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Convergence to the mean
John Maynard Keynes, the famous English Economist whose theories are back in vogue, wrote: “In the long run, we are all dead.”
Rocky Humbert, the obscure American curmudgeon and speculator, writes: “In the long run, prices revert to their long-run mean.”
This morning’s Case-Schiller Housing Index (-19% annualized) shows that housing continues to revert to its long-run mean.
This chart shows the major asset classes since 1987. Black=Housing. Red=CPI. Yellow=stocks. Green=commodities.
Asset class convergence
An inconvenient truth about lightbulbs
Trophy Wife asked Rocky to replace a dozen burned-out lightbulbs in their home.
A routine request, except that Rocky replaced all of their old incandescent bulbs with new, expensive, energy-efficient compact fluorescent bulbs 24 days ago! (Rocky’s massive bulb-change was in celebration of the wildly succesful Boost-The-Economy-Buy-A-Lightbulb-Day.)
Was this mass bulb burnout an innocent quality control failure? Or was it more sinister? (Perhaps a conspiracy to shorten Rocky’s life using tall ladders and electricity?)
Rocky naively believes that Lee Harvey Oswald acted alone. And that Princess Diana’s death was just an accident. Not surprisingly, Rocky is skeptical that the Mob “put out a hit” on him (via faulty lightbulbs). Today’s New York Times bolstered Rocky’s non-conspirarcy-theory theory with a story about widespread lightbulb quality control problems. (Click on: “Do New Bulbs Save Energy If They Don’t Work”)
“Some experts … blame the government for the quality problems, saying an intensive federal push to lower the price essentially backfired by encouraging manufacturers to use cheap components,” reports the NY Times.
“Ah,” Rocky thought, “It’s ALWAYS the government’s fault.”
Since the new bulbs are more expensive than incandescents, consume energy to manufacture, and disperse toxic mercury during disposal, it begs the timeless question: “How many people does it take to change their opinion about the efficiency of a compact fluorescent lightbulb?”
Rocky’s readers are invited to share their lightbulb experiences in this poll:
For want of a Swiss Army Knife, Lehman was lost
After months of tense negotiations, Lehman Brother’s Bankruptcy Trustree and Barclays Bank settled a bitter ownership dispute about golf balls.
Bloomberg News reports that thousands of Lehman logo knicknacks were mistakenly transferred to Barclays in the firesale of Lehman’s brokerage unit. They will now be returned to their rightful owner for “liquidation.”
The inventory included:
1,630 Green canvas duffle bags with “Lehman Green Ribbon.”
353 Green compact golf umbrellas.
75 Waterford crystal clocks.
682 White Lehman coffee mugs.
130 Swiss Army pens.
1 English beechwood-lined sterling silver box from 1902.
200 Lehman conference pens.
12 Pairs of Links of London cufflinks.
24 Screwpull corkscrews labeled “LB”.
24 Titleist PRO VI golf balls labeled “LB”.
30 Girl Teddy bears.
18 Large women’s F&G stretch snap shirts
1 Tiffany shooting star.
After surveying this treasure trove, Rocky finally understands why Lehman went down the drain.
No competent management buys Swiss Army Pens. If Dick Fuld had instead bought “One-Handed-Parachutist” Swiss Army Knives, Lehman would still be alive today.
[Disclosure: Rocky owns no Ebay stock, but was briefly tempted to buy some: Most of these knicknacks will find their final resting place in Ebay auctions... probably without any bidders.]
Populism in retail banking: Redneck Bank
Many banks give free pens and toasters to new depositors.
At Redneck Bank, they send you a free beer-can holder. (See picture above.)
Many banks have serious slogans (“The Citi never sleeps.”)
At Redneck Bank, their slogan is “Where bankin’s funner!”
Many banks have spokesmen with gravelly baritone voices, meant to instill confidence and demonstrate gravitas.
At Redneck Bank, their spokesman is a talking horse. And, to enter their online banking portal, you click on the door to an outhouse.
Most importantly, at most banks, the money market interest rate is near zero.
At Redneck Bank, they pay 3.10% APY on balances up to $35,000.
Rocky lacks any pretensions. Especially when it comes to making money. After checking with the FDIC to ensure that Redneck Bank is fully insured (it is,) he opened a new money market account.
Rocky successfully transferred $1,000 from his Citibank account to Redneck Bank. But the Redneck website generated an error message whenever he tried to transfer more money. He went to Redneck’s on-line chat and tried to reach a Customer Service Representative. But that didn’t work either because every time he typed the word “Redneck,” their syntax filter (more puritanical than redneck) generated a pop-up message which scolded: “You have used foul language! Your message will not be sent!”
Finally, Rocky called their 800 number. He learned that Redneck imposes a 30-day waiting period on new account owners “to prevent fraud.” Although mildly annoying, Rocky concluded that Washington Mutual might have learned a thing or two from those Rednecks!
For more information, see: www.redneckbank.com
[Disclosure: This is a true story. Redneck Bank is the internet banking division of the Bank of the Wichitas, and is a member of the FDIC system.]
Getting stung in Berkeley, CA
The Berkeley City Council is poised to transform all city parks and open spaces into habitats for bees.
The San Francisco Chronicle reports that a proposed City Resolution requires all future landscaping to be “pollinator friendly.” The goal is to attract bees, bats, moths, beetles, and flies to the city parks.
Rocky appreciates nature, but he doesn’t enjoy swatting mosquitos during a picnic, or getting stung while playing in the sandbox. (He also admits to secretly stashing a can of Raid Yard Guard in his garage behind the organic mulch pile.)
Rocky concludes that the Bee and Beetle Lobby must have undue influence on Berkeley’s elected officials. He protests the City Council’s unfair favoritism of bees — at the expense of other, equally deserving species. Please join Pied Piper Rocky at his upcoming “Rats for Parks Rally” and “Million Rodent March” to raise public awareness of the plight of Berkeley’s oppressed rodent population.
Obama to Panda Bears: Drop Dead
Panda bears now share something in common with AIG’s employees: Barack Obama’s wrath.
In a speech before the National Conference of State Legislatures today, Obama said that Washington’s stimulus package specifically excludes funds for zoos. (Circling sharks will be disappointed: the law also prohibits funds for aquariums.)
In a Jimmy Carter-esque symbolism, Bloomberg News reports that Obama also said that he was postponing plans to modernize electrical and heating systems in the East Wing of the White House because this too “doesn’t meet the standard of creating new jobs.”
Rocky notes that the last time his air conditioner broke, a middle-class working man with two kids and a dog came out to fix it. He never realized that the White House uses leprechauns to fix their HVAC systems.
Oceanfront luxury for under $1,000
“Gentle sea breezes, warm sunshine and the sound of the ocean surf,” were the minimum requirements for Trophy Wife’s dream beach house.
Rocky doesn’t like the ocean. (He says, “If man were meant to swim, he’d have webbed fingers and toes.)
Rocky doesn’t like the sun. (His friends call him The Vampire, since he rarely ventures out before sunset.)
Rocky doesn’t like warm weather. (He wears the same heavy charcoal-colored British wool sweater. Every day.)
Nonetheless, Rocky, a dutiful spouse, recently visited Miami Beach, and toured beachfront properties. Rocky concluded that even in this horrible real estate market, suitable beach houses were not a “bargain” at several million dollars. More importantly, they were only 10% to 20% below the peak price.
Always the miserly arbitrageur, Rocky fired up his laptop and started googling….
Gentle Sea Breezes
The Aloha Breeze White Tower Fan ($35.00)
The Smell of the Ocean
Air Wick Ocean Breeze Liquid Air Freshener ($4.97)
Warm Sunshine
StayTanNorth Deluxe Tabletop Tanner ($169.99)
The Sound of the Surf
Ecotones Adaptive Sound Therapy Machine ($299)
Walk to the Beach
Membership at the YMCA ($460)
Total cost: $968.96
“So you can have all the benefits of a Florida beach house, for under a thousand dollars,” Rocky excitedly showed Trophy Wife. “What do you think?”
“I think you should go jump in a lake,” Trophy Wife replied.
Red Ink and Green Beer
Red ink never flows on Rocky Humbert’s trading desk.
The paucity of red ink does not mean Rocky’s trading is flawless. Rather, Rocky prohibits red pens for the same reasons that others avoid walking under ladders, crossing in front of black cats, or opening umbrellas while indoors.
Twenty-four years ago, Rocky acquired the no-red-ink-in-the-trading-room superstition from Mr. Michael O’Brien — a talented foreign exchange trader and wonderful fellow — who made billions for Goldman Sachs as he rode the dollar trend from 1985 to 1986.
Mr. O’Brien had a taste for Guinness, and an ear for laughter. One never knew whether the no-red-ink rule was a farce, but Rocky accepted the dictum without question; and religiously follows it to this day.
Rocky recently stumbled across a recipe for “green beer” (to celebrate St. Patrick’s Day,) and immediately thought of Mr. O’Brien.
Mr. O’Brien taught Rocky that the proper way to celebrate St. Patrick’s Day is with BLUE, not green. In fact, “St. Patrick’s Blue,” was the original color, and the “wearing of the green” only recently became popular. (In the 1750′s.)
So tomorrow evening, while the riff-raff quaff their green beer at the bar, you’ll find Rocky sipping a “Blue Martini” in a quiet booth at the rear of the pub. (And he’ll write his day’s trading tickets in blue, rather than the usual black ink.)
Crime “pays” for Madoff investors
Rocky sadly notes that it’s now more profitable to invest with a BIG crook, than to invest in a BIG company.
Bloomberg News reports that Representative Gary Ackerman (D, NY) introduced a bill giving preferential tax treatment to de-frauded investors in Bernie Madoff’s Ponzi Scheme.
“The bill would extend to 13 years the time for which investors may obtain refunds on taxes tied to the phony profits,” the New York Democrat said in a statement. Current rules limit investor refunds to the past three years.
Rocky highlights the economics of this new Government bailout:
Investors who bought $1,000,000 of stock or preferred shares in:
(1) Washington Mutual
(2) IndyMac Bank
(3) Fannie Mae
(4) Freddie Mac
(5) Lehman Brothers
(6) Enron
(7) Worldcom
have been COMPLETELY wiped out.
These investors receive no tax credit for any retained earnings reported by these companies. It’s a 100% capital loss. Gone. Zilch. Nada. Diddly-squat. Zip. Goose egg. Hill of beans. ZERO!
In contrast, investors who gave $1,000,000 to Bernie Madoff, will receive a $500,000 insurance payment from the SIPC. They also keep any income received before the Bankruptcy Preference Claim period. And, they get an unlimited tax deduction for qualified “theft” losses. (This is under the current law. Rep. Ackerman wants to give a special new tax hand-out to Bernie’s investors.)
Rocky’s suggestion to Rep. Ackerman: Go ahead and change the tax code — but eliminate the current $3,000 per year capital loss limit for EVERYONE.
If the Government wants to be Rocky’s partner on 100% of the profits, it should be his partner on 100% of the losses too.
Not your grandfather’s depression
A widely publicized Rasmussen poll reports, “53% say the US is entering a 1930′s-style depression.”
Buried deep within the fine print, the same poll reports, “45% believe anyone who wants to work can find a job,” and “most say it is possible for just about anyone to work their way out of poverty in America.”
Rocky wonders, “Is someone trying to make political points with the reporting of this poll?”
Rocky checked his history books:
1930: Unemployment climbs from 3.2% to 8.7%
1931: Unemployment climbs to 15.9%
1932: Unemployment rises to 23.6%
And money supply contracted by more than 30% from 1930.
Currently, M2 money supply is growing at an inflationary 17%.
The economy is admittedly in bad shape. But in 1933, unemployment insurance, social security, and the FDIC, were just a gleam in the socialists’ eyes, and no self-respecting man would stand in a soup-line without his gatsby cap or fedora.
This sure ain’t your grandfather’s depression!
GE: Master arbitrageur
“Give a man a fish: feed him for a day. Teach a man arbitrage: feed him for a lifetime.”
General Electric CEO Jeff Immelt learned his lesson well. Rocky reckons that GE shareholders just made a cool $250 million because of Immelt’s arbitrage prowess.
On Friday, GE announced a $1.45 Billion debt buyback. That debt was yielding around 9%.
Today, GE sold $8 Billion of FDIC-backed notes. The new debt (courtesy of the US Government TLGP guarantee) costs around 2%.
Fannie Mae and Freddie Mac used to be called GSE’s (government sponsored enterprises). Now that Fannie and Freddie are kaput, Rocky suggests that we drop the “S” from “GSE.”
[Disclosure: Rocky continues to nibble at shares of GE. And he thanks Mr. Immelt for his entrepreneurial efforts.]
S&P-500 Target: ZERO on 11/1/09
S&P500: Extrapolating the trend
The above chart is clear and succinct. If the current trend continues, the S&P-500 will trade at ZERO on November 1, 2009.
Rocky calculates that a disciplined investor who put $100 into the Vanguard S&P-500 fund every month for the past twenty years, now has a negative return on his entire investment (including dividends). This is a stark measure of the severity of this bear market, and it obviously shakes the confidence of many folks who responsibly “dollar-cost-average.”
Rocky (who believes in long-term-reversion-to-the-mean) finds this information to be bullish for the next 10 to 20 years. Folks who extrapolate perpetual losses today are repeating the same mistake as folks who extrapolated 15% annual compounded gains in the 1990′s.
Rocky continues to contently nibble at stocks. If the stock market reaches zero on November 1st, Rocky will happily own 100% of the US stock market. Noone knows whether the S&P will actually reach zero — but if it does, Rocky will savor firing the irresponsible CEO’s — who like Slim Pickens in Dr. Strangelove rode their companies into oblivion. (As Major Kong’s navigator says, “The Target is in sight.”)
AIG sues USA: Man bites dog
“Where’s John Kerry?” That was Rocky’s reaction upon learning that AIG sued the US Government over a disputed $306 million in taxes, interest and penalties. AIG sued while simultaneously negotiating an additional $30 Billion in US Government bailout funds. Click here for the full article from the Wall Street Journal.
AIG defended the suit to the WSJ: “AIG is taking this action to ensure that it is not required to pay more than its fair share of taxes,” said a company spokeswoman.
The irony is beyond words.
Too bad that Rocky cannot buy stock in American Law Firms. They are the only winners.
Forrest Gump meets Nassim Taleb
Rocky and Trophy Wife went shopping at CVS/Pharmacy last night. While Trophy Wife picked up some nail polish, Rocky headed to the “90%-off Valentines Day Candy” Department, where he bought several heart-shaped Whitman’s Samplers. When they arrived home, Rocky handed a box of the chocolates to Trophy Wife, and told her that he loved her.
Unamused, Trophy Wife remarked that Forrest Gump never said that “Life is like a box of expired chocolates.”
Rocky countered that the expiration sticker read “May, 2009.”
After examining the Whitman Sampler ad (see below), Rocky observed that his (discounted) chocolate price is unchanged from 1942 . In 1942, the Dow Jones Industrial Average’s index level was 150. He wondered aloud whether he should go long more chocolate and short the Dow Jones (as an arbitrage).
After biting into a stale caramel, Rocky decided it was a bad trade: the Whitman’s price was a black swan – (or more precisely, a black chocolate.) The right trade: Nibble at more stocks, and throw out those chocolates!
