A Dash of Insight

ETF Update: The Debate over Health Care

There is an ongoing and important debate over U.S. Health Care policy.  Many lives are affected.  The cost of a true solution is high.  There is sharp disagreement over who will pay.  At issue is whether we, as a nation, want to assure some basic level of health care to everyone.  If we do, does this assurance extend to all, perhaps even those in the country illegally?

In answering, it is important to realize that we already pay many of these costs.  We do it through expensive, after-the-fact treatment in both emergency rooms and hospitals.

Our new President has a plan, but what priority will it get in the face of the economic crisis?

For investors there is another aspect to this debate.  Which health care companies will benefit from a new health initiative?  What are the real chances of passage.

Each week we use the rankings from our TCA-ETF model to direct our market focus.  Since the model looks both at Trends and Cycles, and includes a touch of Anticipation, it helps us to see developments that we might otherwise miss.  (For new readers, there is a more complete description of our methods and ratings at the end of the article.)

Spotlight on Health Care

We track health care through the iShares Dow Jones U.S. Healthcare Providers Index Fund (IHF).  The fund consists entirely of health providers, with 45% concentration in five companies and about 65% in the top ten.  The P/E ratio is below 13 and the beta about 1.3.

Since last week's report, IHF made a big move in our rankings, from #18 to #5 this week.  We just added the position on December 23rd.  Let us take a look at the price and volume history as shown in the chart below.  There is an encouraging recent rebound, but the sector is still well off of recent trading levels and far from last year's high.

Fundamental Issues in Health Care Stocks

The three most important questions for the stocks of the health care providers are as follows:

1. What is the likely impact of the Obama plan?
2. When will the plan be given serious consideration?
3. What are the chances of passage?

At ElectionStocks.com, our sister site, we are evaluating the impact of the Obama transition.  We have taken a look at the health policy issues.   In one article, we noted the potential cost of including illegal immigrants.  In another, we point out that the entire plan is likely to be delayed.

Don Dion suggests that the stocks in IHF are likely to benefit from the Obama health plan.

Tom Lydon, in a pre-election article, noted that the Obama plan would dramatically increase enrollment.

Our Take

Interpreting the action of these stocks is tricky.  Has the recent bounce reflected the Obama victory?  Or does it show market recognition that any plan is likely to be delayed?

For the long term, we believe that more details of the plan are needed.  Campaign rhetoric will mean little when Congress gets involved.  It is too soon for long-term investors to buy the sector.

For the short term, we are sticking with the TCA model.

Weekly TCA-ETF Rankings

The ratings reflect prices and signals as of Wednesday night, December 24th. In our daily trading program (for accredited and institutional investors) we buy the top eight sectors. In our weekly program for individual investors (free report available upon request) we stick with the top six sectors. There was little change at the top.  We were down about 3% on the week, losing some ground to the S&P 500, down 1.65.

Based upon the current ratings, we continued our bullish stance in the Ticker Sense Blogger Sentiment poll.

Note for New Readers

Our weekly ETF Update is designed to assist both investors and traders interested in ETF's and Sector Rotation.  Before turning to the current rankings, let us undertake a review for readers new to this series.

Our Method.  In this past article, we described our basic methodology and why we believe the rankings are useful for fundamental traders and technical traders alike.  While we urge readers to check out the entire article, the key point is that ETF's pose challenges and opportunities different from investment in individual stocks.  The fundamentals may be more difficult to assess.  Even with a good grasp on fundamental trends, there is a lot of technically-based trading in ETF's.  This means that those trading with a fundamental approach (and we do this as well) want to monitor the "hot money" moves.  Here is an article on that point.

The system synopsis. We look at Trending sectors, Cyclical Sectors, and build in an element of Anticipation for both entry and exit -- thus the name of the model, TCA-ETF.  While we do not reveal the exact methodology for spotting trends and cycles, the system is not a "black box."  The basic elements are used by many, and widely reported.  We even discuss the need for human analysis as opposed to black box trading.

We do not buy a sector that is in the "penalty box." One can think of this as similar to a trading stop. It means that trading in the ETF has violated certain technical criteria. To assist readers in following this, we have added a field showing which sectors are in the penalty box. The overall number of sectors in the penalty box is also an important read on the overall market, influencing our overall posture.

We report the rankings each week, now on the weekend with a one-day delay, using the Thursday output from the model.  We monitor and trade this daily, and offer a free report (request via the email address on the top left of the site) for those interested in our weekly trading program.

Economic LIteracy: Do You Meet the Test?

As we all plan our investments for 2009, no factor is more important than the economy.  It is a subject on which everyone has an opinion.  That is the natural state in the American democracy, dating back to the observations of Alexis de Tocqueville.  His famous work, Democracy in America, is still read by every student of political science.

While a complicated work should not be summarized in a sentence, the Wikipedia article includes a good warning:

Democracy in America predicted the violence of party spirit and the judgment of the wise subordinated to the prejudices of the ignorant.

The 21st Century

Democratic opinion has advanced into the 21st century.  Modern scholars are impressed with how well de Tocqueville's work has held up, but there are some changes.  With the help of the Internet, everyone is able to offer an opinion about anything and everything.  Millions of readers are consumers of these opinions.

Readers motives vary.  Many simply want to confirm existing beliefs.  That is easy.  Those seeking information and analysis face a challenge:  How does one identify an expert?

In particular, how can an investor form intelligent opinions about the economy.  At a minimum, one needs basic economic literacy.

A Few Elements of Economic Literacy

Bob McTeer's blog, once again, provides some valuable information for us all.  In his article, Economic Literacy:  A Few Basics, he cites ten principles that anyone should know before drawing conclusions.  They are all great points, but let us pick a favorite, as follows:

Decisions are made at the margin-a little more of this means a little less of that. You maximize profit when the marginal revenue from the last unit produced just matches the marginal cost of producing it. Fixed costs don't count. Once you've bought the tickets, their cost is irrelevant the next day when you're deciding whether to go to the game.

Anyone who thinks an economic question is some black and white causal relationship does not understand this fundamental point.  Pundits who do not understand marginal analysis say things like the following:

• There is no "pent-up" demand for housing.  This is wrong because housing demand is a continuous function, more demanded at any lower price, more offered at a higher price.  The question of whether demand (or supply) curves will shift is a microeconomic problem that might be affected by public policy decisions.
• Stimulus packages do not work.  This is wrong because any stimulus creates new demand at the margin.  Professionals can debate the magnitude, but the broad-brush, X or Y conclusions are inaccurate.
• Retail is dead.  This is over-stated because the level of sales is a continuous function.  Reductions are in percentages.
• And many more similar examples of business and consumer spending and employment, all continuous functions.

Here is another good principle from McTeer:

The fallacy of job counting. We will always have more work to do than workers to do it. Therefore, let's not count jobs; let's make jobs count. Workers are scarce and will go where their return is highest. Politicians focus on creating jobs for their own sake. If they focus on real needs, the workers will come. The false idea that there is too little work to employ all willing workers leads to things like France's 35-hour work week.

Many pundits focus on this count of jobs.  In fact, jobs are created all of the time.  Even in bad times the US economy creates over 2 million new jobs each month.  In bad times of course, even more jobs are lost.  It is not a question of whether jobs are created, but rather how many, and how quickly.  The net job change is the result.

These are just examples.  Readers can test themselves -- and they should - by checking out the entire article.

Conclusion

There are two important conclusions for investors.

1. It is important to realize what you know, and more important to realize what you do not know.  Many investors are making decisions -- right now-- based upon their personal conclusions about the economy.  They fail to realize that they are consumers of the economic conclusions of others.  They are just reading the newspaper or a pundit.
2. It is important to choose sources who understand these principles, not just "pop econ" journalists who throw around some economic terminology.

Our Take

Many of the popular pundits and journalists would come to a standstill if asked to do the following practical open-end essay test:

Take a legal pad and start writing what you really know about economics.

It would be interesting to see how many would stall out at page one.  The pop econ approach does not extend very far, but it resonates with readers whose knowledge is at exactly the same level.

The current Internet democracy, an echo of de Tocqueville, does not serve the investor.  Pundits have media appearances that consist of barely-challenged sound bites.  Journalists assume the role of the expert rather than that of wise communicator.  Readers must figure it out for themselves.  To do so, one must have economic literacy.

A wise investor knows his happy zone, a concept we borrowed from the Splendid Splinter.  The investor must also know when a pundit is swinging at an outside pitch.

Blowouts of the Week: An Example for Investors and Traders

Here at "A Dash" we believe that equity investors can learn from sports markets.  The major reason is that the cycle time is much shorter.  Predictions are made and results are rendered very quickly.

The market cycle is much longer, but the lesson is there.

The NFL Market

Each week in the NFL there is a market for those making bets on NFL games.  The point spread  is set initially by a Vegas expert who puts up a "number" that is expected to balance the betting action.  Since the bookmakers maintain a betting spread, they are guaranteed to profit if action on the two sides is balanced.  If the market jumps on one side, the price moves.

Market Analogies

There are several important market analogies.

1. It is a deep and liquid market, with plenty of action on both sides;
2. The sports punditry, including both free and paid services, engages in fundamental analysis, looking at the strengths and weaknesses of both teams and how they match up;
3. The pundits also engage in the equivalent of technical analysis, looking at how the teams have done versus the point spread, at home, on various playing surfaces, etc.

Blowout Results Seem Obvious -- After the Fact

Last weekend's blowout results included two games that (now) seem obvious.

The Lions lost again.  The line opened with the Saints as 6 1/2 point favorites and closed at 7.  The final score was Saints 42, Lions 7.  The hapless Lions are setting a record for inept play.  How could anyone think they could compete.  Or so it now seems.  Going into this game, the Lions were 6-8 versus the spread.

The Patriots crushed the Cardinals, 47-7.  You only had to lay eight points.  How could anyone expect a warm-weather team to play in the snow at Foxboro?  The Cardinals are crashing.  After the fact, it seems obvious.

Investment Conclusion

We repeat our warning that investing is not gambling.  In an old article we explain carefully why investors can learn from gambling. We look to this "market" to get meaningful lessons.

Should we follow pundits who predicted these two blowouts?  Or is it better to look to long-term records of success?

Learning from Mistakes: The Short Sale Ban

The verdict is in.  There is growing recognition that last September's ban on short selling in certain financial stocks was a mistake.

Most of the professional trading and investment community do not see short selling, per se, as a problem.  There are several debatable issues:  the uptick rule, credit default swaps, and mark-to-market accounting for assets intended as long-term holdings.  Short sales were not controversial among professionals.

The Academic Verdict

There is some fast work from the academic community.  A team led by Columbia Professor Charles Jones, Chairman of the Economics and Finance Division, has a strong data-based analysis of the short-selling ban.  They note that despite the initial pop in these stocks, they actually did worse during the market decline over the period of the ban.  More importantly, they note that liquidity in these issues got much worse.  The average trader faced wider bid-ask spreads leading to more costly trades.  Short sales add liquidity and even fuel rebounds when fundamentals change.  As many noted at the time, there were various ways to avoid the ban, including purchases of put options and inverse ETF's.

The SEC Verdict

SEC Chairman Christopher Cox acknowledges this error.  In a just-released interview in the Washington Post, he is quoted as follows:

Cox said the biggest mistake of his tenure was agreeing in September to an extraordinary three-week ban on short selling of financial company stocks. But in publicly acknowledging for the first time that this ban was not productive, Cox said he had been under intense pressure from Treasury Secretary Henry M. Paulson Jr. and Fed Chairman Ben S. Bernanke to take this action and did so reluctantly. They "were of the view that if we did not act and act at that instant, these financial institutions could fail as a result and there would be nothing left to save," Cox said.

Our Take

We should note first with applause the rapid data-based effort by unbiased academic investigators.  We can all enjoy the effect of the Internet.  Instead of waiting more than a year for academic publication in a peer-reviewed journal, results are now available more quickly.  If there is criticism, that is also available to all.  It is a major improvement in the way academic research becomes relevant.

We find more difficulty in the Cox "go slow" concept.  It is clear that events were moving more rapidly than policy.  Paulson and Bernanke were correct in identifying a problem, but the focus was wrong.

Eventually we will see an academic study that pulls together the key elements:

• The unregulated credit default swap market, easily manipulated with modest amounts of capital;
• The widespread publicity surrounding the CDS trading, implying insolvency of the institutions in question;
• The speculative put buying by those profiting from this pattern;
• The mark-to-market implications for institutions not involved at all;
• The possible manipulation of widely used ABX indices, affecting the entire market.

This all needs investigation.  Will it be on the agenda for the new Obama team?  We hope so.  Learning from this lesson is absolutely essential.

CNBC Anchors on a Mission

In a different place and time, journalists sought to discover information and pass it along to readers.  Really good journalists took complex information and helped to explain it.  Investigative journalists discovered things the average reader would not have found on his own.

What happened?

Too Many Opinions

Something has gone wrong, seriously wrong.  It is an excess of opinion.

Every commentator has so many opinions -- strong ones.  This is true even among our favorite blog sites.  Opinions sell.  And if you get on TV, they really want an aggressive position.  Wow.

The sites that we admire as gatekeepers regularly feature straight opinion pieces  by people who have no expertise on the subject in question.  Where are the "Roger Eberts" of the blogosphere?

The CNBC Example

We are choosing an example from CNBC not because their coverage or anchors are worse than anyone else, but because it is typical and prominent.  We also do not mean to pick on Erin Burnett, who has done some great one-on-one interviews.

Having said this, we need to make the point with real evidence and Squawk on the Street provided the perfect illustration.  Here is the segment for our example.

The Background

The producers had scheduled a segment where Noah Blackstein and Roy Williams (two experts worth listening to) would discuss stocks that might benefit from the Obama transition.  Since this is an important subject for investors, we clicked off the TIVO mute button.  The segment was a disappointment.  After the initial presentation by the two experts, Erin Burnett took them in a different direction.  Instead of drilling deeper on their ideas, she questioned whether any program could work.  Her comment, via the magic of TIVO was as follows:

One in five Americans is living in a home with a mortgage that they are paying every month is worth more than their home will ever be worth again when they sell it.  Homes are American’s biggest asset.  Until that is fixed, it is hard to see how people are going to feel good, spend money, buy things from companies who then put money into plants and invest and hire and wages go back up.  So all of this stimulus, you can talk about it going into biotech or going to building broadband.  We have a core problem that isn’t fixed.  Are either one of you worried or afraid that we could spend another trillion and in six months be back having the same conversation about another stimulus?

She did a repeat performance in the next interview segment, saying "One in five Americans live in a home where the mortgage is worth more than the home."

What Went Wrong?

We started with a good journalist asking experts questions about something where they had knowledge.  A moment later, it was different.

We had a journalist who had recently learned a fact that she found interesting.  To her it seemed all-important.  She wanted to discuss it with everyone, including those who had absolutely no expertise.  What happens when someone talking about the Obama transition and biotech is asked about housing?  Nearly everyone in this position just gives an opinion.  Everyone involved was out of the Ted Williams happy zone.

Analyzing the Housing Opinion

Careful readers will have noted the slight change from the first rendition of the fact about mortgages to the second.

It is an important difference. One problem on the air is that sources are cited sloppily, if at all.  Let us compare the stated opinion with some facts.

1. The CNBC anchor took the guests out of their happy zone, asking them questions about something where they were not experts.
2. Data about home ownership is collected by household, not by person.  Anyone who talks about a "percentage of Americans" is getting a sloppy start.
3. Over 35% of households do not own homes, and have no mortagages.
4. About 40% of homeowners have no mortgages, so they should not be included.
5. There is no evidence that mortgages are higher than the homes "will ever be worth again," a statement that has no face validity.

A more accurate conlcusion would be from Business Week as follows:

Over 7.5 million mortgages or 18% of all properties with a mortgage were in a negative equity position as of the end of September 2008. There are an additional 2.1 million mortgages that are approaching negative equity. These are defined as mortgages within 5% of being in a negative equity position. Negative-equity and near-negative equity mortgages combined account for over 23% of all properties with a mortgage.

The article goes on to state that the problem is heavily skewed to a few states.

Conclusion

None of the interviewed guests questioned the accuracy of the stated facts.  That is not what one does when getting a guest spot on CNBC.

The CNBC anchor team has morphed from being expert journalists to being a team of subject area "CNBC all-stars."

Readers should note that we do not question the importance of housing to the economy.  It has been a frequent theme at "A Dash."

When analyzing the problem, it is important to be accurate.  Let us not make the facts even worse than they are.  Since the experts raised no questions, we doubt that the average viewer spotted problems.  It is yet another element of Wall Street Truthiness.

ETF Update: Strength in Coal? Really?

An important strength of a trading system is that it forces you to think.  Humans form opinions and stick to them.  The blinders of selective perception and confirmation bias lead everyone's fundamental analysis to conclusions that are difficult to budge.

We find that a regular review of the market, sector by sector, helps to avoid these biases.  Our own approach looks at Trend, sector Cycles, and adds a touch of Anticipation.   Since we do this with a universe of 57 ETF's representing a range of sectors, we call it the TCA-ETF model.  (For new readers, there is a more complete description of our methods and ratings at the end of the article.)

This week's ETF update provides two good illustrations.

The Market

The S&P 500 gained almost 1% for the week.  That is a great return, but to most it does not feel that way.  Why not?  Extreme volatility makes a 1% gain seem trivial.  The market was up almost 5% on Tuesday, and declined the rest of the week.  Most of the media and punditry are completely focused on bearish economic news.

The system rankings force us to keep an open mind.  Fifty of the 57 ETF's have positive ratings.  Since three members of the universe are inverse funds, we can never achieve more than 54 in the "buy" range.  In addition, most of the ratings are quite strong, indicating better than average stock performance over the next month.

The market action, captured by the model, suggests that we look past the bearish fundamental news.

Strength in Coal

This week's featured sector is the Market Vectors Coal ETF  (KOL).  The ETF is based upon the Stowe Coal Index, which is down over 56% YTD.  40% of the exposure is outside the US.  The top five holdings make up nearly half of the fund.  The P/E ratio is under 11 and the price-to-book is just under 4.

During the last week, KOL made a big move in our rankings, from #12 in last week's report to #2 this week.   We added the position on December 12th.  Let us take a look at the price and volume history as shown in the chart below.

Our model is like a wise advisor, providing recommendations and ratings without commentary.  From experience, we know that a basing pattern like this is a positive factor.

We are pretty much alone in spotting the KOL potential.  Charles Kirk, who misses very little, noted the ETF as a big mover without further comment.  Tom Lydon did a feature last week on clean coal and coal gasification, mentioning KOL.

Coal Fundamentals

We are surprised at the KOL forecast from the model.  We have three concerns:

1. Oil prices have been falling despite OPEC production cuts.  There is always some ability to substitute one form of energy for another, so this is a negative for coal;
2. Chinese imports have been lower, with the Baltic Dry Freight Index hovering near historic lows; and
3. Obama energy policy does not favor coal.  In fact, it is pretty much the opposite of the Tom Lydon position.  At our sister site, ElectionStocks.com, we continue to monitor the impact of the Presidential transition on specific stocks and sectors.  There is a good article on Obama's plan for auctioning emission rights and also breaking news on his science advisory appointments, the clean team.

Our Conclusion?

Trading has different time frames.  While we expect the Obama energy policy to be relevant in the long run, we respect the market signal on coal.  Our best guess is that there is something positive with Chinese demand.  Meanwhile, we follow our system.

Weekly TCA-ETF Rankings

The ratings reflect prices and signals as of Thursday night, December 18th. In our daily trading program (for accredited and institutional investors) we buy the top eight sectors. In our weekly program for individual investors (free report available upon request) we stick with the top six sectors. There was not much turnover at the top.  One of the new additions, RSX, did not perform well.  While we were up about 2% on the week, this was the major limiting factor.

Based upon the current ratings, we continued our bullish stance in the Ticker Sense Blogger Sentiment poll.

 

Note for New Readers

Our weekly ETF Update is designed to assist both investors and traders interested in ETF's and Sector Rotation.  Before turning to the current rankings, let us undertake a review for readers new to this series.

Our Method.  In this past article, we described our basic methodology and why we believe the rankings are useful for fundamental traders and technical traders alike.  While we urge readers to check out the entire article, the key point is that ETF's pose challenges and opportunities different from investment in individual stocks.  The fundamentals may be more difficult to assess.  Even with a good grasp on fundamental trends, there is a lot of technically-based trading in ETF's.  This means that those trading with a fundamental approach (and we do this as well) want to monitor the "hot money" moves.  Here is an article on that point.

The system synopsis. We look at Trending sectors, Cyclical Sectors, and build in an element of Anticipation for both entry and exit -- thus the name of the model, TCA-ETF.  While we do not reveal the exact methodology for spotting trends and cycles, the system is not a "black box."  The basic elements are used by many, and widely reported.  We even discuss the need for human analysis as opposed to black box trading.

We do not buy a sector that is in the "penalty box." One can think of this as similar to a trading stop. It means that trading in the ETF has violated certain technical criteria. To assist readers in following this, we have added a field showing which sectors are in the penalty box. The overall number of sectors in the penalty box is also an important read on the overall market, influencing our overall posture.

We report the rankings each week, now on the weekend with a one-day delay, using the Thursday output from the model.  We monitor and trade this daily, and offer a free report (request via the email address on the top left of the site) for those interested in our weekly trading program.

Federal Commitments Total $5 Trillion

There is a rising tide of negativity about "bailout nation."  Public opinion has been in opposition each step of the way, most recently on the auto bridge loan, announced today and analyzed by us here.

The problem in the media characterizations is that everything is described as a "bailout" since that is the story that plays.  There is also special emphasis on what the taxpayer will get in return, judged on the basis of investment potential.

Get serious!  The government is not a hedge fund.  The purpose of these actions is not a specific return on investment, but avoiding the collapse of the economy.  Many of the commitments have specific collateral.  Many are short-term in nature and some have already been repaid.  Others are showing a profit.  These are not just grants, and certainly not all "bailouts."

It is typical media punditry.  Describing a program as a bailout is an easy and popular story.  The source attracts many readers, blog hits, or ratings.  Analyzing the public policy costs and benefits is more difficult and pretty boring.

Readers can get some clarification from this interesting interactive graphic from Slate, allowing you to see the timeline and terms of each decision.

Investment Take

The investment conclusion starts with the notion that almost no one has any confidence in the specific plans or the effects, one of our items on the Wall Street Truthiness list.

We plan more detailed discussion, but the broad concept is easy.  Few of the existing pundit opinions and none of the econometric models allow for much impact from these programs.  Meanwhile, we have efforts of unprecedented size.

There is a contrarian opportunity.

Market Curiosities

So many issues -- so little time.  Let us try a few quick takes on some current issues.

Selling the GE News.  We watched with some wonder as selling ensued on the basis of a the announcement by S&P of a negative outlook for GE's triple A bond rating, perhaps in two years.  Surely the issue was widely known, as is Jeff Immelt's determination to avoid this outcome.  If investors doubt his plan, why wait until the S&P announcement?

Additionally, when did everyone suddenly decide that the ratings agencies "got game."  At one moment they are the villains of the CDO fiasco, but now they know better.  Were we alone in this reaction?  No, we see that the astute team at Bespoke Investment Group is on the story.

Bush Delay on Auto Companies.  When the Senate failed to pass legislation to help the auto companies last week, there was some interesting bargaining and speculation.  The measure had majority support, but a procedural vote brought to the floor by Majority Leader Reid showed that the votes were not there to block a filibuster.  In the aftermath, there was widespread speculation that conservative Republicans held firm because they "knew" that President Bush would come to the rescue.  Others speculated that the UAW held the line because they had the same tip.

In short, the parties did not want to negotiate a solution in haste, preferring to sit around a table with a few months to reach a solution.  Now that everyone sees the effect on car sales (see Calculated Risk on Chrysler) and the Bush delay, we wonder if there are any second thoughts.  We still expect action, but it not have the form expected by the parties last week.

Gaius Marius is on this case, discussing the problems with the bankruptcy alternative.

Our take.  The government role should be to create the right incentives for the needed bargaining and let the parties work it out.  This means a firm deadline and some guidelines, but not a dictated solution.  Sen. Corker seemed to be making some headway on this.  The goal should be to achieve the restructuring without the stigma.

Warren Buffett.  In our introduction of the concept of Wall Street Truthiness we noted recent criticism of The Oracle of Omaha, including suggestions that he has "lost it."  Regular readers know our preference for the long term and real data versus an incident or two.  Mebane Faber has a great analysis of the Buffett record, including data and simulation tools.  The results had some surprises, even for those of us who are Buffett fans.

Fed Policy Moves.  It took less than twenty-four hours before the punditry decided that the Fed moves were going to be inflationary -- or ineffective --- or both.  This pattern of market reaction has been typical for months.  Policies that take many months to implement and get traction are declared worthless in the absence of instant results.  Many of those leading the critics, including the CNBC "devil's advocates" do not have much background or expertise on the subject.

Why not look to someone who has both the knowledge and experience?  Readers should consider Bob McTeer's viewpoint.  He has been a practical voice of reason for many months.  Since he is a courteous man, and not a loud and fast talker, he seems to get shouted down on these programs where they put up six or eight talking heads at a time.

Our Take.  There will be time to move from fighting deflation to fighting inflation.  Readers who are not familiar with the importance of the velocity of money should bone up.  You are going to be hearing a lot about the concept.

Opinion Polls and Aid to Auto Companies

With President Bush still pondering what to do about aid to the US auto companies, the question is attracting the interest of pollsters. The results have varied quite a bit. How you ask the question has a lot to do with what you learn. A question on the proposals is featured by nearly every pollster. You can check out all of them at PollingReport.com's Business Issues section.

Two Very Different Results

Let us feature two polls to illustrate how results can vary widely.

The Washington Post-ABC News poll was headlined as follows by MSNBC:

Majority opposes auto bailout, poll shows

 

The article pointed out that most opposed the bailout, held the companies accountable for their own errors, and noted that 60% felt that it would make no difference or be good for the economy if one or more were forced to restructure under bankruptcy laws.

Here is the main question and the responses, showing some improvement from an earlier poll using a larger amount:

21. The federal government is considering loaning up to 14 billion dollars to the Big Three U.S. automakers and putting in place a government board to oversee their restructuring. Some people say (it's a bailout those companies don't deserve, and that they'd be better off reorganizing under bankruptcy laws). Other people say (it's necessary to protect auto workers and save a key part of the U.S. economy). On balance, do you support or oppose this plan?

-------- Support -------- --------- Oppose -------- No

NET Strongly Somewhat NET Somewhat Strongly opinion

12/14/08 42 20 22 55 21 34 3

 

Compare to:

 

The big three automakers in the United States have asked for up to 34 billion dollars in loans from the government. Some people say (it's a bailout those companies don't deserve, and that they'd be better off reorganizing under bankruptcy laws). Other people say (it's necessary to protect auto workers and save a key part of the U.S. economy). On balance, do you support or oppose this plan?

-------- Support -------- --------- Oppose -------- No

NET Strongly Somewhat NET Somewhat Strongly opinion

12/7/08 37 17 20 54 23 30 10

11/23/08* 35 18 17 57 21 36 9

* 25 billion

 

There has been some reduction in opposition, whether from the changed amount or from the news coverage.

The Peter D. Hart Research Associates poll, conducted a month earlier, was headlined by the Detroit News as follows:

New poll says majority of Americans support bailout for Detroit's automakers

 

The key summary came from Mr. Hart:

"Americans' broad support for providing government assistance to the auto industry is built mainly on a genuine fear that a failed GM, Ford, and Chrysler could lead to a depression," said Peter Hart, chairman of the firm. "But their support also is grounded in the hope that a revitalized auto industry could mean good things for the manufacturing sector and the country as a whole."

 

In the Hart approach, the respondents were asked a series of questions, providing more information as part of the process. Here are a few of the questions and some of the responses. (Full survey available for download here.)

4. How important do you feel the American automobile industry is to the American economy--extremely

important, very important, somewhat important, not important, or not at all important?

 

5. If the American automobile industry no longer had the resources to produce vehicles, how much harm would

it cause to (READ ITEM)--a great deal of harm, quite a bit of harm, just some harm, or very little harm?

 

6. Do you believe that the government should or should not provide loans to America's automakers so they

have the money to manufacture vehicles?

Government should provide loans ............. 55 [147]

Government should not provide loans ....... 30

Not sure ................................................... 15

 

7. President-elect Barack Obama has stated that one of his first economic priorities as president is to make

sure that the American automobile industry continues to be able to operate, and he favors an economic

assistance program to help them. Do agree or disagree with him?

Agree................................................ 64 [148]

Disagree ........................................... 25

Not sure.......................................... 11

 

You can see the change in the response when people are asked whether they agree with President-elect Obama.

Our Take

In our survey research classes we had many illustrations showing how small changes in wording or polling technique can make a big difference in the result. These two polls show that effect quite clearly.

Both polls were conducted by highly-respected research organizations using scientific methods.

One of these polls (guess which!) was paid for by General Motors, although the company had "no input or review of the design, methodology, content or interpretation."

Most importantly, leaders are supposed to lead, not just follow public opinion. It is still interesting to know what people think.

The SEC in Action... err, Partial Action

The media are now piling on the SEC and the Madoff failure, something that we highlighted last week.

Reporting to the SEC

We suppose that other investment advisors have made reports to the SEC.  We have done so on two occasions.  In both cases there was a slam-dunk violation of the '33 Act, a stock offering that was obviously fraudulent, not meeting the terms of the Act.

The SEC does not respond to reports -- not at all.  There is not even an acknowledgment.  In one of our reports, the illegal fund was quickly closed down.  The reported losses were in the tens of thousands, but who knows how much it really was.  We have no idea whether our report was instrumental, but the timing suggested that it was.  The other guy continues to operate, taking very small amounts from many people.

There is no accountability about how the agency handles or sets priorities on reports.  In such an environment, one wonders why they have not sought greater appropriations.  This is one of our complaints.

Fiddling While Rome Burns

On the one hand, we know that the Madoff problem was missed.  SEC Chair Cox is now calling for an investigation of his own agency!

Meanwhile, jck at Alea notes the action against National Lampoon for stock manipulation.

Our Take

Going beyond the rather obvious irony, there is a broad quesiton about enforcement.  It should be aggressive enough to provide a deterrent.  The National Lampoon case addresses rampant manipulation in penny stocks, a deserving target.  The net is obviously not broad enough.  One step might be to have a formal acknowledgment of complaints.  At least this would provide an audit trail of decisions.

The Obama Administration faces a big challenge in restoring faith in market regulation.  Here is the latest report on possible SEC candidates.