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  • What If Everyone Indexed? [View article]
    Cullen - actually, the terms have very clear and operationally quite important senses, which you are deliberately obscuring by playing on a merely verbal confusion between active management and trading. Trading isn't active management. If I nuy small amounts of each of 500 stocks in weights exactly matching their weight in an index, that takes a lot of trades, but it simply isn't active management, at all. Active management means deliberately deviating from market weights, including weighting many things at zero by not owning them, while weighting others much higher than the market weight by owning having a high portion of one's portfolio in an instrument that has small overall weight in the total capital market.

    The extreme of active management is not trading every day, it would be putting all your money in one small cap stock. The extreme of passive management isn't never trading, it is owning everything there is with exactly market weights in each. An actuve mananger expects to earn returns above the market by bring right about what to own. A passive manager expects to earn the market return by owning very close to what the market owns in total. Yes there is room for some deviation in that "close to", mostly for practical reasons - liquidity or transaction costs, say. But no these are nit the same thing, or even close. Pretending there is no real difference between them is just plain pretending - they aren't the same.
    Oct 6, 2015. 04:15 PM | 3 Likes Like |Link to Comment
  • Big miss for jobs numbers [View news story]
    "I don't quite understand what you are thinking."

    He thinks that the shareholder's capital exists to be stolen by the employees. And no, that cannot be justified...
    Oct 5, 2015. 11:19 AM | 1 Like Like |Link to Comment
  • Big miss for jobs numbers [View news story]
    You remember deflation from the Carter years? Priceless...
    Oct 2, 2015. 11:41 AM | 8 Likes Like |Link to Comment
  • Big miss for jobs numbers [View news story]
    Dirk - how about because it isn't actually happening, and reflects overblown fears of 2008 reruns, and the readiness of the stock market for a correction? This time next year, GDP will have grown not shrunk, and there will be about 2 million more people working, compared to now.
    Oct 2, 2015. 11:40 AM | 7 Likes Like |Link to Comment
  • Big miss for jobs numbers [View news story]
    Giant overreaction. The whole "its already a recession" fear is misplaced. Job gains will continue at a roughly plus 2 million a year pace, plus or minus 20%.
    Oct 2, 2015. 11:39 AM | 6 Likes Like |Link to Comment
  • 13 Economic Charts That Wall Street Doesn't Want You To See [View article]
    phexac - no they are not considered as "potentially working". There is no norm or expectation that the figure for labor force participation should top out at 100%. Since there are movements in the portion of the population over 65 and also changes in retirement ages and practices, they just record the ratio to the whole adult non-institutional population. Some are 85, some are 17, some are married and taking care of kids at home, etc.
    Sep 30, 2015. 11:38 AM | 2 Likes Like |Link to Comment
  • 'Give Up On The Fed' - Part II [View article]
    wib - I'm not Mr Mason, but I can explain what the term usually means. Banks have a large amount of equity at book value, and that capital is expected to earn something. It is not available "for free", to "earn nothing" and just protect depositors.

    If a bank is earning "enough" in its share capital, then its stock price will trade around its book value, and the bank is seen as basically earning enough to justify its capital. If it is earning more than enough, its stock may command a premium to its book value; if it is only earning half as much as it "needs to", then its stock will trade well under its book value.

    Regulators don't just want to see the bank above break even, they want to see it earning enough to maintain its stock price at or above book value. When that is the case, the bank has financial flexibility. It could potentially issue additional shares and if the market believes it can earn as much as new capital raised that way as on the existing book, do so without any significant dilution of its existing owners or any serious fall in its share price.

    How much does a bank need to earn on its book value to command a price around book? That is partly up to the market, but it might be 10% and it might be 8.33%, if the stock market puts a PE on banks of around 10 times earnings or around 12 times earnings, respectively. When major banks like Citi and Bank of America are only earning 4-5% on their book value, sure they are "in the black", but they are not *enough* in the black to trade at book value. Nobody is going to pay 20 to 25 times earnings for bank stock. Their ability to raise additional capital by issuing shares, if they had to, is seen as impaired by their low profitability.

    As the regulators have increased the amount of regulatory capital they require, especially at the systemic-important, largest banks, they have raised the divisor of share capital those banks are expected to hold. But requiring that doesn't do anything on its own to ensure they are profitable enough that the required book value will actually turn into stock market value.

    When regulators or bank analysts speak of the need for a bank to earn its cost of capital, they mean provide a high enough return to the bank's common shareholders that the price of its stock will be worth at least its book value. I hope that helps...
    Sep 29, 2015. 06:22 PM | 7 Likes Like |Link to Comment
  • 'Give Up On The Fed' - Part II [View article]

    "Cost of capital" is generally a kind of fake calculation, setting a benchmark return that they think they should or need to earn in order to be awarded a valuation at or above book value by the stock market. Obviously, actual long term borrowings and preferred stock have actual fixed costs and can count as portions of their capital in a regulatory sense. But in the US at least, nearly all the capital is equity at book, and what it "costs" is simply what the shareholders are earning.

    What is true is that the big regulatory push to reduce risk and leverage has reduced the rate of return on (enlarged) common equity at the major banks. The same or moderately higher numerators have bigger denominators than they would have had at the 15 and 20 times leverage levels common 10 years ago. But they are safer, too.
    Sep 29, 2015. 02:41 PM | 2 Likes Like |Link to Comment
  • S&P Case-Shiller Home Price Index [View news story]
    There is no inflation. YOY commodity prices crushed (energy above all), gas is $2.25 a gallon, and the dollar is up. 10 year is under 2.1%. The inflation brainstorm is the most overpredicted and wrong call in financial history at this point. Just isn't happening.
    Sep 29, 2015. 11:37 AM | 3 Likes Like |Link to Comment
  • 13 Economic Charts That Wall Street Doesn't Want You To See [View article]
    tewright2012 - I'm not clrodrick, but I can tell you what it takes to be counted as "in the labor force". You have to either be working for pay, full or part time, or you need to have actively looked for work in the last month. That is how it is recorded in the surveys. Anyone who last looked for work over a month ago, or isn't looking, isn't in the labor force. In the 1960s that included lots of people who today would be looking. Many more couples married young, many were one earner families with only the man working. The change in women's labor force participation rates mostly happened in the 1970s and first half of the 1980s. It did get started in the later 1960s, but from lower levels. Yes there were women in the labor force before then, but at much lower rates than men their own age.

    Here is a plot of the female labor force participation rate -
    Sep 29, 2015. 10:46 AM | 2 Likes Like |Link to Comment
  • Why This Is Not The Start Of A Bear Market [View article]
    No, don't try to put words in my mouth; thanks. I use other people's money if prices get crazy enough. 15% my own and 85% borrowed in early 2009, for example. Trust me, bulls do make money.
    Sep 28, 2015. 08:46 PM | 1 Like Like |Link to Comment
  • Why This Is Not The Start Of A Bear Market [View article]
    mr-white - on the contrary, it is a perfect normal bit of market conventional wisdom, and yes it also works in conditions like 1999 when everyone is clamoring to own the best growth tech stocks at 50 times earnings. Investing is a minority game, meaning it always pays to take the position most others are not taking at that moment. In other words, to invest in a contrarian way, as to timing. Following the herd is a good way to get trampled when it changes its mind...
    Sep 28, 2015. 02:41 PM | 2 Likes Like |Link to Comment
  • Why This Is Not The Start Of A Bear Market [View article]
    User 40051196 - It is fair to say my stocks are down some on this correction. But then again, the last time we had an irrational full bear market - 2008 - I added an extra zero to my net worth on the crazy low prices available and subsequent recovery. One more rough time like that and I'll be able to retire. (Not that I would; I like my job and all that). Cheers...
    Sep 28, 2015. 02:34 PM | 3 Likes Like |Link to Comment
  • 13 Economic Charts That Wall Street Doesn't Want You To See [View article]
    Lots of defined benefit pension plans will transition to 401k structures, overly generous peak earnings practices will be reformed, COLAs will be realigned to reality, and corporations will also increase their annual pension contributions. It is not like we haven't been through this exercise before. In every stock bull market, earnings get a tailwind from pension funds performing well, and in every correction or downturn they inject some reality and increase some contributions.
    Sep 28, 2015. 12:20 PM | 1 Like Like |Link to Comment
  • Why This Is Not The Start Of A Bear Market [View article]
    Goldman Sachs is trading at 90% of tangible book value. In other words, it is already priced as though a recession is in progress. A recession is not in progress, nor even particularly likely in the near term. Stocks are violently oversold. The reason is panic and memory of recent financial pain. Lots of people have the brainstorm that the stock market crash in China since its nosebleed (and very temporary) level earlier this year is "just like" the 2008 crash of the US real estate market, and they expect an equal drubbing, and are rushing to get out of its way. There is no justification for it in the actual course of the US economy or US corporate earnings. Stocks are cheap as a result.

    It is fine to see all of that and to still expect the fever to persist through the end of the year in a sustained correction - entirely plausible. It being irrational doesn't mean it isn't happening or can't be sustained for a spell. But anyone buying e.g. banks that routinely earn low to mid double digit returns on equity at under their tangible book is going to do fine in the long run. There are similar bargains elsewhere e.g. in "value tech" (IBM, Intel e.g.) - even if growth stock darlings (internet stocks, biotechs, microcaps) are frothy and deserve the price shakeout now occurring.
    Sep 28, 2015. 11:49 AM | 3 Likes Like |Link to Comment