The Reformed Broker
David Einhorn, president of Greenlight Capital, speaks during the Sohn Investment Conference in New York, in this May 2012 file photo. Einhorn, is best known for his prescient short bet against Lehman Brothers, but even he unloaded some poor choice stocks recently. (Eduardo Munoz/Reuters)
You can't win them all. And it's okay.
This is a tough year for all investors, despite what the index says it's done year-to-date. This morning's daily affirmation comes in the form of a reminder:
Even the most brilliant investors don't get 'em all right. The world's best asset allocator, Ray Dalio has negative YTD performance numbers for the first half of this year. Louis Bacon just gave his investors their money back rather than feel the pressure to perform in this environment.
And get a load of the of the value traps David Einhorn, one of the most brilliant equity guys in history, has just unloaded...
From Barron's:
David Einhorn sold his entire stakes in Dell (DELL) and Research in Motion (RIMM) as of the end of the second quarter, according to a filing his hedge fund Greenlight Capital made with the SEC. As of the end of the first quarter, he had owned 11.9 million shares of Dell and 1.6 million shares of RIMM.
Einhorn also decreased his stake in Best Buy (BBY) by 84%, according to InsiderScore.com.
Remember: No matter how good or smart you are, how much research you've done or how long you've been in the game, you will still get a few stocks wrong and you will still be positioned incorrectly sometimes.
It's okay.
Traders work in the Goldman Sachs booth on the floor of the New York Stock Exchange in this March 2012 file photo. Greg Smith, an executive director at Goldman Sachs, resigned with a blistering public essay that accused the bank of losing its "moral fiber," putting profits ahead of customers' interests and dismissing customers as "muppets." (Richard Drew/AP)
Not with a whimper, but with a bang
This Sunday I was featured in a piece at the New York Times about the new trend of making a high profile exit from one's former employer or industry. Like that flight attendant who cursed everyone out on the PA system, gulped down a beer and then triggered the inflatable slide to make his escape. Or Greg Smith at Goldman or the entire editorial staff at TechCrunch.
Social media is behind a lot of this; people have a pretty big platform to talk about why they've walked from something and if they're disgruntled, they're probably going to use it.
Here's my little slice:
Joshua Brown has some advice for disgruntled Wall Streeters on his blog The Reformed Broker: “Deal with it or leave and open an Etsy store.” Mr. Brown spent about a dozen years as a retail stockbroker, only to conclude: “The business is one giant conflict. Even someone who wanted to do right by his clients couldn’t.”
He is now a registered financial adviser, and his blog, as the name implies, is devoted to illuminating the public about the booby traps of investing. He cheerfully acknowledges the appeal of social media to express regret, disappointment or anger about a former employer.
“Social media is inherently me-centric to begin with — all about me, where am I going,” Mr. Brown said. “But not everyone has to be Jerry Maguire on the way out the door.” And social-media ranting begets social consequences. “There are people in my former industry who won’t even make eye contact with me,” he said.
Head over for the rest, lots of notable people's stories in here, a fun piece:
Parting Is Such Sweet Revenge (New York Times)
The sun shines on Mount Rushmore National Memorial, in this June 2012 file photo, taken outside Keystone, South Dakota. The memorial is a huge sculpture of the heads of former Presidents George Washington, Thomas Jefferson, Abraham Lincoln and Theodore Roosevelt. (Melanie Stetson Freeman/The Christian Science Monitor )
Carving the investor's Mount Rushmore
There's a new profile of Jack Bogle, founder of Vanguard and a revolutionary proponent of low-cost index fund investing, in the New York Times this weekend. Jack's in his 80's, he's been preaching the same simple (and helpful) message for decades - long-term returns are what matters and keeping costs low puts you ahead of almost everyone else.
The profile is very good, Jack's been through quite a lot health-wise and I'm not sure how much more of him we're going to get. But it also got me thinking about who, if anyone, has been more influential and important to investors in the last century. Jack's got to be up there but does everyone agree with me?
So here's what we'll do tonight: In the comments section below I want you to give me the four people who would be on the Investing Mount Rushmore in your opinion, dead or alive. We're looking for the four men or women who have had the biggest impact on all investors based on their wisdom, style, message, writings or actions on the field.
I'll weight them based on your responses and we'll see what we come up with as a group.
For the record, my Investing Mount Rushmore is:
1. Warren Buffett
2. Jack Bogle
3. Alfred Winslow Jones
4. Peter Lynch
Who am I missing? Who's on yours?
Traders work as the New York Stock Exchange nears closing in this July 2012 file photo. Something to remember: while buying dividend stocks is not always the right answer, they're looking more and more favorable in the current market climate. (Bebeto Matthews/AP)
Yes, the answer is dividends. Almost always.
The evidence that dividends are hugely important just continues to pile up. By saying this, I don't mean that it is always a good time to buy dividend stocks - right now, for example, the utility sector looks particularly stupid trading at a premium multiple to the market...but I digress.
Ben Inker of GMO took on Bill Gross's Death of the Cult of Equities spiel in a new white paper yesterday. Essentially, he proves the point that GDP growth rates have little or nothing to do with stock market returns here or elsewhere in the world, effectively negating Gross's premise that some sort of mean reversion must take place. And while that's all well and good, I think the more interesting portion of Inker's white paper dealt with enormous contribution of dividends for the total return of stocks over the decades. Check this out:
When we look at stock market returns, dividends have a very large impact on the total, providing the bulk of equity investor returns for most of history. Exhibit 5 shows the compound growth of real returns and real earnings per share against real GDP. Unlike aggregate profits and market capitalization, it is fairly clear that neither returns nor EPS grow in line with GDP.
The gap between the 1.7% real earnings growth (about half the rate of GDP growth) and 5.9% real return (almost double the rate of GDP growth) is made up by dividends, which have averaged about 3.9% since 1929, and a bit of valuation shift (the P/E of the market is a couple of points higher today than it was in December of 1929).
At my shop, we've been emphasizing fundamentally-weighted indices based on dividends since way before it was fashionable. And while, in the short-term, the trade has gotten a bit crowded, we'd love nothing more than the opportunity to buy weakness as fairweather investors run and chase the next shiny object that comes along in the near future.
A street sign stands outside the New York Stock Exchange on Wall Street in New York in this 2011 file photo. Brokerages routinely take advantage of their junior workers. (Lucas Jackson/Reuters/File)
Want to be a financial adviser? Read this first.
A recurring theme on this blog is the necessary shrinking of the financial services sector in general and the aging decrepitude of the traditional brokerage business firmament. But each year there are less and less financial advisers and brokers at major Wall Street firms and the independent rep model is coming unglued as small firms struggle to stay in business.
And in terms of total industry headcount, how about these stats courtesy of Reuters:
Across banks, brokerages, insurers and other investment firms, the ranks of U.S. financial advisers fell by about 7,000, or 2.3 percent, to 316,000 last year. This downward trend is expected to continue, with those numbers shrinking by 19,000 people over the next five years, or 1.2 percent a year, according to research firm Cerulli Associates' latest brokerage industry market share report...
The ranks of self-employed broker-dealers fell 14 percent last year to about 80,000, reflecting the difficulty of operating an investment business when clients made fewer trades and the stock market ended flat for 2011.
And those financial advisors who are surviving this Ice Age tend to be older and grayer - more so every year. The average FA in America is now 49 years old. And that number will likely trend higher in the near future, not lower.
Why is this happening? It's quite simple, actually: Wall Street Eats Its Young.
I've spent the last week and a half following up with resumes we've been sent since posting an opening for a junior advisor. The good news is, the kids are alright. The younger generation joining the profession is going to be just fine - they're smart, ambitious and almost every single one of them cited "doing the right thing for the customers" as a primary goal when I asked them what they were looking for out of a career in wealth management.
The bad news is that never before have the large firms and their priorities been so arrayed against this incoming class of professionals. Once-proud training programs at the wirehouses have degenerated into a glorified Hunger Games-like contest where the failure rate is somewhere between 80 and 90%. With all due respect, any endeavor that 90% of people fail at is categorically not a training program, it's a massacre. A colossal waste of time for a young guy or gal who is trying to learn a profession.
But the firm wins and the dinosaur "vice presidents" who've been roaming its hallways since before the internet have a permanent upper hand. When a 25-year-old enters the program, it's probably best if his dad is rich and has rich friends. If not, he is sat down in front of an antiquated dialing system where half the phone numbers are dead and the ones that are alive connect him to prospective clients who are dead. 500 phone calls in a day and less than 20 conversations is the norm, not the exception. This training period goes on indefinitely for many, they are running a race with no pre-determined finish line.
In the meantime, the broker must hit several different types of goals - new money raised (or "net new"), gross commissions charged in brokerage/insurance products or a certain amount of client assets successfully tucked into the fee-based platform. It is a triathlon and the targets amounts set for trainees are impossible to the point that if they are hit, the elders are almost suspicious.
Now why, you may ask, would firms want to set impossible goals for trainees in their wealth management program and watch so many wash out each year? Because the assets and new accounts these kids domanage to bring in are swept up to the older advisors, it's all part of the "loyalty program." If you think the rich get richer in general, you should see the upside-down pyramid that the brokerage business has become. There are the established haves and each year a new crop of fresh-faced have-nots to be taken advantage of. The older advisors get away with this because they are consistently profitable to the home office and management keeps getting shuffled around anyway, no one wants to rock the boat. Also, to be quite frank, what client or prospective client wants to entrust their retirement to someone in their 20's anyway? Graying temples are an asset in a business where hard-earned market wisdom is the primary selling point of the product (advice!).
Now their have been some notable new initiatives at the brokerages to restart their training programs and move into the 21st Century. They probably don't want to resemble a Dickensian workhouse forever. Merrill Lynch is doing some interesting things with their Edge program, for example. The trouble is, each time the economy hits a rough patch, the first thing scrapped is the training program. These firms used to be legendary for the amount of talent that had passed through their programs, now they are a line item that gets chopped at the first sign of profit decline. Will the next time be different?
And for the young man or woman who does manage - against all odds - to become an actual advisor and be added to a team, the job that awaits them involves blocking-and-tackling for a senior advisor who has one foot on the golf course. There is the waiting game for more responsibility to be handed down as well as the familiarization process with the multi-level marketing scheme that the industry has become. There is a lifetime ban from social media and a regulatory regime under which creativity is frowned upon and innovation equals risk in the eyes of the complacent corner office managers. And if one is extremely fortunate and can make all the cuts as annual gross commission minimums go ever higher and the herd of non-senior advisors is culled each season, one can certainly make a great living and ultimately reach a position of security and stability.
But at what cost? What happens to the heart and soul of the energetic young kid who goes through that process? What compromises are made along the way and what awful truths about human nature and the priorities of the firm are accidentally revealed?
The tradition of mentorship at Wall Street brokerage firms has been displaced by a vampiric rite of passage where the juniors who don't make it pay for the cost of the one or two who do. In the meantime, the big books get bigger and the future for these firms gets dimmer.
Can anything or anyone break this predatory cycle or is secular decline an inevitability?
A 'for sale' sign is seen outside a home in Elmont, N.Y., in this June file photo. US home prices are inching up as an ebbing tide of foreclosures creates a shortage of properties at a time of pent-up demand, which is stoking a slow housing recovery. (Shannon Stapleton/Reuters/File)
Don't believe housing's permabears
No one in their right mind would refer to the current trend in housing as a rip-snorting bull market - but to dismiss the amelioration out of misplaced loyalty to a long-held pessimistic outlook would be a mistake.
As a refresher - the Fed is making it so the banks can keep millions of foreclosed properties on their books forever and never mark them down. Elsewhere, there's also been some accounting changes that allow the banks to mark-to-make-believe to some extent. I'm not asking you like or approve of these things, just to understand that they are happening. They put the banks in a position of flexibility in terms of pricing and the timing of when they sell them off.
There are buyers for foreclosed homes - Wall Street is raising billions of dollars in new vehicles to scoop them up. Hedge funds are buying them up as well. This will intensify as it's a trade with homerun potential over the next decade and Big Money needs a homerun right about now.
The typical housing permabear (yes, there is a such thing now) will frequently cite the "shadow inventory" of foreclosures that will swamp the market when it comes up for sale. They don't get it - it won't be coming to market at all. At least not until such time as the banks want to offer it. And now there are hungry buyers, negating that aforementioned stale thesis even further.
And of course, this combined with the secret ingredient (T.I.M.E.) is leading to some interesting signs of improvement in the housing market...
From WSJ's CIO Report:
A housing rebound bodes well. We’re starting to see more signs of life from one of the lynchpins of the economy—housing. As the Journal’s Nick Timiraos reports, home prices rose by 2.5% in Q2 – the largest percentage jump in at least seven years, according to data from CoreLogic. Freddie Mac, meanwhile, offered some stats of its own using a different methodology, which showed a 4.8% increase from the previous quarter — the largest rise since 2004. The spike in home prices also helped Freddie Mac post its best quarterly profit since the government took control of it four years ago.
The gains are mostly down to dwindling supply – new-home construction is still depressed and banks have been slowing their foreclosure processes, while low interest rates are helping boost demand. But the trend seems to be a broad one. “CoreLogic said 71 of the nation’s top 100 metropolitan areas saw prices rise on a year-over-year basis in May, compared with just 19 markets in December. That was the largest number of rising metro areas since November 2006, when home prices began to tumble.”
CNNMoney points out another positive sign: Last month’s jobs report showed that homebuilders added 5,800 workers in July — about the same number they were adding during the real estate boom of 2005 and 2006.
Bill McBride also has even more notable data on the continuing improvement in the housing market and its fledgling impact on the rest of the economy...
From Calculated Risk:
I expect CoreLogic and Zillow to report a meaningful decline in the number of homeowners with negative equity in Q2. We might see something like 1 million households that regained a positive equity position at the end of Q2 2012. These are borrowers who might find it easier to refinance, or sell if needed.
We will probably also see a meaningful decline in the number of newer mortgage delinquencies. Note: The MBA Q2 National Delinquency Survey results will be released this Thursday.
Another impact that we've discussed before is the impact on listed “For sale” inventory. Seller psychology is very different if prices are perceived to be falling, as opposed to if prices are stabilizing or even increasing. If potential sellers think prices will fall further, then they will rush to sell and list their homes right away. That behavior pushes up inventory. But if potential sellers think prices are stabilizing, and may increase, then they are more willing to wait until it is more convenient to sell. I think we've been seeing this change in psychology for some time.
I am of the belief that the one thing that can stave off a new recession is a steadily improving home market. The wealth effect from housing is 10X vs whatever the hell Bernanke is trying to accomplish by pumping up the stock market. Let's hope the trend continues.
Sources:
The Morning Download (CIO Report)
The Economic Impact of a Slight Increase in House Prices (Calculated Risk)
In this 2010 file photo, traders work on the floor of the New York Stock Exchange in New York a day after the so-called 'Flash Crash' caused the Dow Jones industrials average to fall 600 points in five minutes before quickly recovering. Regulators pointed to high-frequency trading as one of the major culprits. (Richard Drew/AP/File)
Are markets broken? Two insiders say so.
I hit up a cocktail party on the rooftop of the Gramercy Park Hotel earlier this summer and in attendance were a who's who of financial media stars, reporters and producers - Fox Biz, CNBC, Bloomberg, Reuters all were there. And it's no surprise, the market's become more and more erratic over the years and the media needs guests who can explain what's happening to their wider audience. And no one has a better handle on today's market structure than my friends Joe Saluzzi and Sal Arnuk of Themis Trading. They are the go-to guys when anchors and bookers and journalists need an expert - and for good reason: They've watched the entire Mechagodzilla Trade-a-saurus Rex evolve from the very beginning.
Joe and Sal made their bones at Instinet, one of the pioneers of high tech trading and ECN activities. They've since witnessed a laundry list of well-intentioned (and sometimes nefarious) decisions by the exchanges, regulators and policymakers that have led to what they term a hollowed-out stock market, a de facto kleptocracy wherein only the fast survive and software code has replaced both intuition and common sense.
And so if you plan to stick around in these market's, you might want to make yourself familiar with the new laws of the jungle. In Broken Markets, Joe and Sal bring us through the (d)evolution of our current state complete with some astounding revelations along the way. For instance, did you know that a 1994 research paper about how market makers were consciously not trading on odd eighths (1/8, 3/8, 5/8, 7/8) led to some of the most destructive policy decisions ever made for our equities markets? There's so much juicy stuff in here I found myself reading it with a highlighter.
Anyone trading, investing, regulating or learning about markets should buy this book immediately. You may not agree with Sal and Joe's contention - that the exchanges have abandoned their original purpose of maintaining orderly markets for America - but I guarantee you'll have your eyes opened.
Trader Frederick Reimer works on the floor of the New York Stock Exchange Wednesday, Aug. 1, 2012. Brown argues that resolute predictions about the stock market shouldn't be trusted. (Richard Drew/AP)
Stock market predictions: Don't believe a sure thing
I was talking to a TV producer yesterday from a mainstream news network about the general stock market outlook. I astonished her by not having a price target or a directional call for year-end. Maybe "astonished" is the wrong word. Probably I annoyed her.
Because regular people like it when a professional speaks with certainty about future events, even when the regular people themselves realize that they are listening to a guess. It's why the most confident people in this world are the most successful, even if they are not always the most able.
The guests this producer is accustomed to booking from our world are either stock analysts from big brokerage firms or Chief Market Strategists. The language these people speak is a language of conviction and of predictions. It's not a character trait they happen to share, it is literally their job. Price targets are their stock in trade.
But I had something different to say by way of general stock market outlook. Something probabilistic and vaguely vague.
I took her through the secular bear market of 2000 - ? and laid out the historical facts about what we should expect, based on the three previous examples of the past 115 years. And then I explained how 115 years and three prior secular bear markets is actually a terribly unhelpful sample size of data, but it's the only data set we've got.
I am the anti-price target on this phone call, I am certain of my uncertainty, I deal in qualified answers as opposed to resolute responses.
I am completely unhelpful to a news producer who wants to develop a stock market segment. But I know I'll be extremely helpful to her show's viewers. They will expect answers from me and conviction and certainty. It's what the man on TV has always given them.
I will give them something better.
A money changer shows some one-hundred U.S. dollar bills at an exchange booth in this November 2010 file photo. Desperate for money, many troubled banks are falling victim to common financial scams. (Issei Kato/Reuters/FIle)
Banks fall victim to con men
The irony here is so delicious it just has to be fattening...
From Problem Bank List:
The reason banks are viewed as a prime victim to defraud is because, quite simply, many banks are desperate for money. It’s no secret that 772 banks or almost 11% of all FDIC insured institutions are on the FDIC Problem Bank List. Since investors are in no mood to put money into banks considering their poor profits and earnings outlook, banks must search out unconventional sources of capital.
Trying to take advantage of banks’ desperate need for capital, con men are approaching banks using the classic scheme of offering to obtain funds for an upfront fee. In many cases, the desperate borrower makes the payment and the happy con man heads on out to relax in the Caribbean. The FDIC Special Alert explains how the fraud works:
"The FDIC has become aware of multiple instances in which individuals or purported investment advisors have approached financially weak institutions in apparent attempts to defraud the institutions by claiming to have access to funds for recapitalization. These parties also may claim that the investors, or individuals associated with the investors, include prominent public figures and that the investors have been approved by one or more of the federal banking agencies to invest substantial capital in the targeted institutions. Ultimately, these parties have required the targeted institutions to pay, in advance, retention and due diligence fees, as well as other costs. Once paid, the parties have failed to conduct substantive due diligence or to actively pursue the proposed investment."
Everyone on earth knows the money-up-front thing is the oldest scam in the books. Except the dying and desperate banker, I guess.
An elementary student walks past a screen displaying the Korea Composite Stock Price Index (KOSPI) during an educational visit to learn about stock market systems at the Korea Exchange's information centre in Seoul in this 2011 file photo. Vaue managers are struggling to stay ahead of volatile global markets. (Jo Yong-Hak/Reuters/FIle)
How are value managers predicting global markets?
The economy is slowing and the stock market is expensive.
There, now you know what the data says, empirically speaking. Now let's talk anecdotally...
I was visited last week by one of the largest global value managers in the world (AUM $50 billion plus) last Friday. Their flagship fund, the one I use in that slot for client accounts, is running about 18% cash right now, 9% Japanese equities and only 36% US stocks. They rarely hold cash as cash, usually they'll buy the short-term commercial paper of the companies they like on the equity side - this allows them to pick up some extra points when they're highly liquid.
I ask them why the almost 20% cash position, is there something they're seeing in the macro data or the headlines that their peers (who are much more heavily long) don't necessarily see?
No, they tell me, they don't play that game in terms of trying to read the macro tea leaves or anticipate the political outcomes in the 17-nation Euro Zone. Rather, they've got a 20% cash pile because as they've sold things, they've not been able to find replacement candidates worth buying given their bottom-up approach. It's a combination of stocks not being cheap enough around the world to offer the "margin of safety" they live by and earnings growth being non-existent across much of the global landscape.
One pocket of interesting buys is in European multi-nationals that do most of their business outside Europe. These stocks are being pressured because of the Euro exchanges they are listed on despite the fact that they don't have the perceived exposure to Euro economies that people assume. The Japan overweight is derived from a similar viewpoint - large corporations in Japan that are selling outside of Japan. There are some buys in areas like forestry and cement as well in these regions.
Ordinarily the fund would be looking at the European bank equities, but there's that nagging margin of safety dearth again - how can you calculate the value of a business when everything on a balance sheet is being masked from shareholders? So while Euro bank stocks may appear "cheap" on the surface, they fail the litmus test that's gotten this fund through some rough times over the last 30 years.
Worth noting here is the fact that this fund was also peaking out in cash as a percentage of assets in 2007. Again, it wasn't that they were studying the macro concerns and coming to the right conclusions then either - their cash hoard was a function of not being able to find value with good fundamentals and a margin of safety. Stocks were expensive and underlying fundamentals were beginning to turn the wrong way, so they sat back and bought nothing.
They are in much the same position today.
The economy is slowing and the stock market is expensive.
There, now you know what the data says, empirically speaking. Now let's talk anecdotally...
I was visited last week by one of the largest global value managers in the world (AUM $50 billion plus) last Friday. Their flagship fund, the one I use in that slot for client accounts, is running about 18% cash right now, 9% Japanese equities and only 36% US stocks. They rarely hold cash as cash, usually they'll buy the short-term commercial paper of the companies they like on the equity side - this allows them to pick up some extra points when they're highly liquid.
I ask them why the almost 20% cash position, is there something they're seeing in the macro data or the headlines that their peers (who are much more heavily long) don't necessarily see?
No, they tell me, they don't play that game in terms of trying to read the macro tea leaves or anticipate the political outcomes in the 17-nation Euro Zone. Rather, they've got a 20% cash pile because as they've sold things, they've not been able to find replacement candidates worth buying given their bottom-up approach. It's a combination of stocks not being cheap enough around the world to offer the "margin of safety" they live by and earnings growth being non-existent across much of the global landscape.
One pocket of interesting buys is in European multi-nationals that do most of their business outside Europe. These stocks are being pressured because of the Euro exchanges they are listed on despite the fact that they don't have the perceived exposure to Euro economies that people assume. The Japan overweight is derived from a similar viewpoint - large corporations in Japan that are selling outside of Japan. There are some buys in areas like forestry and cement as well in these regions.
Ordinarily the fund would be looking at the European bank equities, but there's that nagging margin of safety dearth again - how can you calculate the value of a business when everything on a balance sheet is being masked from shareholders? So while Euro bank stocks may appear "cheap" on the surface, they fail the litmus test that's gotten this fund through some rough times over the last 30 years.
Worth noting here is the fact that this fund was also peaking out in cash as a percentage of assets in 2007. Again, it wasn't that they were studying the macro concerns and coming to the right conclusions then either - their cash hoard was a function of not being able to find value with good fundamentals and a margin of safety. Stocks were expensive and underlying fundamentals were beginning to turn the wrong way, so they sat back and bought nothing.
They are in much the same position today.
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