Posted by Mark Eshman
The recent public vetting for the next Fed Chair of Larry Summers, the brilliant former Clinton Treasury Secretary and highly controversial Harvard president is likely to end badly...for him.
As is the custom in DC, big hairy potential political candidates and appointments are usually floated by PR firms, staffers, or in the case of Summers, the candidates themselves.
Few doubt Summers' acumen. His pedigree is pristine: the son of two economists, the nephew of Econ 101 textbook legend Paul Samuelson, an MIT freshman at age 16, etc. But Summers has proven throughout his career that he does not play well with others.
He notoriously offended just about everyone with is 2005 speech in which he suggested that the under-representation of women in science and engineering could be due to a "different availability of aptitude at the high end," and less to patterns of discrimination and socialization.
Many also cite Summers' pivotal policy role preceding the sub-prime mortgage crisis in encouraging deregulation including the repeal of Glass-Steagall. He also infamously claimed that big banks were entirely capable of regulating themselves in regard to their trading in derivatives.
In 1998, then-Deputy Secretary of the Treasury Summers testified before the U.S. Congress that "the parties to these kinds of contracts are largely sophisticated financial institutions that would appear to be eminently capable of protecting themselves from fraud and counter-party insolvencies."
However, the best reason not to confirm Summers is because there's a much better candidate: current Fed Vice Chair Janet Yellen. In addition to her vast leadership experience as Chair of the Clinton's Council of Economic Advisors and President of the San Francisco Fed, Yellen is, like Bernanke, a dove on monetary policy.
In order to fulfill the Fed's dual mandate of price stability and full employment, she would willingly sacrifice some inflation for more jobs. With an unemployment rates at stubbornly high levels, and with inflation exceptionally low, this appears to be the best route to a sustainable, growing economy.
Finally, from a political point of view, by nominating Yellen, President Obama sustains a Fed policy that seems to be working, gets credit for naming America's first woman Fed chair, and doesn't give his detractors another reason to pile on.
So ignore the hype, turn off CNBC, and welcome to the dog days of Summers.
7.28.13 at 11:04 am | Who should succeed Ben Bernanke as Fed Chair?. . .
6.9.13 at 8:54 am | The recent market volatility is the direct result. . .
6.5.13 at 1:47 pm | The past two weeks' market sell-off has spooked. . .
5.13.13 at 2:24 pm | Wall Street legend and Blackstone Vice Chairman. . .
5.7.13 at 7:43 pm | To get the best performance from your portfolio,. . .
4.29.13 at 8:25 pm | The Wall Street parlor game of what would happen. . .
4.24.13 at 10:30 am | (3/29/12 – CBS Marketwatch) Bernie Madoff:. . . (5)
5.13.13 at 2:24 pm | Wall Street legend and Blackstone Vice Chairman. . . (5)
6.9.13 at 8:54 am | The recent market volatility is the direct result. . . (2)
June 9, 2013 | 8:54 am
Posted by Mark Eshman
Volatility has returned. Confusion over when and how the Fed will end it's QE has become a parlor game on Wall Street.
Diane Swonk, chief economist at Mesirow Financial had what I think was the most rational comment of the week when she noted, "taper does not equal reversing policy."
Bernanke has not only indicated as much but the Fed has already indicated exactly how their QE exit would occur. Whether or not they can do so with such precision is a completely different question.
For now, we're in a Goldilocks environment: the economic news is good, but not so good that the Fed is worried about slamming on the brakes just yet. Economist Ed Yardeni was quoted last week saying "the stock market is open-minded to the idea that they (the Fed) may be able to make a smooth transition if the economy continues to perform better."
To date, the Fed has communicated its intentions extremely clearly, and there is every reason to believe that when the taper and the ultimate exit begin, Bernanke will let the world know each and every move.
All that said, last week's action suggests that the bond market is jittery. Some of the significant outflows in high yield and mortgage-backed securities can be chalked up to traders finally realizing large unrealized gains, but I'd assume a chunk of the selling is coming from trigger-happy investors who, still smarting from portfolio losses during the financial crisis, are concerned that they'll be too late to the selling party.
If the Fed is true to its word, and if we're reading the economic tea leaves correctly, it seems that the market is overestimating the velocity of rates moving to higher levels. As Gary Cohn, COO of Goldman said last week, "When you get a fundamental shift in rates, which doesn't happen very often, the initial move is always pretty dramatic...people try to get ahead of it."
His partner Gary Beinner, CIO of fixed income at GS noted "the magnitude of the moves was extreme and wasn't based on fundamentals. It may have been based on a liquidity-driven event, with hedge funds selling when prices fell to target levels."
Finally, Beinner commented that he thinks merging market debt is still cheap and that investors should also look to floating rate corporate bonds. I agree, thanks to low cost and liquid exchange-traded funds (ETFs), these investments are avialable to everyone.
This market volatility may continue, but worrying about whether or not the Fed is going to "taper" anytime soon is a sport best left to professional investors. For the rest of us, if we continue to maintain a diversified portfolio of all types of stocks and bonds and keep our eyes on the long-term, we'll achieve our financial goals.
June 5, 2013 | 1:47 pm
Posted by Mark Eshman
On the heels of a nervous pre-holiday week, we saw a strong sell-off in the markets last Friday, leaving many to wonder if we've seen the highs for the year. In fact, some investors are beginning to wonder if the bull market that has doubled the value of the S+P 500 since March of 2009 is finally coming to an end. While the economic news is, on balance, improving, some disappointing news releases coupled with stronger sentiment that the Fed will start "tapering" their massive bond buying program in the not-too-distant future have created a much more volatile investment climate.
After attending the Economic Club Of New York luncheon honoring Paul Volcker last week I remain firm in my conviction that low rates are going to be part of our investment calculus for a long time. In other words, we are in an era where stocks (and to a lesser extent, high income investments) will remain the only game in town not for months, but for years. Consequently, any market sell-offs should not be construed as the turning point that investors are shifting out of stocks and into bonds. Rather, investors are taking large profits and sitting in cash until they realize that there is no substitute for stocks.
Volcker noted that the history of economic deleveraging teaches us that rates can stay low (between 0% and 2%) for years. In the case of post-WWII America, rates hovered in a low range for 15 years! Lengthy periods of economic repair are necessary following big bubbles. These periods are almost always characterized by low rates and years of rising stock markets.
A good test of any investor is the ability to understand lessons from history and to apply them, hopefully proactively, before the tide shifts. In the case of the recent market action, it is clear to me that what we have been seeing these past two weeks is not a shift in fundamentals but something much more indicative of short-term trading.
May 13, 2013 | 2:24 pm
Posted by Mark Eshman
In what was one of the most selfishly rewarding meetings I've had in a long time, I was fortunate enough to spend some time last week with Wall Street legend Byron Wien. Wien is Vice Chairman of Blackstone Advisory Partners LP, and consistently ranked as one of the most widely read market analysts and strategists. Wein grew up in Chicago during the Depression. He was orphaned at 14, and overcame a difficult and traumatic childhood to attend Harvard undergrad and Harvard Business.
He recently turned 80, and in response to a request from a conference organizer moments before he was supposed to speak, Wien committed to paper some ideas which surely contributed to his investment success, but more important, they are lessons that shaped such a rich and remarkable life:
Here are some of the lessons I have learned in my first 80 years. I hope to continue to practice them in the next 80.
The views expressed in this commentary are the personal views of Byron Wien of Blackstone Advisory Partners L.P. (together with its affiliates, “Blackstone”) and do not necessarily reflect the views of Blackstone itself. The views expressed reflect the current views of Mr. Wien as of the date hereof and neither Mr. Wien nor Blackstone undertakes to advise you of any changes in the views expressed herein.
May 7, 2013 | 7:43 pm
Posted by Mark Eshman
The tulips in New York City are in vibrant, raging bloom. The locals who, less than two weeks ago donned dark overcoats, scarves, and gloves, and were slumped miserably over their iPhones as they trudged down into the dank subway, are now walking brightly, as the sun warms their souls. Birds sing in the newly leafed elms, and the park is alive with sun worshipers, bikers and runners, and parents screaming at their future Yankee starters. Spring has arrived.
Just as spring follows winter, the economy also reveals its own seasons. Savvy investors understand that the way to achieve their financial goals is 1) invest in a broadly and globally diversified portfolio; and 2) increase or decrease the percentages of certain investments within that portfolio based on the “season.”
(My firm believes that low-cost and tax-efficient index funds are the best way to diversify across different asset classes, but most advisors still think they can add value by selecting individual stocks and bonds.)
The key to successful investment management is understanding where you are in the economic cycle – the “season” – and to have the right mix of investments. For example, if you believe that we are currently in the midst of an economic expansion – and I do -- you want to have an over-weighted position in stocks because they tend to rise as the economy grows. Conversely, since interest rates are so low, and bond prices will decline when rates ultimately rise, you want to have a smaller-than-normal amount of bonds in your portfolio. (What is “normal” for you depends on your risk tolerance. You and your advisor need to determine this together before you invest.)
There are no guarantees that any investing philosophy will give you positive returns each and every year. What we do know from history is that the typical “win big, lose big” style practiced by the big Wall Street firms is a recipe for losing money. Play it safe. Be patient, and manage your portfolio for sustained performance by paying attention to the seasons.
April 29, 2013 | 8:25 pm
Posted by Mark Eshman
The Wall Street parlor game of what would happen to Apple stock after the October, 2011 death of Steve Jobs has morphed into a populist frenzy over the past 18 months, as shares somewhat surprisingly and steadily rose to over $700 a share last September, and then came crashing down over 40% to a low of $390 earlier this month.
Now, I’m not saying it’s related, but it is instructive, that during these same 18 months there’s also been a populist frenzy over the Kardashian sisters. Part of successful investing is making connections, often between apparently unrelated things. So, I’ve come to the conclusion that Apple stock and the Kardashians have a few things in common:
1) The proliferation of what I call “buzz” media: the sound bites of titillating stories designed to generate water cooler talk (or in today’s world, retweets). Think: exclusive video of Kim’s ample belly or booty on TMZ, or Jim Cramer screaming “buy, buy, buy!” on CNBC. Everyone is hooked, and it’s really hard to avoid. Even if you don’t watch it, someone will post it on Facebook or you’ll catch it on a TV screen in your dentist’s office. Is it important? Who cares!
2) The facts matter less than the story. Kim Kardashian has 10 million Twitter followers and few of them could tell you why she is famous. (Hint: it started with a sex tape.) Nonetheless, in the rich cultural tradition of her predecessors like Zsa Zsa Gabor and Paris Hilton, Kim and her clan have embodied what social scientist Daniel Boorstin called "a person who is known for his well-knownness." In a similar vein, Apple has become a target for being famous. Apple stock has risen over 4,000% over the past 10 years, but the real “story” is how fast it’s crashed post-Jobs. The company generates $40 billion in quarterly revenue, nearly $10 billion in quarterly profits, and still trades at a 50% discount valuation to the S+P 500. The company is sitting on $144 billion of cash, more than the value of all of the stocks on the Tel Aviv stock exchange combined! Still, people can’t get enough Apple trash talk.
3) Consumers of both the Kardashians and Apple stock are starting to converge. Up until the end of 2011, most shareholders of Apple were loyal users and/or savvy investors. In the post-Jobs era, Apple has become more of a speculative play with shareholders hanging on to every new product rumor, Chinese factory retooling, and “i-anything.” They punish the stock if a rumor doesn’t materialize, but keep watching, lest they miss the next 4,000% move. These are the same folks who were upset that Khloe’s faux wedding to Lamar didn’t pan out, but can’t wait to find out what Kanye wants to name the baby.
Will people remain obsessed with the Kardashians for much longer? Will the Kardashian-watching Apple shareholders ever focus their attention on more than just a sound bite in order to make more intelligent investment decisions based on long-term fundamentals? So, the question isn’t whether Apple stock is a good investment. The question is, who should buy it?
April 24, 2013 | 10:30 am
Posted by Mark Eshman
(3/29/12 – CBS Marketwatch) Bernie Madoff: “From my first interview to the media I have said that ‘the banks must have known,’ and were complicit and contributing to my crime.”
He’s back. In a pathetic effort to reduce his 150 year sentence while also offering his unsolicited assistance in reforming the financial services regulatory regime, Madoff is making sure we all know that JP Morgan, Citibank, and other large global banks knew that they were participating in his $50 billion Ponzi scheme that shattered lives as well as investor confidence.
The real lesson from Madoff isn’t that crooks will think twice before screwing investors and therefore the world will be safe for investors. History simply isn’t on our side. It will happen again, but we need to know the right questions to ask.
So the next time you are presented with a “too-good-to-be-true” investment opportunity, Question Number One should be, “where will my money be held?” That’s it. End of story.
The vast majority of registered investment advisors and hedge fund managers are decent, trustworthy fiduciaries who won’t steal your money. Think of investment advisors like commercial airplanes. You only hear about the crashes, not the safe landings.
Most advisors keep clients’ money in custody with a third party brokerage firm like Charles Schwab or Fidelity. These firms have extensive fraud and investor protection systems. Not Bernie. He held clients’ dough at Bernard L. Madoff Securities; a brokerage firm owned by, well, you get the picture.
A now-famous (and completely unconfirmed) story: Three well-known partners of movie company met Madoff a number of years ago. LIke most of his victims, they were impressed by his modest, but extremely consistent long-term performance. Two of the partners signed up on the spot, but the third simply asked “where do propose keeping our money?” When Madoff answered, Partner #3 said “thanks, and goodbye.”
Madoff’s genius was his appeal to a different type of greed. It wasn’t that investors were promised or expected 20% returns. Rather, they were promised something that doesn’t exist in this universe: long-term consistent returns, year-in and year-out. The frustrating thing about the Madoff affair is that investors could have avoided their catastrophic losses by simply asking the only question that matters.