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GaltMachine

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  • Don't Worry About Profits As A Percent Of GDP [View article]
    Gary,

    "talking about an (American) population which is mathematically challenged enough as it is"

    One of my favorite pieces of financial trivia is what I call the math of losses.

    Start with $100 lose $50 and you have a 50% loss. If you then subsequently produce a 50% gain you still only have $75. This is the type of basic math that eludes people and explains why even after the market is up 100% they can still be down in their portfolio. People then cynically conclude that the market must be "rigged" because they can't do basic math.

    Another one is the use of averages in returns.
    Start with $100
    Year 1 100% return (100 x 2 = 200)
    Year 2 50% loss (200x -.50 = 100)
    Average Return 25%/yr
    Absolute/Geometric Return 0%

    Your point is extremely well taken. Mathematical illiteracy is like the old adage of a fool and his money.

    Thanks for the response.
    Aug 23 04:51 PM | 1 Like Like |Link to Comment
  • Don't Worry About Profits As A Percent Of GDP [View article]
    "A singular focus on profits can be disastrously simplistic for the long term investor."

    It's not the absolute %age level of profits that matter but rather the rate of change and the direction of change that matters. It is at the extremes in both directions such as today where margins and profits are at record highs that present the most risk.

    The lessons you might draw from this discussion and the charts presented is that the time to buy is when profits as a percentage of GDP collapses precipitously in a relatively short period of time. This makes sense because assuming most normal business cycles the process of having those profits recover is the basis for the next bull market. It is also precisely the most terrifying time to buy!

    James Montier of GMO covered this issue in great detail in:

    "What Goes Up Must Come Down!"
    http://bit.ly/RajFte
    Aug 23 02:55 PM | Likes Like |Link to Comment
  • July New Home Sales: 372K vs. 362K expected, 359K (revised) prior. [View news story]
    bbro,

    Absolutely :)

    The big question of the day still is whether deflation is our future. The FED still seems terrified of the prospect and is acting accordingly.

    The Chinese slowdown is a blackbox of uncertainty but one thing is sure if they start to build up excess inventories of finished goods they will dump them further putting downward pressures on prices.

    I am not an inflationista but I do see long-term inflation after deflation which is why I see the worst of all worlds for average Americans - high prices for what they use everyday and deflation in everything else.

    I hope you are right for everyone's sake.
    Aug 23 11:41 AM | Likes Like |Link to Comment
  • July New Home Sales: 372K vs. 362K expected, 359K (revised) prior. [View news story]
    bbro,

    You are assuming a normal inflation-induced business cycle recession here. What if we get a tip into recession with deflationary pressures?

    This is the potential outcome of the credit crisis induced recession of the 2008 period.

    That's why it would be so left-field if it happened.
    Aug 23 10:19 AM | 1 Like Like |Link to Comment
  • July New Home Sales: 372K vs. 362K expected, 359K (revised) prior. [View news story]
    This was actually a better improvement than the headline based upon the prior month's revision (which is a rarity) but it basically matches the high from the year in May.
    Aug 23 10:16 AM | Likes Like |Link to Comment
  • A comparison chart of U.S., EU, and China PMIs shows the supposed decoupling - in which the U.S. economy stayed strong while the EU and China deteriorated - is becoming less so. [View news story]
    I wish the chart were extended a bit to cover more early years.

    Certainly seems like a worldwide manufacturing recession is staring us in the face.

    This could be cyclicals under pressure over the next couple of quarters. Might be good some opportunities.
    Aug 23 09:42 AM | Likes Like |Link to Comment
  • FOMC Minutes: Support is growing for additional action "fairly soon," unless there is clear strengthening of the economic recovery. QE3 is among possible actions, but other options discussed included extending the announced period of ZIRP, or reducing interest rates on reserves. [View news story]
    klarsolo,

    This is what happens when the SA people change the comment without showing it as an "update/edit". I wasn't the only one originally confused by this.

    I guess the editor caught their mistake because my excerpt was a direct quote from the blurb :)
    Aug 22 04:14 PM | Likes Like |Link to Comment
  • More on Existing Home Sales: The median home price rose 9.4% Y/Y thanks to higher-end homes representing a bigger slice of the home sale pie. NAR spinmeister Lawrence Yun is worried about low inventory, not demand, and calls for builders to build and Fannie, Freddie, and the banks to push their stable of foreclosed homes onto the market. [View news story]
    "The median price of an existing home jumped 9.4 percent from a year earlier, the biggest 12-month gain since January 2006, to $187,300 from $171,200 in July 2011, today’s report showed."

    This is a pretty big deal but I have to admit a bit of confusion as to why it hasn't been picked up by any of the other house price tracking indexes like Corelogic, FNC, Zillow, etc. Corelogic is a repeat sales index so in theory when they release their next report it should show a big jump.

    http://bit.ly/NIeBZo
    "CoreLogic June Home Price Index Rises 2.5 Percent—Representing Fourth Consecutive Year-Over-Year Increase
    August 07, 2012, Santa Ana, Calif. –

    ––Pending HPI Forecasts Year-Over-Year July Increase of 2.0 Percent––
    The CoreLogic Pending HPI indicates that July home prices, including distressed sales, will rise by at least 0.4 percent on a month-over-month basis from June 2012 and by 2.0 percent on a year-over-year basis from July 2011. Excluding distressed sales, July house prices are also poised to rise by 1.4 percent month-over-month from June 2012 and by 4.3 percent year-over-year from July 2011. The CoreLogic Pending HPI is a new and exclusive metric that provides the most current indication of trends in home prices. It is based on Multiple Listing Service (MLS) data that measure price changes in the most recent month."

    If this number is predictive the 2% forecast above will be blown out.
    Aug 22 02:30 PM | Likes Like |Link to Comment
  • FOMC Minutes: Support is growing for additional action "fairly soon," unless there is clear strengthening of the economic recovery. QE3 is among possible actions, but other options discussed included extending the announced period of ZIRP, or reducing interest rates on reserves. [View news story]
    "raising interest rates on reserves"

    I don't understand this point. This would be a tightening as banks would hold even larger reserves and get rewarded for it. Reducing interest rates on reserves might force banks to lend more, otherwise this is just another stealth bailout of the banks.

    Please correct me if I am wrong on this as I must be missing something.
    Aug 22 02:17 PM | 2 Likes Like |Link to Comment
  • More on Existing Home Sales: The median home price rose 9.4% Y/Y thanks to higher-end homes representing a bigger slice of the home sale pie. NAR spinmeister Lawrence Yun is worried about low inventory, not demand, and calls for builders to build and Fannie, Freddie, and the banks to push their stable of foreclosed homes onto the market. [View news story]
    Two sides to these transactions: buyers and sellers.

    For buyers, it would seem like an excellent time to buy and even with the risk of further declines you are already starting from a low base to begin with so in absolute numbers, risk is a lot less than it used to be.

    Sellers on the other hand are now faced with locking in a loss if they bought at any time within the last 9 years or so especially in the bubble areas. I suspect the psychological impact of this event is yet to be felt as it dawns upon people that the drop in house prices they have heard about actually applies to them.
    Aug 22 12:49 PM | 1 Like Like |Link to Comment
  • MBA Mortgage Applications: -7.4% vs. -4.5% last week. [View news story]
    And this is with record low rates.
    Aug 22 09:23 AM | Likes Like |Link to Comment
  • 2 Things To Do And Not To Do When Your Investment Thesis Proves Wrong [View article]
    James,

    That's a very nice writeup.

    I do, however, have a concern about this statement:

    "In particular, it is my view that all investors should revert to cash/short-term bonds (including money market funds)"

    Contrary to popular belief there is a potential risk of principal loss in money market funds which means that with zero return you are accepting "return-free risk" (to borrow Gundlach's phrase) in exchange for the convenience of parking your money.

    I would rather choose any of a number of online savings accounts (Capital One, AMEX, ING, etc.) that offer FDIC protection and small but still positive returns. They are generally very flexible and account transfers can be completed quickly. AMEX is the best in the speed of transfer as it historically transfers money into an account the next day. You can link all of these to brokerage accounts.
    Aug 21 04:19 PM | 4 Likes Like |Link to Comment
  • Could tablets eventually cannibalize smartphone sales? In spite of the obvious arguments against the idea - a tablet can't fit in your pocket, and holding one against your ear is uncomfortable - it's gaining believers, thanks to the popularity of 7" tablets and Samsung's (SSNLF.PK) 5.3" Galaxy Note (just passed 10M sales), as well as video-calling and VoIP tablet apps. Samsung is reportedly prepping a 5.8" device that would further blur the line between smartphone and tablet. [View news story]
    X-money,

    Any phone larger than 3.5 inches in screensize is by definition a larger screened phone. The S2 has 4.3 inches at a minimum. HTC also has a large screened phone. My LG is larger even though it is an older model.

    They have sold many millions of all of these phones.

    You should keep an open-mind on the subject because it is easy to fall in love with an investment and be blind to the risks especially when things change. Remember the Crackberry?

    Anyway, nothing against AAPL it is a phenomenal company but with the loss of Jobs you may be seeing the early stages of missed opportunities and weaker strategic vision.

    You can google S3 to get the following without much effort:

    Techradar:
    "Number 3: iPhone 4S
    UPDATED Top mobile phones compared: what phone is best for you?
    Make no mistake: the Samsung Galaxy S3 is the best smartphone on the market. It's got every kind of feature we could ask for and more, and raises the bar once again in terms of what consumers should be expecting in terms of battery life, processor speed and media management."

    Iphone 4S number 3 on the list.

    http://bit.ly/RbYXJx

    Newbies looking for a phone always google to help make a decision on what to get. Ignoring this fact is not wise.

    I am not making predictions on the stock price as it looks like it is still cheap but the competitive risks are growing and if you have done well with the stock, congratulations! The question is would you buy it in the same amount today?

    Expectations for the new Iphone are sky-high which is scary if it does not live up to expectations.

    From TechCrunch on July 23rd:
    http://tcrn.ch/RbYVBk
    "A new survey out from 451 Research/ChangeWave on consumer smartphone sentiment found that Apple’s iPhone 5 — whatever that may turn out to be — is seeing an “unprecedented” wave of advance demand — higher than any other iPhone model has had before, with 14 percent of respondents saying they were “very likely” to buy the iPhone 5."
    "A key difference here, which should be noted, is that while Apple has yet to any anything official on its next iPhone, the Samsung Galaxy S3 was launched months ago, and so people who are being canvassed would have already known more about what the device had (or didn’t have) when responding — even if the phone had yet to hit the market. In the case of the iPhone 5, ChangeWave says that it presented respondents with a description of “probable” features for the device.

    Those included a larger screen, better camera, new OS and 4G capability."

    That last line ( "larger screen") is what users want in the new Iphone 5 according to their research.

    Good luck.
    Aug 20 02:15 PM | 1 Like Like |Link to Comment
  • Interest Rates: The Darkest Black Swan Ahead? [View article]
    Benny,

    "People buy payments, not price."

    That is a profound statement. Explains the whole buying process in as few words as I have read anywhere else.

    A few years ago it was all greed driven based upon future price appreciation so when you have eroded this relationship, you make it more about the living in a home rather than the home as investment which might explain the still tepid home ownership interest despite the record affordability.

    I can see rising rates increasing the cost of ownership but not the price of houses until we have a much stronger employment market, and in fact, I surmise the price of a house would have to fall to maintain the same payment structure now that 20% down is almost a given. I think the balloon payment option is a thing of the past but you never know :)

    A rising rate environment might make existing MBS's more attractive however as pre-payment risks go down despite the potential for a rise in default risk.

    ZIRP has certainly turned the investment environment on its head and created incredible interest rate risk for just about anyone who holds a fixed income investment which includes just about everyone alive today. Pension funds must be scared out of their wits by what the future holds based upon the duration risk that has been created.

    Funny no one thought ZIRP was going to be a permanent investment fact when it started five or so years ago. I would never have believed it back then and I still don't believe it now :)
    Aug 20 11:25 AM | 2 Likes Like |Link to Comment
  • Caterpillar (CAT) CEO Doug Oberhelman gives a sobering outlook for the world economy, saying that while the prognosis is not as bad as at the start of the financial crisis in 2008, it's more uncertain. "The storm clouds are around things that none of us know about - like what will happen with the political situation in Europe," Oberhelman says. [View news story]
    Interestingly he rarely ever sounds this bearish.
    Aug 20 09:33 AM | 3 Likes Like |Link to Comment
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