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The Reformed Broker

Members of the Mortgage Victims' Platform protest against evictions in Barcelona, Spain, on July 2, 2013. Depending on the outcome of Germany's elections, Europe may 'go American' — reflating asset prices — in its attempt to pull out of a recession. (Manu Fernandez/AP)

Is Europe about to 'go American'?

By Guest blogger / 07.08.13

America is gradually dragging itself out of crisis mode as Europe continues to suffer.

But maybe not for long.

The German elections are the final hurdle between the old Austerity ideas and the new policies of stimulus and forbearance. It is my belief that the European economic bosses are about to Go American in their ongoing battle with deflation and depression.

Here's the playbook for how that will work, via Liam Halligan at The Telegraph (emphasis mine):

Angela Merkel faces crucial federal elections on September 22. In the run-up to those, the German chancellor will do everything possible, in terms of easing bail-out conditions, to reduce the possibility of turmoil in European financial markets – which would shatter her reputation for economic competence. ( Continue… )

An investor sits in front of an electronic board showing stock information at a brokerage house in Hangzhou, China, in June 2013. Being able to predict what the masses will do next can give an investor an edge over his or her peers. (China Daily/Reuters/File)

How to succeed at investing

By Guest blogger / 07.05.13

When people ask me what my edge is, I tell them I have a very good sense of what the crowd is thinking and I think I've gotten pretty good at what they'll do about it next. I pay close attention to when there's an emotional or tonal shift to the rhetoric of the Pundit Class because I know that the masses gradually adopt these oft-repeated tropes and heuristics for their own and act accordingly.

Keynes figured out that his job as the King's College endowment portfolio manager was not to guess at the future - but to guess at what other market participants would be guessing and to beat them to those assumptions. Before he realized that this was the way to invest, his track record was terrible - lots of trading, very little to show for it, the Crash of '29 nearly wiped him out of his own small fortune. But after this realization hit him, his confidence grew and his cockiness faded. His average holding times lengthened, his turnover decreased and his returns began to trounce the market.

Keynes was now a master at judging the judges of the beauty pageant, and leaving the judges themselves to fret over their petty calculations of pulchritude.

This is what I do.

I do not say that this is easy or that I can do it effectively all the time, but I'd much rather work on this skill than any other. I'd prefer to develop a consistent ability to survey the surveyors than try to be the best forecaster of the earnings of one kind of company. The reality is that fundamental research to determine cash flows and earnings per share is a software function with minor tweaks colored by conversations with management, customers and suppliers. ( Continue… )

Earlier this year, traders work on the main trading floor of the New York Stock Exchange shortly after the opening bell in New York, New York. Retail investors bought all ten S&P sectors on a net basis last week — a phenomenon that has occurred only seven other times since 2008. (Mike Segar/Reuters/File)

Who bought the dip?

By Guest blogger / 06.26.13

Last week the S&P 500 fell 2.1% - it's worst weekly drop of 2013 so far.

Hedge funds sold as did institutions. But retail investors were out there buying on a net basis according to the latest equity flows report from Merrill's Quant Strategy group. This is rather amazing.

Four important tidbits from the report:

* Not only did the retail, what Merrill terms their "private client" segment, do all of the buying - they bought all ten S&P sectors on a net basis. Also amazing. This is only the eighth week in which retail investors have done this kind of broad-market buying since 2008. The last time we saw them buy the whole market was in January.

* The hedge fund segment sold again last week, three in a row. They are now net sellers of the equity market on the year - they were only net buyers during the March and April period of new highs, because, en masse, they are essentially benchmark-chasing pussies who jump in and out of the tape like they're "managing risk" and then lever up like maniacs when they begin to trail the markets (not BofA's words, mine).

* Small caps saw net sales from all three groups.

* While all three segments - private client, hedge fund and institutional - posted a combined a net sale of stocks last week, the one sector that all three groups actually added to was Technology. It was a record week for flows into tech stocks, the first over $1 billion week since 2008. BofA has previously determined that tech is actually the best performing sector during periods of rising interest rates so this makes sense. Chart below:

A screen displays the final closing number for the S&P 500 index at the New York Stock Exchange last month. The stock market is seeing an interesting trend where private investors are buying the dip in the market while hedge funds are taking in profits. (Brendan McDermid/Reuters/File)

Tug-of-war breaks out between private investors, hedge funds

By Guest blogger / 06.18.13

Right now there's a bit of a tug-o-war between what private clients and what hedge funds are doing about the recent patch of volatility we've seen in the stock market.

Savita Subramanian's quantitative research group at Bank of America Merrill Lynch does a really great job with their weekly equity flow reports.  The firm breaks up investors into three categories: Private Client (retail), Hedge Funds and Institutions (including pension funds).

This was an interesting week as private clients and institutions bought the 1% dip in the stock market while hedge funds took profits. Not that this is exactly the opposite of what we saw throughout the spring, as hedge funds were buying the new highs in April and May while retail investors sold into strength.

Some other highlights from BAML's report:

* Last week, during which the S&P 500 was down 1.0%, BofAML clients were net buyers of $725mn of US stocks following two weeks of net sales. Inflows were led by private clients, whose purchases of US equities were the largest since January.

( Continue… )

Traders work on the floor of the New York Stock Exchange, NYSE, on April 11, 2013 in New York, New York. Although it is easy to get caught up in minor details when you're watching the stock market, Brown advises trying not to constantly search for explanations of random events. (Melanie Stetson Freeman/The Christian Science Monitor/File)

A healthy dose of skepticism

By Guest blogger / 06.17.13

Morgan Housel (Motley Fool) does an excellent job here reminding us of how much superfluous news is created each day:

Avoid explanations of random events. Pay more attention to historical context.
People can't stand the idea that events are random and unexplainable, so they try to attach meaning. You'll see things like, "Stocks fall 0.5% as investors react to manufacturing data" rather than the more honest, "Stocks fall 0.5% because they just do that sometimes."

Instead of reading explanations of what the market is doing, pay attention to what the market is doing in a historical context. The next time stocks have a down day, remember that they do that, on average, every other day. The next time stocks decline 10% from a recent high, remember that they've done that almost every year since the Civil War. And the next time we have a recession, remember that no one in history has made it to the 5th grade without living through at least one recession.

Trying to explain market moves gives us the impression that we can predict the future, which we can't. Looking at market moves in historical context reminds us to ignore the noise, which we can.

What he doesn't mention is that the reason financial journalists and media producers do this is because its what people think they want. They see the market go up or down or both in the course of the day and they want an explanation for it that is logical enough to satisfy the part of their brain that searches for answers.

And the media is happy to give this to them because ads can be run alongside it.

If investors weren't constantly in search of explanations, this wouldn't go on and on the way it does. But they are so it continues. Your job is to be aware that fluctuations do not require ex post facto answers and to take the whole shooting match with a big helping of skepticism.

A man looks at the update of the Nikkei stock rate on an electronic board in Tokyo, Thursday, June 13, 2013. Brown warnes that overseas volatility (Junji Kurokawa/AP)

Why the stock swoon? Look overseas.

By Guest blogger / 06.13.13

The old playbook that worked from January through mid-May isn't working anymore.

Two reasons - first, US stocks are now coping with rising interest rates and the bond back-up. No one knows whether or not that's done for now. The yield on the 10-year, at 2.29%, is sitting at 14 month highs. Can't be ignored.

This means the yield plays at best can stabilize but should probably not be loaded up on.

Secondly, we're starting to pay more attention to the overseas stuff. We ignored the fact that European stocks, relative to US stocks, had peaked last December. We also ignored the China decline, month after month.

Not anymore. Look at Tuesday morning's action in Citigroup. It was everybody's favorite bank turnaround story, just as the XLF sector SPDR was starting to lead the market. Now we get chatter of a massive currency-related loss and that whole bank leadership heuristic gets thrown for a loop.

The new drivers of fear in US stocks are emerging markets and Japan. Tuesday's sell-off comes courtesy of an EM bond / currency rout overnight combined with a lack of new action from the Bank of Japan.

What this means is that elevated volatility needs to factor into your decision-making. I'd say position-sizing should probably come down as well. Lastly, I'd imagine that getting accustomed to gap-up and gap-down opens would be a good idea as well. We hadn't seen a lot of those until the international stuff came back into focus, but if you remember this type of trading from years past, then you remember the frustration of markets that didn't move all day, only in the futures markets before the open.

This is where we are, just so you know.

Job seekers wait to speak to a representative for positions at a new Target store in San Francisco, Calif., in 2012. Although unemployment rates are falling nationwide, joblessness continues to hit those with less education harder than those with college degrees. (Robert Galbraith/Reuters/File)

College educated? You're doing better than most.

By Joshua M. BrownGuest blogger / 06.10.13

The multi-speed nature of the economic recovery has perhaps been the single greatest source of confusion for market-watchers, journalists, investors and business owners over the last few years. When most people talk in terms of "the economy" being good or bad, they mean it as a whole. Much harder to have that discussion without all of the caveats these days.

For example, the unemployment rate for the college-educated is under five percent and is now attaining the levels of the Bush or Clinton administration. The recovery for this demo looks and feels significantly different than it does for groups with lesser educational backgrounds - although unemployment is slowly falling for all.

From Bill McBride:

Clearly education matters with regards to the unemployment rate - and it appears all four groups are generally trending down. Although education matters for the unemployment rate, it doesn't appear to matter as far as finding new employment (all four categories are only gradually declining). Note: This says nothing about the quality of jobs - as an example, a college graduate working at minimum wage would be considered "employed."

Traders work on the main trading floor of the New York Stock Exchange shortly after the opening bell in New York, May 2013. (Mike Segar/Reuters/File)

For investors, a moment of optimism

By Guest blogger / 06.06.13

It's a tough moment to beat for my profession — investors have been returning to the markets and putting money to work, asset markets have been fairly non-volatile and almost all market charts are moving "up and to the right." The fear of crises past is still with us — which is restraining the behavior of many in a very healthy way - but investors are once again recognizing the value of long-term asset management and wise counsel.

A glimpse at what this kind of atmosphere translates to via Diana Britton at

It feels a lot like 2006. The equity markets are up 30 percent since the beginning of 2012; retail investors are finally starting to put their money to work. And advisors are starting to see an increase in their pay, especially within the fee-based portion of their business, according to REP. magazine’s annual advisor compensation survey.

Seventy-one percent of advisors said their total compensation grew in 2012, with about half saying it rose by more than 10 percent, according to the REP. report. Seventy percent said they are serving more clients than a year ago, and 79 percent have experienced a net increase in new dollars clients have invested with them.

FAs are even more optimistic about this year, with 59 percent expecting their compensation to grow by 10 percent or more in 2013.

Need I quote Lou Mannheim from Wall Street here? Okay, I shall... "Kid, you're on a roll. Enjoy it while it lasts, 'cause it never does."

A trader looks at his screen on the floor of the New York Stock Exchange. The average investor, sitting in its 'dumb money' S&P 500 index fund, may be sitting on a 17 percent return so far this year, Brown writes. (Lucas Jackson/Reuters/File)

The paradox of 'dumb money'

By Joshua M. BrownGuest blogger / 05.27.13

“By periodically investing in an index fund, for example, the know-nothing investor can actually outperform most investment professionals. Paradoxically, when ‘dumb’ money acknowledges its limitations, it ceases to be dumb.”
- Warren Buffett, 1993 Berkshire Hathaway Shareholder Letter

Warren doesn't believe that active management doesn't work or that beating the market cannot be done. In fact, he believes the opposite - that it can be done. Unfortunately, just not by most people and certainly not by theaverage person.

By definition, most people cannot be above average - although for a long time most investors did believe that they were, in fact, above average. It appears that they have learned. The "dumb money" has figured out the truth about the game. It is changing it's behavior and becoming cognizant of what it can and can't do.

Vanguard has now taken in $2 trillion dollars with a very simple implicit promise - that its funds and vehicles willnever "beat the market." This message is resonating. The movement began as a surrender of sorts: "Forget it, I can't be bothered with this anymore." It has morphed into something more confident, more wizened. The stigma of resigning one's self to hands-off, average returns is almost non-existent now; it would have been unthinkable to investors just fifteen years ago.  ( Continue… )

The Apple logo hangs inside the glass entrance to the Apple Store on 5th Avenue in New York City. There is still downside risk to investing in Apple, Brown writes, but this is true of any stock. (Mike Segar/Reuters/File)

Apple $100 billion payback is a no-brainer

By Joshua M. BrownGuest blogger / 04.24.13

Most of the time, this is hard. But sometimes, the Market Gods (Trend, Valuation, Volatility) and the minor deities who flank them (Art Cashin, Louis Rukeyser) see fit to lay an easy decision at our feet.

Apple is one of those easy decisions right at the moment.

The company has just informed us that they plan to return $100 billion dollars to you, if you are a shareholder, over the next 36 months.

This is an unheard-of sum, the Exxon dividend-buyback combo of a few years back is the only corollary.  This comparison is important because Exxon is not growing but it has treated you very well over the years if you simply sat back and collected your gains and payouts from the boring business.  ( Continue… )

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