The Reformed Broker
Do you have to be aggressive and selfish to make it in America? How much of your success is a result of your upbringing and the right learned behavior? How much is genealogical? How much of it is simply due to the social class you were already raised in? And when you've made it, how different does your personality become? Are you likely to become less humane or even less human?
This weekend's must-read is a feature story in New York Magazine that seeks to answer these questions or at least to frame the debates with some kind of scientific underpinning...
T. Byram Karasu, a psychiatrist at Albert Einstein/Montefiore Medical Center who treats wealthy clients, believes all very successful people share certain fundamental character traits. They have above-average intelligence, street smarts, and a high tolerance for anxiety. “They are sexual and aggressive,” he says. “They are also competitive with anyone and have no fear of confrontations; in fact, they thrive on them. And in contrast to their image, they are not extroverted. They become charmingly engaging when needed, but in their private world, they are private people.” They are, in the parlance, all business.
I'm fascinated by this stuff and I come across all kinds of contradictory examples of how affluent people behave versus how you'd expect them to behave each day. You probably do too and these episodes likely have you constantly re-evaluating your beliefs on this topic.
Make some time for this over the weekend.
Another month another miss for the key unemployment report out of the BLS. Non Farm Payrolls were an anemic 84K vs a consensus that hovered just over 100k. Obama can blame the weather or the lack of a Triple Crown contender or any thing he wants, it won't matter. The three month average for this quarter just ended is 75k new jobs per month - a joke in the context of a 155 million person labor force.
Of note is the fact that the unemployment rate for college educated Americans is now 4.1% vs the total average of 8.2%. if that isn't testimony to the fact that this is a structural and not just a cyclical problem, I don't know what is. We have vast amounts of people who simply lack a skill set that renders them necessary for the technologically savvy, services-oriented economy we're morphing into. This is a fact, not an opinion. The only question we can debate is whether or not this will cycle back around and we'll see a new manufacturing renaissance.
I have no idea.
The mechanics of how Barclays traders were able to manipulate a rate that was the benchmark for some $800 trillion in loans and borrowings are by now well-known. And documented, they have emails going back to 2005 right up through the present.
What is not well known is what the final cost could be to the world's financial institutions. It is starting to become apparent that these costs could be enormous.
From The Economist:
Corporations and lawyers, too, are examining whether they can sue Barclays or other banks for harm they have suffered. That could cost the banking industry tens of billions of dollars. “This is the banking industry’s tobacco moment,” says the chief executive of a multinational bank, referring to the lawsuits and settlements that cost America’s tobacco industry more than $200 billion in 1998. “It’s that big,” he says...
As many as 20 big banks have been named in various investigations or lawsuits alleging that LIBOR was rigged. The scandal also corrodes further what little remains of public trust in banks and those who run them.
Regulators around the world have woken up, however belatedly, to the possibility that these vital markets may have been rigged by a large number of banks. The list of institutions that have said they are either co-operating with investigations or being questioned includes many of the world’s biggest banks. Among those that have disclosed their involvement are Citigroup, Deutsche Bank, HSBC, JPMorgan Chase, RBS and UBS.
For the whole picture of how widespread this manipulation may have been, I highly recommend reading the whole piece. Make popcorn.
Happy July 4th from the Tax Foundation, celebrate with these factoids below...
Top marginal income tax rate in 1913, the first year the modern income tax was levied: 7%
Inflation-adjusted annual income to qualify for the top rate in 1913: $11,332,304
Top marginal rate for tax year 2011: 35%
Minimum income needed to be subject to top rate in 2011: $379,150
Highest-ever marginal tax income rate: 94%
Years during which highest-ever marginal rate was levied: 1944-1945
Level to which it was lowered after in 1946: 91%
Number of days from the beginning of the year until Tax Freedom Day in 1900: 22
Number of days from the beginning of the year until Tax Freedom Day in 2012: 107
Inflation adjusted income required to be in the top 1% of earners in 1980: $219,970
Income required to be in the top 1% of earners in 2009: $343,927
Share of all federal income taxes paid by the top 1% in 1980: 19.05%
Share of all federal income taxes paid by the top 1% in 2009: 36.73%
Percentage of federal income taxes paid by the bottom 50% of all taxpayers in 1980: 7.05%
Percentage of federal income taxes paid by the bottom 50% of all taxpayers in 2009: 2.25%
Sources: IRS, Tax Foundation analysis.
Zero Hedge posted some recent commentary from Nicholas Colas (ConvergEx) that discusses the way forward for equity analysts once this macro storm abates. I particularly liked the intro, in which Nic lays bare the problem for all to see, the utter pointlessness of so much research today:
Suppose for a moment that you are a money manager with just one client, whose investment more than covers your day-to-day expenses at your customary 2% management fee. The catch to this happy arrangement is that this investor wants a 10% absolute return and will pull his capital if you do not achieve it. On the plus side, he will keep the money with you for as long as you achieve this bogey. Drawdowns don’t matter; just make 10%. Oh, and the performance fee is 50% of anything over that target.
One more catch – you can only use one external resource in your investment process. Our mystery client wants you focused. Your choices are:
- Unlimited access to one major broker’s sell side research and investment conferences.
- Top-customer status at one expert network of your choice.
- All the quantitative research resources you would like. The catch here is that you can only hire a few programmers to exploit this content.
- Unlimited access to a top-tier macro research firm, with resources deep in every major central bank around the world.
In the current investment environment, the last choice is the lay-up answer. With asset price correlations near 90% for a wide range of investment choices, the on-off switch to market direction sits in Washington, Frankfurt, Beijing, and other centers of political and central bank power. The other choices would give you little insight here. Even those brokerages with excellent macro research and alumni in high places don’t seem to be able to call the twists and turns of macro policy.
That about sums up the last three years or so.
Colas is optimistic that analysts will start taking better advantage of datasets and the transparency afforded us in the internet age in order to bring a more novel research product to market. Or failing that, they could just continue to rely on "management access" until the last guy out turns off the light. Whatever, LOL.
Head over for the whole thing and read it when you have some time.
The most interesting tech story happening beneath the surface - to me anyway - is about how Microsoft has essentially given up on its hardware partners and has decided to be more proactive in the war on Apple.
Redmond, Washington has awoken and the furnaces have been jerked into life, steam and smoke appear above the forest's treeline. And it's a good thing, because it's getting past the point where it will matter anymore.
Microsoft has learned (the hard way) that it cannot sit idly by anymore hoping Dell and Hewlett Packard (and to a less extent Nokia) will come up with the hardware that will showcase its software admirably enough to get some traction in what the PC guys call "alternative devices." Anyone not living in a secret terrorist compound in Northeastern Pakistan knows that there is nothing "alternative" about tablets - they are replacing PCs, plain and simple, and Microsoft increasingly finds itself as the king of operating systems for yesterday's device.
So how far with Microsoft go on the hardware side? I think pretty far. They certainly have the capital and the relationships and the gumption (historically, anyway) to really go for it. But what does that mean for their partners at Dell at HP? Are they now competitors?
Here's Tiernan Rey writing for Barron's Tech Trader last week:
Microsoft did little to tame speculation about competition. CEO Steve Ballmer, presenting the Surface on stage, talked out of both sides of his mouth.
He said Microsoft remains committed to its hardware partners. But he also took a page from the late Apple (AAPL) founder, Steve Jobs, declaring that people's interactions with machines are better when "all aspects of the experience—hardware and software—are considered in working together." That's a major shift from Microsoft's classic approach of selling Windows as the software engine anyone can license to make a great machine.
A person close to Microsoft tells me competition may be more limited than it appears. Microsoft wants to push the entire Windows "ecosystem" forward, the person tells me, to prompt hardware partners to design better machines.
Sure, for now. Rick Sherlund, who follows Microsoft for Nomura Equity Research, believes competition between Microsoft, HP and Dell will prove all too real, because "we are in a new world," as he puts it. Microsoft, he told me last week, cannot afford to leave its battle against Apple's iPad to the fumbling of the PC makers.
Will Microsoft's ambitious entry into hardware mean a competition-driven renaissance for the box-makers they used to rely on? That would certainly be the optimistic case and perhaps the thing Apple (and Google) would fear most. Or does it simply mean a more brutal environment for gadget and device makers in general?
One other thing I came across that lends credence to the latter view - here's Ina Fried on a pretty noticeable departure at MSFT in All Things D:
The head of Microsoft’s unit responsible for interactions with PC makers is shifting jobs.
Steve Guggenheimer, a longtime Microsoft veteran, will move to a new, unspecified role at the company. Bloomberg quotes a Microsoft spokesman as saying that Guggenheimer would take a sabbatical before taking on the new role.
The move comes just days after Microsoft introduced the Surface tablet, its first effort to compete with its computer-maker partners in the market for Windows computers. A version of the Surface running chips from Nvidia is due to ship around the same time that computer makers release their own Windows 8 machines.
Computer makers are said to have been given only a very limited heads-up on what Microsoft was planning, and sources say many companies are unhappy to find themselves competing against their software provider in the tablet market — one they had hoped would provide a new growth opportunity.
My conclusion is that this kind of thing makes HPQ, DELL, NOK and anyone else making hardware "for" Mister Softee an uninvestable company. Ballmer's grown impatient with his partners and there's no telling what the company's product roadmap may actually mean going forward.
Forget about this healthcare decision sideshow (okay don't totally forget about it, read about it here) - what happened yesterday is a realization that the May correction is still in progress, nothing from the first two weeks of June has really meant anything at all. The market may have sold off more after the decision but it was down anyway, Spanish bond yields above 7 and weakness from Germany's employment number was going to mean a risk-off day here regardless.
In terms of today, my traders point out the following:
The depths of the May weakness were met with complacency rather than panic, not enough fear at those lows set us up for a continuation of the correction. Especially compared to the panic from last fall.
You start getting closer to the washout you need when even the good stuff gets hit - have a peek at the utilities, even they can't catch a bid here. This is productive, believe it or not.
We're going to need a bit more fear and a lot more throwing out the good with the bad.
My friend Jason Zweig (of the WSJ's Total Return blog) dug up some interesting data from a recent report on the saving and investing habits of investors. Vanguard looked at 3 million retirement plan accounts it administered and determined that yes, stock fund purchasing is down, but the typical plan account is still 65% equities. And also, it's not quite that simple...
The story gets more interesting when you look beyond people’s balances to see what they are doing with the contributions from their current paychecks. Fully 71% of that money is going into stocks, reports Vanguard – up one percentage point from 2010 and three points higher than in 2009.
If this is “the death of equities,” the funeral seems extraordinarily well-attended.
There is something subtle going on beneath the surface, however. The share of new contributions going directly into diversified stock funds is only 38% – down drastically from 51% in 2007. Employees have also scaled back their stake in their own company stock, to 6% now from 8% in 2007. The money they have yanked from company stock and diversified equity funds has migrated into target-date funds, those prebundled baskets of stocks, bonds and cash that are aimed at workers who will retire in specific years. When you count the portion of target-date assets that are invested in stocks, they account for about a 27% commitment to equities.
The deal with the target date fund popularity is very simple: First, they are in every plan now, just about. It's one of the few things mutual funds have come up with in the past decade that actually makes sense in their wrapper and has stuck. Second, the concept of auto-rebalancing based on a goal off in the future (as opposed to trying to time markets and retirement concurrently) is an extremely attractive one for the severely tormented investor class circa 2012.
Make no mistake, this is the investor saying "I can't even deal with this anymore, here - you do it for me."
I talk to guys on serious trading desks around the city, the consensus is they've never seen things this dead in their entire careers. "It's like August started in June," my friend Joe tells me. "Nothing is crossing, no one is doing anything at this point."
I think seasonality only explains part of it, there's also this Eurofail Summit happening on Friday and the fact that we're in this between-earnings-seasons lull. Other than biotechs and nat gas strength, there is also very little working thematically.
We have a few core holdings flirting with new all-time highs (WMT, XBI, BRK-B, V) and a few that just cannot get any traction at all (Our Emerging Markets play, DEM, is just awful here but thankfully it has a yield while it languishes). Nothing new is popping up on our screens that we can get very excited about.
They say never short a dull market. I say never obsess over one either - we're not forcing any trades here or making moves just for the sake of making moves. We're spending our time on administrative stuff, client work and lots of research.
I don't mind.
Angela Merkel made her most forceful comments yet on the possibility of Germany providing some kind of shared eurobonds and an FDIC-like guarantee for bank deposits - she said "not in my lifetime." That quote comes courtesy of Reuters, there is a string of comments coming from the same source as we speak.
And, well, the markets certainly didn't love to hear that door slamming shut.
I do not like
Shared bonds and banks.
Would you like them
Here or there?
I would not like them
here or there.
I would not like them
I do not like
shared bonds and banks.
I do not like them,
Sir, no thanks
Would you like them
in a house?
Would you like them
with a mouse?
I could go on but, well, you get the picture. Not happening, which kind of throws some cold water on this Friday's eurosummit.
More to come.