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GaltMachine

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  • Do You Understand Ceteris Paribus? [View article]
    Jeff,

    "Profit margins. We have all heard ad nauseum that profit margins are mean-reverting. The blunder of this one-variable approach is a failure to consider why profit margins are so high. Corporations have squeezed employment and costs. Think lean and mean. "

    The Federal Govt's deficits are a big factor in the current level of corporate profits so if deficits drop there needs to be a compensating factor to ensure they continue to grow. The alternative viewpoint on profit margins is represented by the Kalecki equation as described and discussed by Cullen Roche and James Montier on Pragcap last year:

    http://bit.ly/YniSKZ
    http://bit.ly/HqQrj7
    WHERE ARE CORPORATE PROFITS HEADED?
    03/21/2012 3:04 AM CULLEN ROCHE 24 COMMENTS
    Yesterday’s post by James Montier did much of the heavy lifting on the corporate profit outlook, but I wanted to add a few details to the future outlook since I run a profit model based on similar thinking. We use the Kalecki profit equation to arrive at an approximation of future profits. I’ll save the mundane accounting details for another day, but the basics are rather simple as Montier outlines:
    Profits = Investment – Household Savings – Government Savings – Foreign Savings + Dividends"

    “The government deficit may stay high this year, due largely to it being an election year. However, it is almost unthinkable that it will remain at current levels over the course of the next few years. As such, unless households start to re-leverage or the current account improves significantly, and assuming that the government moves toward some form of deficit reduction plan, corporate profits are likely to struggle. From this perspective, a structural break in profit margins looks to be difficult to support. So, for the time being we will continue to base our forecasts on the mean reversion of profit margins.”

    Personally I don't think of James Montier of GMO or Cullen Roche as lightweights and this multi-variate accounting identity explains what needs to happen for profits to remain elevated.
    Jan 23, 2013. 09:54 AM | Likes Like |Link to Comment
  • Weighing The Week Ahead: Signs Of A New Bull Market? [View article]
    DD & anyone else who is interested:

    There are actually two variants of the RSI. Bbro was kind enough to point me to barcharts.com and they calculate both:

    http://bit.ly/VYm6Cb

    The RSI Mod and the traditional RSI are 85.3 and 71.1 respectively. The difference between the two is:

    "Unlike the traditional Relative Strength Index, the modified uses traditional moving averages as opposed to Wilder's accumulative moving average technique"

    I have no clue as to which yields the more relevant results.
    Jan 22, 2013. 04:37 PM | Likes Like |Link to Comment
  • More on Chicago Fed National Activity Index: Production and Employment contributed +0.12 and +0.09 to index respectively. Personal consumption and housing impacted index by -0.17. The three-month moving average print at -0.13 is tenth consecutive reading below zero suggesting economic activity below its historical trend. The diffusion index increased to -0.05 from -0.12 in Nov. [View news story]
    This is all before the affects of the new tax increases have been felt.
    Jan 22, 2013. 09:01 AM | Likes Like |Link to Comment
  • Weighing The Week Ahead: Signs Of A New Bull Market? [View article]
    DD,

    Makes me feel stupid for trusting this source. Oh well you live and you learn.

    There must a central "feed" for this data and I am guessing it is Yahoo that is syndicating out the crappy data to the other sources. They are probably the source of the problem.

    Marketwatch, CNBC, my Scottrade charts all match your number.

    Found this link on Big Picture for worldwide markets as well:
    http://bit.ly/VVImwD

    What a pathetic joke.
    Jan 21, 2013. 02:29 PM | Likes Like |Link to Comment
  • RIM (RIMM) could sell its hardware production and license its software once it has launched BlackBerry 10 devices, CEO Thorsten Heins tells German newspaper Die Welt. RIM will also explore strategic partnerships with other tech companies. (Google translation[View news story]
    There is still a sizable number of people addicted to their crackberry devices to ensure there will be a decently profitable revenue stream for a quite a while.

    They make a very good email product and this is still a very important buying criteria for the IT dept of mid and large sized companies not to mention despotic, totalitarian governments.
    Jan 21, 2013. 02:16 PM | Likes Like |Link to Comment
  • Weighing The Week Ahead: Signs Of A New Bull Market? [View article]
    DD,

    Thanks for the update.

    I am amazed that yahoo finance has this wrong!

    http://yhoo.it/WmD5vv;c=

    This is freaking me out. How many people out there are relying upon this data?

    What does that say about Yahoo's quality control?
    Jan 21, 2013. 01:47 PM | 1 Like Like |Link to Comment
  • Risk Of 'Double-Rip' On The Rise [View article]
    bbro,

    I own DBLTX & DBLFX which gives me a slightly better overall performance - about 0.3% per year. The current yield on DBLTX is about 6%.

    The duration on DBLTX has always been low and is currently high by historical standards primarily due to the fact that the cash position is substantially less than the historical average. 2011 was about 2% for the S&P (assuming you collected the dividend yield) so clearly the volatility of equities is much higher. Clearly having a diversified strategy during the entire time period would have yielded excellent results all along the way. I do hold equities as well but have been underweight for too long as I suggested above.

    You cannot compare the non, risk-adjusted returns and pure alpha between the Doubleline Funds and the S&P, that's like comparing apples and oranges. However on a Sharpe ratio basis it is pretty clear that DBLTX is the better pure investment in recent history.

    The point I was making is that being dogmatic about anything, such as "equities are the only way to go and bonds are for idiots", is never a wise strategy.

    I agree bonds are currently priced for disaster thanks to the FED and I don't think that that is a wise development. Roiling the bond market which is many times larger than the equity market has the potential for massive unintended negative consequences.
    Jan 21, 2013. 12:38 PM | Likes Like |Link to Comment
  • Weighing The Week Ahead: Signs Of A New Bull Market? [View article]
    stickum,

    That's very interesting. I did not know there were different forms of RSI so this is indeed a conundrum.

    My three sources above, Yahoo v-charts & marketvolume.com, calculate it as I noted above on the 14 day - 88.14. My Scotrade account confirms your number. Big difference between your quoted number and this one. Very bizarre considering the calculation should be the same for every source.

    Which one is the right one?
    Jan 21, 2013. 12:13 PM | Likes Like |Link to Comment
  • Weighing The Week Ahead: Signs Of A New Bull Market? [View article]
    Jpsloan,

    That response was very thoughtful and informative. Great example of the value of wisdom combined with experience.
    Jan 20, 2013. 10:50 PM | Likes Like |Link to Comment
  • Weighing The Week Ahead: Signs Of A New Bull Market? [View article]
    DD,

    "Most people use a 14 day rsi - which closed at 68 for the spy; but even if I use the 9 day which few do, it was 73. The weekly spy rsi(14) is 63; hardly exceptional by most standards."

    Where do you get your RSI data?

    On my Yahoo account and these two sites the 14 day RSI for SPY is 88.14.

    http://bit.ly/10epG9f
    http://bit.ly/YhG3pW

    Thanks I want to make sure I am looking at the right data.
    Jan 20, 2013. 08:17 PM | 1 Like Like |Link to Comment
  • Risk Of 'Double-Rip' On The Rise [View article]
    bbro,

    The average expense ratio on a bond is about 0.6% and usually a lot less than the average for equity mutual funds. BND for example has a very low fee. My Doubleline Funds have expense ratios of 0.49%. Anyone spending your quoted 1.25% is indeed being ripped off.

    http://bit.ly/10dLvpD

    I have yet to hear any mea culpas from the bond bears that have proclaimed that every year since 2008 was the year to short bonds meanwhile the performance has been phenomenal on a total return basis and that goes all the way back to 2000.

    The whole hyperinflation nonsense was just the catalyst for the outperformance. Anyone with a decent understanding of the FED monetary system would have seen that bonds were a strong buy in 2009 just like equities.

    Having said that this is the year that they may indeed be right. The FED has succeeded in its mission to make bonds expensive. The unintended consequences of doing so have yet to reveal themselves.

    I have always found it odd that somehow bonds have been treated with such disrespect when all they are is an alternative asset class. Perhaps it has something to do with the fact that most people are completely clueless on how bonds work and the fact that there is an incredible diversity of them.
    Jan 20, 2013. 03:51 PM | Likes Like |Link to Comment
  • Risk Of 'Double-Rip' On The Rise [View article]
    bbro,

    I often wonder how many mom and pop buy and holders were actually able to maintain the mental fortitude necessary to remain invested all along. I suspect not very many.

    The problem is that the first 10% loss can be handled but once the trend sets in and you get to the first 20% drawdown level panic sets in and they just want to sell. Of course they may miss further declines but they clearly miss the upside as well.

    Even so a buy and holder who hasn't deployed new money during the crash is at the point where they may be close to breaking even so it's been a long slog.

    The fact that we have had two massive drawdowns in the last 10 years hasn't been lost in the minds of the public when it comes to confidence in the market.

    Recall the SPY closed at 153.38 with the S&P at 1527 on March 27, 2000 so like most things in life timing is everything :)
    Jan 20, 2013. 11:49 AM | 2 Likes Like |Link to Comment
  • Risk Of 'Double-Rip' On The Rise [View article]
    Wade,

    Since there is no history for you pre-2009 on this blog it is hard for us to evaluate whether you are fair or not to the gurus above that you hammered.

    What were you telling your clients to do in 2007-2008?
    Jan 20, 2013. 11:39 AM | Likes Like |Link to Comment
  • Weighing The Week Ahead: Signs Of A New Bull Market? [View article]
    I think we have swung from rampant pessimism to a near giddy optimism in a very short period of time as measured by sentiment indicators. Just look at the RSI on the SPY - 88.21 - everyone is piling in on the long side now.

    All of the "worries" have literally evaporated with the aversion of the fiscal cliff despite the fact it was a pretty big tax increase.

    Does the market do better with a positive psychology or a negative psychology?
    Jan 20, 2013. 11:30 AM | Likes Like |Link to Comment
  • Weighing The Week Ahead: Signs Of A New Bull Market? [View article]
    bbro,

    It cost me some gains on the equity markets. By flukey timing I managed to be out of the equity markets in Aug 2007 and didn't get back in for a long time. I was scarred by the drawdown experience and when Obama won, I thought it would be calamitous but I misunderstood the power of the FED to rescue markets.

    However, I did very well on the bond side. It's been an incredible run since 2007 but I think its peaked out now.

    In the case of equities it was more about a lack of trust in government and its direction that affected my opinion of the economy so yes my bias did affect my past results but I think that's pretty human. In my case, I just couldn't imagine that the FED would be doing what is doing today and for the past several years.

    Clearly, bbro, you have had a good run and I have learned a valuable lesson.

    Good luck.
    Jan 20, 2013. 11:24 AM | 1 Like Like |Link to Comment
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