it's 52 week low so I believe there is upside for capital appreciation

As always, I didn't take a large position - it's less than 1% of my portfolio. Although it's not in keeping with my new found devotion to index investing, I think it's a good investment and I'm OK with a bit more risk.

Index Allocation Update

2006-02-09T06:29:00.000-05:00

As I mentioned before, I'm finally getting serious about my overall asset allocation. I've made a bunch of balancing trades over the last week and I want to start regularly reporting my portfolio's allocation and its performance. I'll show the asset class, my current allocation, my target allocation and Index Investor's allocation:

Asset Class	Current	ER Policy	II Policy
Cash	2.4%	2.5%	0%
Commodities	9.4%	10%	12.5%
Domestic Equity	46.2%	50%	52.5%
Domestic Real Estate	4.9%	5%	0%
Emerging Equity	11.9%	10%	10%
Equity Market Neutral	9.9%	5%	5%
Foreign Equity	5.8%	5%	5%
Foreign Real Estate	7.4%	7.5%	7.5%
Timber	2.1%	5%	7.5%

I did not include my employee stock options because I haven't decided if they fit into one of these asset class nor have I decided whether I should value them at their 'in the money" value or their underlying value.

In early March, I'll post my portfolio's performance as compared to various benchmarks including Index Investor's portfolio.

No need for a national energy policy

2006-02-07T10:49:00.000-05:00

Don Luskin at The Conspiracy to Keep You Poor and Stupid supplies us an excerpt from John Tierney's latest NYT column:

When something finally comes along that's cheaper and more reliable than oil, no national energy plan will be necessary. Capitalists will be ready to sell it to eager American drivers. For now, the best strategy is to buy gasoline and stop worrying that it's sinful or dangerous.

After you fill up your tank, twist the rear-view mirror so you can gaze at yourself. Repeat these words: 'I'm good enough, I'm rich enough, and doggone it, people in the Middle East like my money.'

Why am I a Republican?

2006-02-07T07:09:00.000-05:00

When I tell people that I'm a Republican and that I'm active in a UU church, I generally hear 2 questions:

From UUs: How can you possibly be a thoughtless, greedy Republican and yet be an active member of a UU church?
From Republicans and non-UUs: What the hell is Unitarian-Universalism?

Today, I want to answer the first question. Here we go:

Economics - Even when I was a Democrat (birth to age 30), I generally agreed with free-trade capitalist Republicans versus protectionist-leaning, socialist-coddling Democrats. As nice as it sounds that we should divert the wages of the rich to bring the poor up to middle-class standards of living, it doesn't work. When the government gets too entangled with commerce (whether though excessive taxation, regulation or state-owned enterprises), history has shown that those governments have to start controlling other aspects of citizens' lives in order to get the economic outcomes they desire. Corporations, along with organized religions, also prove to be useful counter-balances against too much government power.

Republicans certainly don't always side with free-market capitalism (I was strongly opposed to the steel tariffs that W pushed though in his first term), but they are head and shoulders above the socialist legislation that the union-dues addicted Democrats would pass if they had control of the government.

Race Relations - Yes, that's right, I believe the Republican party is taking a better approach to race relations than the Democrats. In the past, I believe liberals (I cannot say Democrats due to the despicable behavior of Southern Democrats during the civil rights struggles of the 50's and 60's) had the higher moral ground on matters of race. Additionally, I would credit these social liberals with the dramatic transformation of our society in the last 50 years. That being said, I believe a new approach is needed now that truly racist behavior (i.e. conscious decisions to denigrate someone based on their race) is largely isolated to small pockets of stupidity.

Today, Republicans preach, and largely practice, the idea of meritocracy (i.e. Dr. King's idea that people should be judged by the content of their character) versus the Democrats tendency to confuse unequal outcomes (a fact of life in a free society) with unequal opportunity (racism). Additionally, African-American Democratic leaders have acted so hurtfully and negatively toward fellow African Americans that have chosen to be active Republicans. Claiming that Rice and Powell are 'house slaves' (Belafonte) and throwing oreos at Ohio Republican Michael Steele are indicative of the fear that African Americans may not be a solid Democratic voting block and, god forbid, some may even find an ideological home in the Republican party. Even in the blogging world, Republicans who happen to be minorities, get chastised by left leaning bloggers as being stooges who have been tricked by evil Republicans into selling-out their race (eg. attacks against Michelle Mallkin).

Is Trent Lott an idiot? Yes. Are Republicans hatching a secret plot to keep minorities in the under-classes? Absolutely not. I would argue that the welfare state (which financially supports a culture of teen mothers with disinterested fathers) is the single biggest inhibitor to minority success in America.

National Defense - I remember commenting to one of my most conservative friends on September 12th, 2001 that, although I voted for Gore, I was glad Republicans were running the government. I hadn't always felt this way. I remember thinking in my youth that Reagan's constant jousting with the Soviet Union was unwise and that fighting Communism where ever it reared it's head was simply political theater. Now that I have read Sharansky, Hayek, D'Souza, Sowell and many others, I now believe that Regan's fight against the Soviet Union was the only moral path to take if you truly believe the the inherent worth, dignity and liberty of every person.

I wish I didn't have to get searched at airports and I wish overseas telephone conversations were not at risk of being wiretapped. Higher security, however, comes with a price and to believe otherwise is simply naive. I believe most Americans understand that civil liberties are being encroached upon in the name of national security. I also believe that most Americans are OK with the methods and motives currently employed by the Bush administration. The Democrats appear to be tone deaf on this subject. If they continue to criticize Bush for going to extremes to fight terrorism, they will loose even more power in Washington. Is it possible for Bush to go too far? Absolutely. Any efforts to actually shut-down open debate of issues or turn the CIA against political opponents would be completely unacceptable and I think most Republicans would agree. However, criticizing opponent's arguments as silly or misinformed is not inhibiting free speech nor is there any evidence that Bush is targeting political opponents with the CIA.

Those are my big issues. Are there 'Republican Positions' that I disagree with? Yup... prayer in publicly managed schools is a stupid idea (I think school choice is a great idea), Tom Delay is an a**hole (he thinks atheists are un-American) and consenting adults should be able to do whatever they want in private.

Democrats in trouble...

2006-02-06T09:48:00.000-05:00

If this discussion of the cartoon riots is any indication of the true feelings of the left's approach to violence and terrorism, the GOP is going to hold the White House for quite a while.

Daily Kos: Embassies Burned, Violence Erupts

You'll find a significant minority (thankfully most posters find this weekend's violence disgusting) of Kos Kids that are still worrying about why radical Islam hates the West so much. I have yet to hear any such navel-gazing discussion among the GOP faithful.

Note: Kos takes a firm stand against the violence - he does, however, throw in an obligatory dig (albeit weak) against the Bush administration.

Drug Companies Are Evil

2006-02-06T09:06:00.000-05:00

How dare Merck create a vaccine to stop a virus that kills 600,000 kids a year in developing nations when everyone knows that they just using groundbreaking discoveries like these to cover-up their crimes against humanity.

Everyone: make sure to lobby your senators and representatives to enable us to buy medicine overseas at artificially low prices so we can choke-off the money that pays for cheap publicity stunts such as this!

Hussman's Weekly Market Commentary

2006-02-06T08:29:00.000-05:00

Hussman Funds - Weekly Market Comment: February 6, 2006 - Flying Wallendas: "In short, if we accept market risk by closing down our hedges, it's not enough for the market to advance from here. Given the strong likelihood for disappointing returns over a more extended period of time, we've got to have reasonable confidence that we'll be able to close out our market risk out at even higher levels before conditions deteriorate. In my view, that's a very tall order. Last week, with the ISM figures below expectations but the prices-paid figures above, the employment figures below expectations but the wage inflation figures above, the productivity figures below expectations but the Fed Funds trajectory (as indicated by futures prices) above, and so on, I took the Strategic Growth Fund back to a 95% hedged stance. We've still got a slight amount of uncovered risk, and could very well trade between a full hedge and a 70-80% hedge depending on the quality and character of market action, but overall, the Fund is defensive at present."

Read the whole thing.

In Defense of the GOP

2006-02-06T05:43:00.000-05:00

Full Disclosure: In the last 4 presidential elections, I voted for: Clinton, Clinton, Gore, Bush. I'm an atheist who grew up in a Jewish household. I was once a member of the ACLU and People For The American Way.

A reader recently asked:

ER,

You have some very interesting perspectives. Most of your posts are insightful or at least thought provoking. You are a very strong supporter of the GOP. It seems mostly for their pro-business economic policy. As a member of UU community, how do you feel about the "RR" (Religious Right) and their control over the party?

Also, do you have any prediction for what will happen in the 2008 election?

Lastly, have you read, It's My Party Too, By Governor Whitman?

Let me get the last two questions answered first. Based on the messages that each party has been generating, the growing chasm between the Kos-kids and the DLC, and assuming that Sen. Clinton will be the nominee for the DNC, I believe the GOP will maintain control of congress and The White House. I have not read Whitman's book.

OK... so let's get to the big question: how do I feel about the RR and "their control over the party"? First, I disagree with the proposition that the RR is in control of the party. Are they an important constituency? Yes. In control? I don't think so. The majority of the much maligned Religious Right constituency are normal, hard-working Americans who happen to be both Christian and politically conservative. I really didn't personally know any RRs until I befriended a few in the last five years. They are not evil. The ones I know are extremely decent, thoughtful people who happen to have strong religious beliefs that I don't share. They are very intellectually honest and their actions match their core beliefs.

Despite the scare tactics of the press and DNC, I don't believe that the true religious wackos (i.e. Robertson) have a creditable voice in the GOP. In fact, I believe Republican pundits have a much better record of publicly chastising figures like Robertson when he goes off the deep end. Democratic pundits, on the other hand, let outrageous comments from the far left go with out comment (think of Michael Moore positively comparing murderous Iraqi insurgents "Minutemen").

Tomorrow, I'll give a point-by-point (economics, social policy, etc.) analysis of why I'm a Republican.

ER Book Review: The World Is Flat

2006-02-04T18:06:00.000-05:00

I just finished Thomas Friedman's new book, The World Is Flat. It's a pretty compelling read and I highly recommend it.

Friedman traces the origins of globalization (what he refers to as 'flatness') by identifying 10 'flattening forces' (internet, outsourcing, off-shoring, etc.) and a triple convergence of super-forces (global web-enabled playing field for business, horizontal business collaboration and new global trading partners).

Throughout the book, Friedman gives great examples of just how fast and flat our world has become. Did you know that China is manufacturing goods (like Virgin of Guadalupe statues) for Mexican consumption? His point is that if you believe that India and China are simply 'racing to the bottom', you're wrong... they are racing the rest of the world to the top. China and India are investing in both capital and intellectual infrastructure. Their end goal is not to be the cheapest labor market... they want to build successful multinational companies than generate wealth. Being a source of cheap labor is only an initial step to a robust economy(this is true of most countries - remember when Japan was today's China?).

Friedman is spot-on with his critiques of the West's inability to realize that the rules of the game have changed and the move to a flat, global economy is accelerating. He fillets anti-globalists and calls on the political left to focus on 'how we globalize' versus 'whether we globalize'. His description of 'sweat-shop' obsessed, upper-middle class, designer jeans wearing, white, college students and their clueless shilling for anti-competitive labor unions is priceless.

I didn't really appreciate his swipes against the Bush Administration and Republicans, but, considering he's employed by The New York Times, we has remarkably even-handed.

Buy the book.

More from The People's Cube...

2006-02-03T14:23:00.000-05:00

Too funny (sorry if it offends)...

2006-02-03T14:21:00.000-05:00

Early Riser Asset Allocation

2006-02-03T06:48:00.000-05:00

I’ve been talking a great deal about the value of index investing even though most of my portfolio is individual stocks. Well, I’m starting to put my money where my mouth is. I took the advice of Index Investor (with a bit of tweaking) and decided on an Early Riser asset allocation. Here it is:

50% Domestic Equity - individual stocks and ETFs
10% Emerging Foreign Equity - WVO & EVM
10% Commodities - CanRoys and PSPFX
7.5% International Real Estate - FIREX
5% Domestic Real Estate - AIGYX
5% Timber - PCL / RYN
5% Developed Foreign Equity - individual stocks and ETFs
5% Equity Market Neutral (hedged) - HSFGX
2.5% Tax Free Domestic Bonds - E*Trade muni money market & PML

This portfolio is designed to achieve a 7% Real Return (i.e. 7% above US inflation) with the lowest possible annual return standard deviation. This not not exactly the recommended portfolio but I don't want to liquidate all of my holdings due to the potential tax liability on my current winners. Additionally, I will continue to buy some individual stocks (they'll be part of the Domestic Equity allocation) - not because it makes financial sense (passive investing is the way to go), but because I enjoy it.

I'm about 60% complete with the allocation and I'll continue to get my portfolio allocated as close as possible to the policy targets above by investing my new savings into the under allocated asset classes. I'll try to keep you up to date on my performance and progress.

Update: After 20 or so trades, I'm pretty much allocated.

Republicanism Caused By Brain Disorder, Mutation

2006-02-01T14:32:00.000-05:00

From the People's Cube Republicanism Caused By Brain Disorder, Mutation ...

In a deformed Republican (capitalist) brain, areas that normally control life-sustaining processes (the Guilt Gland, the Envy Center, or the Everything for Free Lobe, etc.) are miniaturized - while other regions become bloated out of proportions (the Personal Responsibility Lobe, the Self-Interest Cluster, or the overdeveloped and inflexible Spinal Cord that is connected to the Absolute Morality Lobe).
Symptoms of a Republican brain mutation include delusional ideas that democracy is the best known form of government, that capitalism creates wealth, that American culture stems from Judeo-Christian tradition, that people all over the world desire liberty and prosperity, that Third World countries should be self-reliant, that moral
standards are absolute and objective, that the individual supersedes the collective, that parents should teach children values and have a wide choice of schools, and similar incoherent ramblings that mimic the speech of the insane. Everyone knows that the complete opposite is true.

If you want to see some of the funniest, most inventive political satire on the web, check-out The Cube.

Pick One: Global Warming or Peak Oil

2006-01-31T06:42:00.000-05:00

I had an interesting exchange with some church folks about global warming and/or peak oil. This message from a fellow congregant started the whole thing...

In this week’s edition of his chronicles, Jim Kunstler says we should stop griping about Bush, even though he says Bush is an a*hole, as he calls all presidents after JFK. Kerry, for example, has done nothing or said nothing about improving our rail system, and it has deteriorated, meaning that the only major interstate transportation network we have is the Interstate System (I-64, I-90, and so forth). He cites the hypermedia for airing a show saying that the tar sands of Alberta will solve our energy needs. It is interesting reading, and it is at:

http://www.kunstler.com/mags_diary16.html

I checked-out the link and found a foul-mouthed peak-oil fanatic. Here's my response...

I would like to get Kunstler and the Global Warming talking-heads together in a room and let them figure-out which approach they are going to use to try to slow down economic growth. They have two mutually exclusive choices:

1. they can claim that our continued use of fossil fuels will create massive global warming; or
2. they can claim that we're on the verge of running out of oil and industrial / suburban life as we know it will cease to exist.

Both of these cannot be true at the same time... proposition number 2 solves number 1.

The response to my message was stunning (not in a good way)...

Economic growth is not desirable. If you take a number and multiply it by a number greater than 1 over and over again, it will get larger and larger and larger without limit. If this number is monetary worth, this could be because of inflation – one day we will be exchanging quadrillion-dollar bills over the future version of a cash register. If it is real growth, then there is no way that can happen. The Earth is finite, and growth CANNOT happen forever.

Economic decline is just as undesirable. If the number you multiply by is less than 1, then it will shrink and shrink and approach zero. Eventually, essentially nothing will be left.

The only acceptable growth is zero growth. This is the only way we will have something without exceeding Earth’s limits.

Number 2 does solve number 1. That’s the problem in the years ahead.

Bush gives his state of the union talk tomorrow. I hope he acknowledges that the reason for the War in Iraq was oil, that we need to conserve on all types of energy, and that Congress needs to pass a big tax on fuels, including gasoline. Bush needs to come up with a talk similar to Jimmy Carter’s.

Jimmy Carter!!! This is what I deal with when I engage my fellow UU congregants in economic discussions. Here's my response...

oh my gosh... where to start...

Real economic growth in the last 300 years is the sole reason we're not all peasants barely surviving on subsistence farming. Economic growth is the ONLY empirically proven way to bring large amounts of people out of poverty (try telling your zero growth story to sub-Saharan Africa).

The Earth, as a lump of matter, is indeed finite. Human potential and technological progress, however, is growing exponentially (check out http://singularity.com/kain.php/ ) and I doubt the earth's physical resources we ever constrain our development. Our approach to development will, of course, be shaped by the availability of resources, but human invention has always stayed many steps in front of our physical constraints. Just think about computers... we take earth-given sand & human know-how and make multi-teraflop computer
processors. Energy... once science can make an efficient solar cell, oil will be an non-issue.

The Earth has been in a state of flux much longer than humans have been around. Could global warming make weather more extreme? Sure. Could oil become very expensive and change the way we live? You bet. Will humanity suffer? Maybe a bit... but any future suffering will pale in comparison to historical levels of diseases
and death due to extreme poverty and the lack of scientific progress.

Here's my point... everything in life has trade-offs. If I had to choose between a stable global temperature and the scientific / economic progress made in the last 100 years, I'll take progress every time.

I ended this last response with one of my favorite quotes... it's from Calvin Coolidge in 1932:

Nothing in the world can take the place of Persistence. Talent will not; nothing is more common than unsuccessful men with talent. Genius will not; unrewarded genius is almost a proverb. Education will not; the world is full of educated derelicts. Persistence and Determination alone are omnipotent. The slogan “Press On”, has solved and will always solve the problems of the human race.

Hussman Weekly Market Commen

2006-01-30T06:37:00.000-05:00

Here's a link to the latest Hussman commentary:Hussman Funds - Weekly Market Comment: January 30, 2006 - Where Else are Investors Going to Go?

"The S&P 500 currently trades at 19.3 times peak earnings (trailing GAAP basis), compared with a historical average for the
price/peak earnings ratio of about 14, and if we only look at points where earnings were actually at fresh peaks, a historical average closer to 12. Suppose that earnings, currently right at the robust 6% trendline connecting S&P 500 earnings peaks from economic cycle to cycle across history, continue to grow along the peak of that historical channel over the next 5 years, and that the price/peak earnings ratio at that point touches, merely touches, a level of 16 - still well above historical norms. Given a current dividend yield of 1.84%, the resulting 5-year total return would be:

(1.06)(16/19.3)^(1/5) + .0184(19.3/16+1)/2 - 1 = 4.13%
... which is about what you can expect from money market funds.

This isn't a timing argument, because the quality of market action is at worst mixed, and investors may very well have some
speculation left in them. Unfortunately, speculation at this point will simply cause further deterioration in the long-term returns that stocks are priced to deliver. It's not necessary for investors to actually shift from stocks to money market funds (in fact, it's impossible for them to do so, in aggregate). All that's required for a "bear market" is for investors to recognize how unsatisfactory the long-term returns are likely to be from prevailing valuations. Investors could discover this with simple algebra, and historically reliable algebra at that, but hope springs eternal."

IndexInvestor.com: Best $25 Spent

2006-01-29T06:03:00.000-05:00

Still don't believe that index investing is the way to go? Do you want to stay on top of all the latest academic research on passive investing? Do you need impartial analyses of different index mutual funds and ETFs? Do you need statistically optimized asset allocation models to get the best return with the lowest multi-year standard deviation?

Trust me and spend some time (and $25) exploring IndexInvestor.com. This site is very content rich and had a ton of indexing and asset allocation information. There is a decent amount of free content, but the subscriber information is great.

There are a bunch of persistent articles and research papers that cover a range of index investing topics. Additionally, they publish a large (44 pages this month) monthly journal that contains a 10-12 articles (sometimes pretty technical) and an update of their model asset allocations.

The authors take special care to approach each topic with intellectual honesty... they site available research, present opposing views without twisting meanings and their rigorous approaches to asset allocation (they list their optimization methodology and give alternative allocations based on different methodologies) gives readers many options. Since their only desire is to sell more subscriptions (ridiculously under-priced), they don't have any vested interest in mutual fund selection, brokerage preferences, or whether you need to invest with a 'professional' to achieve investing success.

Check it out and let me know what you think.

Check Your 1099-DIV

2006-01-27T14:52:00.000-05:00

E*Trade just made my 2005 tax documents available and I went ahead and downloaded my main broker account 1099 and my 2 kiddie tax account 1099's. The kiddie accounts look great... (almost) tax free income of over $1700!

I start looking over my 1099 and noticed that my non-qualified dividend (i.e. the dividends that get taxed at my marginal rate) amount looks pretty large. I do have a fair number of REITs, but it still looks big. I go ahead and download the detail income report and start looking over where all the non-qualified income comes from.

Here are the big sources of my non-qualified dividends...
- BDV - $1,080 - this is a surprise... it's not a REIT
- FFC - $759 - this is a preferred security closed-end fund
- HRP - $336 - this is a REIT
- SFI - $915 - this is an MREIT... but I know this is wrong
- NFI - $1050 - another MREIT

Now, I look for tax-related press releases for each of these companies and I find something pretty disturbing...
- BDV - 100% qualified - $140 error
- FFC - 30% qualified - $30 error
- HRP - 32% return of capital - $30 error
- SFI - 12.5% qualified & 21% return of capital - $69 error
- NFI - 100% non-qualified - $0 error

Only 1 out of 5 of these were reported properly by E*Trade!!

If I hadn't checked, this error could have cost me $269 in extra taxes. If your 1099 shows any non-qualified dividends, do yourself a favor and verify the information yourself. Let me know if you have any success stories and I'll post them on the blog.

Common-Sense Religion

2006-01-26T11:03:00.000-05:00

The Chronicle has a thought provoking article about critically evaluating your faith:The Chronicle: 1/20/2006: Common-Sense Religion.

Here's a quote:

That's why those who have an unquestioning faith in the correctness of the moral teachings of their religion are a problem: If they
haven't conscientiously considered, on their own, whether their pastors or priests or rabbis or imams are worthy of such delegated authority over their lives, then they are taking a personally immoral stand.

That is perhaps the most shocking implication of my inquiry into the role religion plays in our lives, and I do not shrink from it,
even though it may offend many who think of themselves as deeply moral. It is commonly supposed that it is entirely exemplary to adopt the moral teachings of one's own religion without question because — to put it simply — it is the word of God (as interpreted, always, by the specialists to whom one has delegated authority). I am urging, on the contrary, that anybody who professes that a particular point of moral conviction is not discussable, not debatable, not negotiable, simply because it is the word of God, or because the Bible says so, or because "that is what all Muslims (Hindus, Sikhs...) believe, and I am a Muslim (Hindu, Sikh...)" should be seen to be making it impossible for the rest of us to take their views seriously, excusing themselves from the moral conversation, inadvertently acknowledging that their own views are not conscientiously maintained and deserve no further hearing.

Read the whole article.

Employee Stock Purchase Plan Taxation

2006-01-26T10:15:00.000-05:00

Here's a link that explains ESPP taxation...Employee Stock Purchase Plans.

The bottom line is that if you immediately sell your shares when they are deposited in your account, the vast majority of your gains will be reported through your W2. Your W2 will reflect the difference between the buy price and the market price as reported by your company at the time you get the shares. Any difference between the reported market price and what you actually sell it at, is reported as a short-term capital gain or loss.

Investment Risk & Indexing

2006-01-26T05:52:00.000-05:00

I have scoured IFA's website for the past week and I repeat my prior claim that this is one of the better index investing sites in existence. Much like Swensen, their focus is on convincing us that index investing your best bet.

One of the more interesting tidbits I discovered was their discussion of investment risk and return (which is step 8 of their 12 step active management recovery program), including research findings from French and Fama.

One of modern finance's key pillars is the CAPM model -- CAPM says that your investment return should be the risk free rate plus some percentage of the return of the market based on your exposure to the market. Sharpe created a ratio that purports to measure how well a portfolio performs as compared to what the CAPM model predicts. If the Sharpe ratio is less than 1, you would claim that the portfolio's return does not justify the risk. If the Sharp ratio exceeds 1, you would conclude that the portfolio manager 'beat the market'.

If you believe in efficient markets, Sharp ratios exceeding 1 should not exist. Well, they do exist and many proponents of actively managed investing point to this fact to sell there stock picking services.

French and Fama discovered that the CAPM model only 'predicts' 70% of a given portfolio's return. The active traders believe the remaining 30% is manager skill - French and Fama show it was simply model error. Their research expanded the CAPM model to include additional factors in addition to market risk. They added a factor for the weighted market capitalization of a given portfolio and for the growth/value tilt of the portfolio. This new, expanded model predicts 95% of a given portfolio's return - an 83% reduction in tracking error.

French and Fama both work/consult for an index mutual fund company called DFA. DFA manages $84 billion in index mutual funds for private and institutional investors. Their funds take advantage of all three risk factors that French and Fama discovered and they have some truly unique offerings. IFA's model portfolios are based on DFA's funds. In fact, I've taken their risk survey and I've identified the portfolio I want to model my holdings after. There's just one catch - DFA funds are only available through selected financial advisers. Although there are advisers who will grant you access to the funds for relatively small fees (20 basis points), I plan to try to construct my portfolio based on freely available mutual funds and EFTs.

I'll let you know how it turns out.

Hussman Strategic Growth - The Latest ER Investment

2006-01-24T05:42:00.000-05:00

I have decided to get my portfolio much closer to the allocation models mentioned by Swensen and IFA by putting 10% of my portfolio into HSGFX. Hussman's Strategic Growth Fund (here is a chart comparing HSGFX to the S&P 500) is a large-cap blend fund that , based on market valuation and market action, is sometimes hedged or leveraged. Their hedging protects the fund against downward market moves when valuations are deemed too high and it's leveraged (up to 150%) when the market is deemed undervalued.

Here's what I like about this fund:

Performance: their 5 year performance is top notch for large cap funds (this is a key period to look at because it includes both bear and bull markets.
Loss Aversion: the worst quarter for this fund has been -2.39% and their worst 12 month period has been 1.9%.
Co-Investment by Manager: John Hussman (the fund manager) has 100% of his net worth in his two funds.
Ethical Attitude toward the Market: I'm sure Swensen would approve of the fact that Hussman charges no loads, 12-1b fees, inflated commissions. Additionally, to discourage short-term trading, the fund charges a 1.5% surcharge if you sell within 6 months of purchasing. Here's the neat part - the 1.5% is added to the fund's assets and not the manager's pocket. Additionally, they have a record of reducing their fees as they attain economies of scale through asset growth.
The Manager: Hussman is a well educated economist (PhD from Stanford) who understands and believes in the efficient market hypothesis. He believes, however, that the market can be, at times, overvalued or undervalued. His weekly commentaries are thoughtful and the show a consistency of thought that I really appreciate.

The bottom line for me is that I can sleep at night with this investment. Their hedging strategy fits well with my loss aversion and I still get a good exposure to market upside.

Unconventional Success - An ER Book Review

2006-01-22T05:18:00.000-05:00

David F. Swensen is the manager of Yale's endowment. It's one of the largest in the world and, more importantly, it is considered the best run endowment. His ten year record of 16.8% for a fully diversified portfolio is unmatched.

Thankfully for us, he decided to write a book about personal investing. It's uninspiring cover art and uncreative title, Unconventional Success: A Fundamental Approach to Personal Investment, are it's two most glaring issues (I really think the cover and title are testaments to Swenson's un-flashiness and lack of gimmickry).

The book lays-out the following argument:

Most investors rely on money managers (brokers, mutual funds, etc.) whose compensation systems are in conflict the the investor's objectives.
Academic and real-world studied have shown that diversification, low fees and rigorous re-balancing are the three keys to investment success.
Stock picking, market timing and chasing last year's 'hot hand' do not produce consistent results.
There are six core asset classes that every investor should be exposed to in their portfolios: US equities, foreign developed equities, foreign emerging equities, real estate, US treasury bonds, US treasury inflation protected securities (TIPS).
Every other available asset class (muni's, corporate bonds, mortgage bonds) are simply combinations (from a risk perspective) of the 6 core assets.
You should use very low cost and tax-efficient ETF's or mutual funds to invest in the core asset classes.
It is critical to re-balance (sell a portion of winners to invest in losers) to ensure you do not get too much exposure to a single asset class (think about the 2000 tech collapse).
The vast majority (95%+) of mutual funds and some ETF's are a total scam. High fees, poor after-tax performance and a core misalignment of interests make actively managed mutual funds a loosing proposition for individual investors (he presents a ton of evidence supporting these claims).
Vanguard and TIAA-CREF are non-profits and investors' best bets for ethical business practices w/ investors. He also mentions Long Leaf Partners and Numeric Investors as highly ethical mutual fund companies - I would add Hussman to that list.

This is a game changer for me. I've always known that I should have more of my portfolio in passive and diversified index funds, but nobody with Swenson's 'street cred' has built such a convincing case. I think I'll always play some stocks, I just need to segregate the vast majority of my portfolio to the side for a true asset allocation.

Read this book. It's a bit dry, but you'll be a better steward of your money for reading it. I'll leave you with one paragraph from the book where Swenson 'let loose' on full-service brokers:

The full service offered by full-service brokers generally impairs the investor's odds of success. Full service includes demonstrably worthless research. Full service encompasses clearly irrelevant broker advice. Full service costs materially more than other trading alternatives. Investors who employ full-service brokers pay a very real something for an extremely costly nothing.

Kiddie Tax for 2006

2006-01-20T13:45:00.000-05:00

One of my first and most popular posts was about using custodial accounts for your kids to shelter tax on non qualified dividends and interest. Here is an updated version for the 2006 tax year.

If you have young dependent kids and significant unearned income (interest, dividends, etc.), you can convert a portion of that high taxed income to tax free with a few clicks of a mouse. Here's why: your children can earn up to $850 per year of interest and dividends tax free and another $850 taxed at only 10%. Anything over $1,700 will be taxed at your rate.

Here's what I did:

I created a custodial account for each of my children @ E*Trade (all of my accounts are with E*Trade)
My wife and I made tax free gifts to each of their accounts - each kid got a total of $15k
I invested their new found money into high dividend stocks such as FRO, SFI, ACAS (no need to put the money into stocks that are entitled to the 15% dividend tax - I went for maximum gross dividends)
At tax time, I simply file a IRS Form 8615 for each kid on my return and the income gets tax at the reduced rate.
With 2 kids @ $1700 of income per child, I'll save $782 in taxes just this year! (My marginal rate is 28%)

Words of caution:

Always consult a tax adviser if you are unsure of how this would impact you
When you give your children money, it's theirs... it can only be used to their benefit or you risk losing the tax benefit
Just because it works for me, doesn't mean it will work for you.

UPDATE: Political Calculations has built another wonderful calculator based on this post.

Index Investing - Fantastic Resource

2006-01-20T07:05:00.000-05:00

I've been wanting to write a post on active versus passive investing and, in doing my research, I ran across a truly wonderful and FREE web resource. It's IFA's 12 Step Program: Active Investors Anonymous.

Clever art, great analytics, and sound advice... what more could you ask for.

Another Favorite Investment - iStar Financial

2006-01-19T09:49:00.000-05:00

iStar Financial (SFI) is a MREIT that specializes in complex corporate real estate lending. I've owned it for several years and it's been a great investment (both capital appreciation of 44% and my cost-based yield of 11.5%). Although I have discussed in the past that you should hold REITS and MREITS in tax deferred, tax free or kiddie tax accounts, this happens to be in my taxable account.

I have always assumed that the taxes on the dividends from iStar would get smacked with my marginal income tax rate (28% federal). Not so... based on the latest press release from iStar:

During 2005, taxable dividends for iStar Financial's common stock were $2.93000 per share. For tax reporting purposes, the 2005 taxable dividend will be classified as follows: $1.90554 as ordinary income, $0.37271 as 15% capital gain, $0.03419 as 5% capital gain, and $0.61756 as return of capital.

I had no idea that an MREIT had different levels of taxation from their dividends. This is definitely good news and it somewhat impacts my thinking about whether they should be put in tax-deferred accounts.

I took the iStar dividend numbers into excel and calculated my my true tax rate on the 2005 dividends. It turns out that at a 28% marginal tax rate, iStar would be taxed at 20%. This moves my after-tax, cost-based yield from 8.2% to 9.1%... a full 90 basis points!

It will be interesting to see if E*Trade properly reports this on my 1099.

Religion & Politics

2006-01-19T05:48:00.000-05:00

I'm a bit of an oddity. I'm a politically conservative Unitarian Universalist. No one really knows how many of us exist, but we're surely on the endangered UU species list.

Our Board of Directors recently passed a resolution that stated that our Church has taken a formal stand against a proposed amendment to Virginia's Constitution that bans same-sex marriage or any legal approximation thereof. It's a poorly written amendment and, I believe it is bad law: it limits private contracts. The Board resolution, however, had several debatable findings of fact (like equating same-sex marriage to the civil rights struggles of the 50s and 60s).

I don't want to write about same-sex marriage... I doubt I can come up with any position or argument that hasn't already been made. Rather, I want to discuss the wisdom of individual Churches and Denominations taking 'official' stands on divisive issues.

This topic was bantered back and forth yesterday on my Church's discussion board and I have a few choice quotes to share.

It all started when one member simply asked, "How many individuals at church actually voted to oppose HJR 585?" Seems like a valid question since the Board resolution states that 'the Church' opposed the amendment.

Next, there were some clarifications that the Board unanimously voted for the resolution, and that the Church had voted overwhelmingly to become a welcoming congregation. I made the observation that I didn't like when our Church or Denomination makes 'Single Voice' pronouncements about divisive issues and, if we do, we should offer opponents the chance to offer their dissenting opinion. Well... that opened-up the flood gates of comments from other members:

What is a legitimate 'dissenting view' on this issue?

...true forces of darkness, having lost the ability to persecute people on the basis of religion (for the most part) or skin color still feel safe in persecuting homosexuals.

But do we offer a justification of racism -- to prove our intellectual diversity -- or justification of economic exploitation and coercion of the poor when speaking on other social justice issues? I hope not. Similarly, I don't see the need to offer the "other" view on homosexual marriage.

And what does it say about our ability to be a moral force in a world in which right-wing fundamentalists (whether Christian or Muslim or Jewish versions) feel no limitations on their action in the public arena and are actively working to take over governments and kill off the opposition?

Wow! I think I touched a nerve. I offered the following:

I have no problem, what so ever, with a group of concerned UUs aggressively lobbying for social change. I struggle with those people using the Church (the church that I consider a second home for me and my family) as their communication vehicle. I think the family analogy is a good one. How you you feel if you disagreed with 90+% of your family on a given issue and your family made a public statement that said, "Our family believes x". Would you feel welcome in your own family? This family estrangement is what many UUs feel when the Association or individual Churches make sweeping pronouncements concerning divisive issues whether it be political or theological (remember when Sinkford made his god comments a while back? How did that make humanists and atheists feel?).

If you don't want dissenters in the family, do what other religions do and proclaim that you have discovered the One Truth. If you want dissenters in the family, encourage members to organize in the larger community to fight for what they feel is important - always knowing that they can come home and be with their family.

Then, my friend offers:

You are faced with the a common dilemma, one that most everyone faces at one time or another ... if they are involved in a pluralistic organization or society. You disagree with a position, or policy, or a statement made by that group. Everyone in this situation must then ask themselves if this problem is significant enough to require that they no longer be associated with the group. If it is, they leave, but if they can live with it, they either choose to accept things and let go and/or they fight to change the group.

Great point. This is what I have been doing for the last four years when I'm in the minority at Church. I, however, came up with, in my un-humble opinion, a convincing counter argument:

The group also has a decision to make. Which is more important: making a statement as the group on an issue that does not have unanimous support and risk alienating some members of the group -- or -- refrain from making 'group' comments and encourage sub-group and/or individual comments.

In a business or political party setting, I would certainly choose the former due to the need for a single, strong voice.

In a family, religious or social situation, I would choose the latter - family and friends (for me, at least) trump economic, political and policy issues every time.

Let me know your thoughts on the matter.

PS - I'm 90% recovered from my illness and the regular posting schedule has resumed.

More Wal-Mart

2006-01-17T15:43:00.000-05:00

Check out Arnold Kling's response to the Maryland Wal-Mart law...TCS Daily - Liberals Should Know Better.

Here's the 2nd paragraph - it hit's close to home for me with my friends in UU-land:

Most of my friends are liberals. This series is the conversation I wish that I could have with them. I wish they would let me finish my train of thought before
interrupting. I wish that they would consider my arguments, rather than try to bury them in rhetorical put-downs.

Don't worry, it's not an attack on 'liberals'... it deals with the unintended consequences of government meddling in market (in this case, the labor market) dynamics.

Overvalued, Overbought, Overbullish

2006-01-17T11:05:00.000-05:00

Here is Hussman's weekly commentary... Hussman Funds - Weekly Market Comment: January 16, 2006 - Overvalued, Overbought, Overbullish

And the 'money' quote:

On average, this set of overvalued, overbought and overbullish conditions has historically produced tepid results even when the broad quality of market action has been favorable on the measures we use, and has been downright mean when the internal quality of market action is unfavorable (such periods include February 1962, December 1972, and August 1987, all which shortly preceded violent declines). Given current conditions, the quality of market action is best described as either tenuously unfavorable or neutral, so in any event, market risk hardly appears worth taking at present.

Early Riser - Down For The Count

2006-01-17T08:51:00.000-05:00

Loyal Readers,

I've been sick all weekend and I'm still under the weather. I'll be back tomorrow (hopefully) with some sort of moderately interesting post.

ER

Maryland Is Now A Province Of Red China

2006-01-13T06:53:00.000-05:00

I cannot believe the short-sighted legislation that Maryland just passed. The bill forces any employer that has more than 10,000 employees in Maryland to spend 8% of their payroll expense on health-care for their employees. It just so happens that Wal-Mart is the only employer in MD that has over 10,000 employees. What a coincidence!

Here are some choice quotes from the liberal brain trust:

"Don't dump your employees that you refuse to insure into our Medicaid system," said the bill's sponsor, Sen. Gloria Lawlah.

In the House, Delegate Anne Healey compared Wal-Mart to a schoolyard bully. "We're here to tell this bully to change his behavior," she said.

And the minority voice of reason:

House Republican Leader George Edwards called the measure an unwarranted intrusion into private enterprise. "If you don't want to work for Wal-Mart, no one's twisting your arms. Go somewhere else and work," Edwards said.

Wait... you mean Wal-Mart employees aren't indentured servants!?! I didn't know they had a choice of where to work!

If I was Wal-Mart, I would immediately close enough facilities to get under 10,000 employees in MD (they currently have 17,000). Then I would open distribution centers & technology centers just on the other side of the MD state line in each of the neighboring states.

An alternate strategy would be to contribute the money to health care expenses that directly help Wal-Mart's bottom line... smoking secession programs, weight loss programs, etc.

If Maryland is really committed to employers providing health-care, they should pass a law that requires every employer to provide health-care. This won't happen, however, because it would create more unemployment and, therefore, more folks on the Medicare rolls. That being said, I never underestimate the lack of economic literacy of politicians. Time will tell if idiot-legislators from other states will try to crater their economies with similar bills.

Update: Go read Don Luskin's column over at The Conspiracy.

Employee Stock Option Diversification - A Different View

2006-01-12T06:18:00.000-05:00

I posted a series of articles a few weeks ago that dealt with analyzing Employee Stock Options (Part 1, Part 2, Part 3, Part 4). As my company’s stock has continued to appreciate, I have sold about 30% of my vested options (much to the dismay of my tax preparer - me).

I have written about the desire to diversify my risk by reducing my exposure to my company’s stock. Currently, my options’ exercise value is about 21% of my net worth (excluding my house). Not too bad, but I really don’t want any single investment to be more than 5% of my net worth.

I was trolling through Quicken last night and I had a bit of a revelation: comparing a highly leveraged investment to non-leveraged net worth, may incorrectly minimize your over-concentration risk. What if we valued the ‘in the money’ options as if we held the underlying stock? My 21% would grow to 51%. Yikes!

I think the 51% is the best way to understand how the movement of your company’s stock impacts your overall portfolio. This means that a 10% decline in my company’s stock would reduce the total value of my portfolio by 5%.

I think I’m going to sell some more options today.

Hussman Weekly Market Comment - Do P/E Ratios Expand Once the Fed is Done?

2006-01-11T09:21:00.000-05:00

Here's a link to the latest Hussman market commentary: Do P/E Ratios Expand Once the Fed is Done?

And the money quote:

If we restrict valuations to a price/peak earnings multiple of 16 or higher (the current multiple is 19), we find that on average, S&P 500 earnings declined by -8.6% over the 18 months after the final rate-hike. Yet despite this decline in earnings (which would normally raise the raw P/E ratio if prices were to remain constant), the raw P/E ratio actually declined as well, by an average of -1.3%. The result was an average loss, including dividends, of -6.5% over the 18 month period (an annualized loss of -4.4%).

TRFX - The Latest Early Riser Investment

2006-01-11T06:19:00.000-05:00

I purchased some shares of Traffix (TRFX) at $5.90 yesterday. Traffix is an on-line advertising firm. It's also a Prudent Speculator pick.

You say, "Why did you buy some third-string online advertiser?"

I say, "I'm glad you asked."

Any Prudent Speculator pick is, in my book, pre-qualified for my investment dollars due to my record with their picks.
Gross Margins of 50%+
$35M of cash and equivalents on their balance sheet (that's more than $2 per share)
An annual dividend of $0.32 or 5.4% (15% taxation)

I have decided to post all of my trades from this point forward to give my readership an idea of my personal finance ideas in action. I'll keep you updated on TRFX.

Note: I'm always looking for good topics to write about. Please don't hesitate to leave your personal finance questions as comments to my posts and I promise to write an article about your topic of choice.

SinceSlicedBread.com

2006-01-10T13:26:00.000-05:00

Instapundit has an ad link to SinceSlicedBread.com. The site supposedly contains 21 great ideas to make the country stronger and we're allowed to vote for our favorites. Sounds pretty compelling, huh?

Nope... it's a lame collection (with a few exceptions) of socialist rantings - very few of which are actually new ideas. Here are some of the fascinating ideas:

Medicare As A Single payer - Hillary-care!

Massive Public Works Projects

Civil Works Corps - more spending, again!

Blanket The US With Wireless Access - for free, of course

Universal Health Care - again

Extend Social Security Tax Beyond $90k - more taxes.... Hurray!

Ownership of Retirement Assets - uhhh... I guest they have never heard of 401ks and IRAs

These idea sounded a bit suspicious to me so I scrolled down to see who runs the site. At the bottom there is a logo that says SEIU with the tag line - "Stronger Together". Sounds like some left-leaning think tank.

I click on the logo... ohh... it's the Service Employees International Union. I guess it now makes sense.

There are a few reasonable, non-socialist ideas like teaching Personal Money Management to High School students that I voted for. Everyone should visit the site and try to only vote for the ideas that don't further the interest of the union.

I love dividends

2006-01-10T06:21:00.000-05:00

First, a favorite quote...

The handout and the spokesman threaten our diligence, our ingenuity, our skepticism, our zeal. For zealots we must be. Not for a cause. For facts and for truth—and all of the truth.
Frank H Bartholomew, President, United Press 1958

I'm going to start offering my favorite quotes so my blog posts seem classier.

Allow me to count the ways I love dividend paying stocks...

At it's core, a company's stock price should be the net present value of it's future dividends. Companies that pay dividends today are, by this definition, more valuable than non-dividend paying stocks.
They are less risky. Most companies that pay dividends have profits that exceed their dividend rate.
Favorable tax treatment - sometimes. Other than REITS (Real Estate Investment Trusts) and MREITS (Mortgage Trusts), dividends are taxed at 15%. REITS & MREITS are taxed at your marginal tax rate. You can mitigate the impact of REIT taxation by placing them in an IRA or a KIDDIE TAX account.
Regular, no-work-required, passive income. For all you RDPDs (Rich Dad, Poor Dad) fanatics, you'll understand the draw of a monthly or quarterly check.
Your yield on your investment can increase significantly based on earnings growth of the company.

Here are a few of my favorite holdings, their current dividend rate, my dividend yield based on my cost basis and the tax treatment:

Washington Mutual (WM) - 4.3% current yield - 4.9% for me - 15% taxation
Ameren (AEE) - 4.9% current yield - 5.8% for me - 15% taxation
Hospitality Reality Trust (HPT) - 7% current yield - 10% for me - REIT taxation
JP Morgan (JPM) - 3.4 % current yield - 5.1% for me - 15% taxation
UST (UST) - 5.3% current yield - 7.9% for me - 15% taxation

I got all of these picks from The Prudent Speculator.