A Dash of Insight

Reacting to News: What to Make of Dubai?

Here at "A Dash" we try to identify the best experts on any subject.  Since we are free to position our clients in any way, we are consumers of news and analysis.  So are you.

While I manage client portfolios in real time, my writing is after hours.  I am not trying to advise people with short-term trading horizons.  Our TCA-ETF approach (still bullish) has a three-week time horizon.  Our program for long-term investors has an even longer time frame.

When I write, it is an honest assessment of my own views and an attempt to find the real authorities.  It is not trading or investment advice.  It is just something you might want to consider.

The Issue

Each night I get the daily report from Charles Kirk, a valuable service for his subscribers.  Charles (who is currently neutral on the market in all time frames) always includes a quotation with his analysis, and today's is especially apt:

"Look at market fluctuations as your
friend rather than your enemy; profit
from folly rather than participate in it."
- Warren Buffett

This is a great statement of the issue.  Is the Dubai reaction the start of something bigger, or an opportunity to "buy a dip?"

The Analytical Viewpoint

At TheStreet.com's Real Money site (subscription required)  Marc Chandler, a source for whom we have great respect, wrote as follows:

We stress again that the current troubles being seen in Dubai are a direct result of its efforts to tie its fortunes to global real estate, tourism and services, and are particularly unique to Dubai and should not have wider implications for sovereign EM risk. The property boom helped this strategy work in the good times, but the popping of the global real estate market has put severe strains on Dubai.

Developments in Dubai should thus be seen in the context of the entire country basically being geared toward real estate development and not in the context of EM sovereign risk and fundamentals. Thus, while the current period of risk-off trading could yet persist, longer-term investors should be looking for buying opportunities in EM during this correction.

We note the careful analysis of the nature of the problem, and how it might be connected to various markets.

The World Leadership Viewpoint

Other sources also provided perspective on this issue.

Banks, world leaders play down Dubai debt threat, from Reuters.  The article quotes leaders from the US, Britain, France and Japan.

The Bearish Viewpoint

Those who have been calling for a market correction see this as the start of something big.

Pimco, with a bearish viewpoint on stocks and now even seeking less risk in bonds, calls it the start of an "overdue correction."

Others, whom we will not name, see this as the first step in the decline of commercial real estate.  Or they say that we should not believe anyone who sees this as "contained" because someone or other said that subprime would be "contained."

The Trading Viewpoint

Barry Ritholtz, despite a continuing bearish tone from most articles, expected a rebound from the overnight bottom and was pretty accurate with his pre-opening call.

Our Take

There is a widespread acceptance that any warning of doom is correct, and every event is proof.  If so, the case against buying stocks is clear.  There will always be something to worry about.

Today's bears did not make a very good case.

I watched the currency trading closely.  The dollar flight to quality ended rather quickly.  The trade-weighted dollar is about where it has been for the last week.  And I am still waiting for someone to show a good link between low treasury rates and the ability to speculate on US stocks.

There were plenty of buys in individual stocks that have nothing to do with Dubai, European banks with big exposure, or even the dollar carry trade.

I don't know if Warren Buffett was buying today, but I was.

A Profitable Pattern

I have noticed a profitable pattern.  I am going to cast this from the bearish perspective, but in theory it could work either way.  I have a few other historical examples, but let us focus on the present.

Background

Investors have many time frames, and so do those managing money.  When you see someone interviewed on CNBC it could be a mutual fund manager, a hedge fund manager, or a trader.  It is natural for everyone to talk his book, but the time frame is relevant.

A mutual fund manager likes to see holding increase, get publicity, and attract new assets.  Having said this, these managers are not likely to sell into rallies.  Instead, new money in their funds gets invested at current prices in current holdings.

A hedge fund manager or trader is different.  Their disclosures warn that they may change opinions and trades in a heartbeat.  They can, and should, do so.  A five percent move in a stock is a major trading profit.

The Process

A portion of the hedge fund community takes a position.  For this example, it is a short in semiconductor stocks.  The position is supported with plenty of reasoning they deem to be rigorous and also by technical analysis.  It is especially desirable to find a situation where a sector has made a big run.  A chart of the SOX tells the story.

I haven't added any lines in this, and readers should ignore the last decline, since that is the end of the story.  The point is that analysts could have a field day with this chart -- before the decline.

Cocking the Hammer

Those establishing a bearish position wish to highlight major concerns.  In this case the "hammer" was the question of double booking of orders.  This occurs when inventories are so low that those building mother boards want to be assured of needed parts.  To do this, the theory holds, they place multiple orders for needed parts in short supply, canceling some orders when their needs are met.

It is an argument that raises a question about the validity of reported orders, and creates fear that the orders will decline.

Pulling the Trigger

One might think that actual evidence of order decline would be necessary to trigger the fear.  That assumption is incorrect.  It is easy to grasp any news as evidence that this prophecy has been fulfilled.

Yesterday the B of A/Merrill analyst downgraded the entire sector.  The resulting report, which I have read carefully, is based upon an inventory model and some assumptions about where we are in the cycle.  It does not specifically refer to any double booking, and the resulting forecasts are still above many other Street observers.  It was a big call, getting a lot of play, and knocking down the stocks by 5 percent or so, as the chart indicates.

Bearish observers incorrectly cited the double booking argument, not actually mentioned in the report.  It talks about a small "overshoot" in inventories, not mentioning any double booking.  It is based upon a theoretical model, without a lot of supporting evidence.  Since few actually read these reports, the inaccurate summaries gain credence.

The Result

Anyone with a short position can cover for a nice trade.  It was a nice setup.  Any downgrade could be cited as evidence.  When the analyst from a big firm downgrades, everyone pays respect, at least in the short term.  That is long enough for traders and hedge fund types.

The Facts

There is plenty of evidence contradicting the double-counting argument:

From iSupplyCorp we have the following:

In their earnings announcements, leading semiconductor suppliers, including Texas Instruments, STMicroelectronics and Intersil, all reported they saw no signs of double-booking during the third quarter, said Ciriello. “This should give the semiconductor industry confidence that the magnitude of the current recovery accurately reflects real demand levels.”

A balanced article at the WSJ mentions the double-booking issue:

Another analyst, FBR Capital's Craig Berger, also cited signs of weakening PC demand, though he said in a note, "We do not want to get overly bearish on the PC space given improving global demand and still-unknown holiday sell-through trends."

Berger said he remains "bullish" on the semiconductor sector. "We think fears of a first half of 2010 estimate cuts from double ordering are overblown, that global supply chain inventories are at or near all-time lows, that global demand trends will continue to recover in 2010." 

Astute tech stock observer Bob Faulkner writes as follows (see the full article for his nice inventory charts and complete analysis):

I've tracked inventory in the electronics-supply chain for years. While it’s too early in earnings season to draw any final conclusions, I think it’s very safe to say that inventory is quite tight on a relative basis.

Steve Ballmer reports that Microsoft sees "fantastic sales" for Windows 7.  If this is accurate, it should stimulate a new cycle of purchases.  More people and businesses replace computers -- especially those who avoided VISTA -- than upgrade existing machines.  The current hardware may not be adequate and is difficult to configure.

Our Take

The trading setup is a real dilemma for managers with a long-run horizon.  It was completely predictable that something -- anything -- would be seized upon as confirmation for the double-booking argument.  There was no need to wait for actual evidence.  Even knowing this, should the manager blow out all of his chip holdings, expecting a pull back of unknown size?

The real answer for those with a longer perspective is to focus on the actual time frame and ignore the bumps in the road.  The traders will make their profits, and eventually the results will tell the story.  It is an opportunity to add to positions for those who disagree with the thesis.

An Interesting Exercise

There was a similar setup -- hammer pulled back -- on car sales after the Cash for Clunkers expired.  Perhaps this is a good topic for an example where we now have more evidence -- an immediate decline, followed by a restoration in sales.

I invite other examples -- both long and short -- from readers.  Look for the setup -- what we all should watch for-- and then look for evidence.

Our position:  Long INTC, MSFT, and AAPL.

Specific Expertise: Insisting on the Best Information

Here at "A Dash" we have emphasized that we are all consumers.  We are consumers of data, of analysis, and of opinion.  Our principal mission is helping readers understand their role as consumers and figure out what sources and information to follow.

Background

Here are two widely-accepted findings to consider.  Both have strong support from empirical evidence on market returns.

1. Stock analyst ratings often lag, so the wise contrarian investor fades the consensus opinion.
2. Chasing performance is a major source of losses.  Those who "called the last move" are often the mean-reverting cases.  One needs to look at long-term performance.

These precepts are widely accepted in the investing community.  (I will add that both are part of my own approach to stock-picking, with a nice long-term return.)

Meredith Whitney

Yesterday afternoon CNBC indicated that Meredith Whitney would be featured on Maria Bartiromo's program.  Regular readers know that we are big fans of Maria.  We think that she asks the right questions and draws out interesting answers from high-profile guests.  Many market participants guessed at the nature of the interview and sold the market before and during her interview.

You can check out the key points of the Whitney interview here.

Our Take

Meredith Whitney, in her prior role as bank analyst with Oppenheimer, did one thing well --- very well.  She accurately predicted that banks would need to write down assets.  She accurately predicted that there would be no FAS 157 relief on mark-to-market accounting, so there would be a death spiral of bank value declines.  Those following her predictions made significant profits and/or avoided losses.

Since starting her own firm, Whitney has expanded her universe of predictions.  She is now making forecasts about the economy, the housing market, and consumer behavior.  (I regularly read her work via my helpful Oppenheimer rep when she worked there, but now I get the information along with everyone else).

It is quite fair to question Whitney's skill at economic forecasting.  Her success related to analyzing bank holdings, not forecasting the economy.  Personally, I prefer a different approach to economic forecasting, and so should you.

Her current bearishness is grounded in valuation -- financial stocks should return to tangible book value.  When asked what would make her bullish, she responded in valuation terms, giving the example of BAC at 3.  She does not believe that banks have sound core earnings, despite an attractive yield curve.

Others have commented on Whitney's bearishness, with varying conclusions.  Quite frankly, most of them use the wrong criterion.  They talk about how well she has predicted the market -- either last year, or this year, or both.  This is a very small universe for inference, dependent on a couple of key conclusions in each case.  The circumstance this year, including marking assets to market, are quite different from last year.  Whether or not one agrees with government policy, the various arms of our Federal government are all on a concerted mission.

A More General Conclusion

We are all bombarded each day with fresh opinions about our investments.  These are now taking the form of the CEO interview.  I modestly suggest the following guidelines:

• CEO's are great at discussing their current business;
• CEO's are sometimes helpful in discussing what is in their pipeline (analyze this skeptically and carefully);
• CEO's have no added advantage when offering opinions about the future of the economy, beyond what they see in their own business.  They are reading and analyzing the same news that we are.

Readers might enjoy revisiting our Ted Williams strike zone article --- emphasizing the importance of staying in your "happy zone."

[I am long GS in personal and client accounts and hold a small BAC position as well.  I am slightly long in trading accounts and remain fully invested in long-term accounts.]

Dollar Weakness and Stock Market Strength -- the Data

Anyone who is following the market on a daily basis is paying attention to the strength of the dollar versus other currencies.  It can be confusing.  While a strong dollar might seem like a good thing, there is actually an inverse market relationship with stocks -- at least in recent times.

I described the basics of the dollar debate here:  Understanding the Debate on the Dollar.  There are many opinions -- prescriptive, political, and descriptive.  The next step is to consider some data.

Dollar Strength and U.S. Equity Market Returns

In my last article I highlighted the inverse relationship between a strong dollar and the stock market.  This chart provides a dramatic illustration of the relationship for calendar 2009.

 
Sometimes a chart tells the story in a glance, but I always like to look at data as well.  I used the Fed's measure of the dollar versus a broad basket of currencies, weighted by trade.  The series started in 1995.

The correlation for this year is an almost perfect negative relationship:   -.96.

A negative relationship sometimes stands out even more if you invert one of the scales.  Here is that chart.

The data are the same, but the tight relationship is especially clear using the inverted scale.

So much for what we know.  An obvious question for investors in stocks is what would happen if the dollar gets stronger.  Perhaps we should look at more data.

A Longer Perspective

Some believe that a strong dollar is consistent with economic growth and a strong stock market.  To examine this concept, we need to consider more data.

If we look at the full data series, we see long periods where dollar strength was consistent with a rising stock market.  In fact, the correlation between the two series is a positive value:  .35.

For an objective analyst of data, the chart suggests three conclusions:

1. The relationship changes over time;
2. The last year is quite atypical;
3. There are other important variables at work.

The Carry Trade

The prevailing hypothesis about the dollar/stock relationship is the "carry trade."  Supposedly there are investors/companies/speculators who are able to borrow in dollars at a very low interest rate.  This makes the dollar the "funding currency."  Most outspoken on this subject is Nouriel Roubini, who sees disaster ahead.  [Full disclosure -- I am a contributor at Nouriel's valuable site.  I respect and appreciate his encouragement of alternative viewpoints.]

The borrowers do not then do the obvious -- lend in another currency, hedging the difference with a forex trade.  Instead they supposedly use the borrowed funds to engage in a variety of speculative trades -- emerging markets, real estate, and, of course, US stocks.

Following this logic, there is now a speculative bubble of major proportions.  This seems implausible.

My skepticism comes partly from the lack of any real data supporting this viewpoint, and partly from the daily trading.  If you really had this trade on, would you really take it off if the dollar moved by 0.4%?  The carry trade hypothesis does not explain the closely calibrated trade between the dollar and stocks, but we see this every day.

For now, let us stick to conclusions supported by data.  There is a strong inverse relationship.  If you are a trader, you had better pay attention.  If you are a long-term investor, you need to understand the long-term relationship.

Meanwhile, I invite reader comments, citations for new data, and fresh hypotheses.  I will pursue this for at least one more article, considering various causal models.

How I Pick Stocks

Valued commenter Mike C. asks for a change of pace from my regular topics and a focus on more specific stock picking.  He notes that I have said several times that there are plenty of opportunities.  So what are they?

This is a thoughtful question, so let me start down the path to a complete answer.  I cannot get there in one article, but this will be a start.

Mission and Audience

Anyone who is a regular reader knows that I have not catered to the existing Internet audience.  If you follow blog statistics, it is pretty obvious how you should get a big audience, and I do not do it!  Here is a list of things that I am doing wrong in a marketing campaign:

• I do not think the world is coming to an end;
• I do not  see the immediate application of Austrian economics (but I watch the debate carefully);
• I do not hate Obama (nor did I hate George Bush);
• I do not hate the Fed, nor do I see them as responsible for everything that has gone wrong;
• I do not see a conspiracy around every corner;
• I do not think that government is a unilateral force organized to lie to us, manipulating data.

Putting this into a positive statement, I think that government leaders, whatever their party, are attempting to avert a deeper recession and to create employment.  Presidents Bush and Obama both did their best, given the circumstances, the existing law, their teams, and their ideology.

The government is on a mission.  You may not like the policies, but as an investor, you fight it at your peril.

This is an unpopular viewpoint in the Internet audience.  This audience has had an undue influence on mainstream media, where writers are under pressure to get readers, comments, and page views.

It reminds me of the Truman versus Dewey polls, where newspapers all predicted the Dewey victory based upon their letters to the editor.  People need to realize that Internet blog ratings, Seeking Alpha popularity, and CNBC viewer polls, are all culled from a special audience.  If I were to take this seriously, I would quit writing!

My real audience consists of people who are not even following the Internet debates.  My ideal client is an expert in what she does in her work and is looking for an expert to help with her investments.  I use the feminine gender advisedly, since guys (including me) do not like to ask for directions.  People who want to read a few Internet articles, ask about last year's performance, and think they have a "feel for the market" are not my best potential clients.

Briefly put, I am writing a book for people who are not currently reading my blog, but who need help.  Having said this, I am delighted that some current readers find my material useful, and I value their comments and contributions.  I know from my email that many readers are other investment advisors who share the challenges I face.

Also, I write at night, after my day's work is done.  My list of blog agenda items grows more rapidly than I can work.  It is a labor of love, and one that I will never complete.

My Approach

The approach that I use is not a secret.  Anyone writing to me gets a nice description and a performance update.  I am not allowed to advertise this (so say my lawyers), but the excellent results are available upon request.  I talk to every potential investor.  If someone wants overall advice on asset allocation, I provide that.  If they want a good long-only approach as part of the portfolio, I screen them for risk tolerance and suitability.  That is part of being a Registered Investment Advisor.

With this "disclaimer" in mind, here is an overview of my stock-picking approach.

Find a Theme.  I look for themes where there is excessive skepticism.  I use my extensive background in economics (where I have real training, used to follow actual data and opinions), in politics (where I have built a sister site to track everything relevant), and in valuation (where I relate forward stock potential to alternative investments).  I use daily analysis of data to challenge and review these viewpoints.

My current themes include the following:

• Recognition that public policy initiatives, from all government sources, are focused upon economic growth and recession concerns.  You can worry about inflation and excessive government, but the concern is too early for practical investment purposes.  There is plenty of stimulus in the pipeline, and more is about to be enacted.
• Health care companies.  The uncertainty about the final shape of a bill, and whether something will be passed, have cast a pall over the entire sector.  It will not end badly for all of these stocks, despite the day-to-day market reaction.
• Growth stocks.  There are always growth opportunities, if one looks at data and trends.  I always have some growth in the portfolio.
• Energy stocks.  When economic growth was more promising, we were near a tipping point in energy prices.  There are many forces providing a bottom in these sectors, and the upside is significant.

There are other themes, but let us stick with those for the moment.  I am always adding or adjusting themes.

Find a stock.  I look for stocks with the themes in mind.  At the moment, here are some considerations I have in mind:

• International exposure.  Many US companies have a  balance between US and foreign sales.  They are less exposed to a weaker dollar, and may even benefit.
• Cost cutting.  Companies that have reduced costs are well-placed to enjoy a revenue rebound and extra earnings.
• Analyst disfavor.  I like stocks that are unloved by the analyst community.  Unlike others, I think that analysts do a reasonable job on earnings forecasts.  They are too slow in changing official ratings.  I often buy when the consensus ratings are low, and sell when they are high.
• Resistance to risk.  Some companies have a business model that can dodge the apparent pitfalls.
• Stocks that have lagged the market in the rebound from the pre-Lehman levels, a point that I am using as an initial target.

Specific Ideas

I have revealed and recommended some of our holdings in past articles, especially in my 2009 preview piece.  I still like Transocean Energy (RIG), Apple Computers, Inc.  (AAPL), ResMed (RMD), and Caterpillar, (CAT), for reasons that should be obvious from the above analysis --- energy, growth, health (with resistance to skepticism) and global economic growth.  I also own Intel (INTC) which I may not have mentioned before.

While the stocks have all rallied, they are all still buyable right now.  I own them for myself and for clients.

I take a fresh look each day.  Is this a stock that I want to own for the next month, next six months, or the next year?

I recently recommended Research in Motion (RIMM) as a good post-earnings candidate, when the stock sold off sharply.  The thesis is growth in the mobile Internet space, but I like holding it along with Apple to avoid changes in market share.

A Final Thought

I mention these stocks as examples.  Obviously, my actual analysis involves much more detail.  In a future article, I will take a single example and show how it fits the criteria.

Thanks again to Mike C. for the suggestion.  Tomorrow night I have a fine birthday celebration planned in Chicago for my wife and my son (birthdays two days apart).  That means no article tomorrow.  While I love to write about stocks, it is not something I can do every day.

Our Best Predictions: A Review

Last March, at the market bottom, we wrote a three-part series on why a bottom would not be recognized by most investors.

Investors would be misled on valuation.  The debate is playing out just as we forecast.

• David Rosenberg, the economist hero of the bears, continues to see the market as overvalued.  We have all been suckers.
• Eddy Elfenbein sees things as more balanced.

We predicted the wide disparity in methods, suggesting that backward-looking methods would fail.  The forward-looking methods continue to catch criticism. 

Investors would be misled on politics.  We suggested that the failure to deal with "troubled assets" would provide scope for criticism.  This was correct.

Investors would be misled on economics.  We accurately noted the consensus forecasts, much better than most thought at the time, and now proved to be accurate.

Our Current Take

Anyone who is a serious investor or trader should click through to read the old articles, but most will not.  Most people start with a viewpoint about market valuation, politics, and economics and stubbornly adhere to this viewpoint even when the evidence changes.

In the face of improving economic data, many focus on their political viewpoints rather than finding investments, a theme that we cover regularly.  It is an unfortunate fact that most people highlighting investment articles do not realize that this is an important theme.

In April, we described how this was a classic Wall of Worry.  This is also a good read, and one met with skepticism when we wrote it.

Many investors now worry that they have "missed the rally."  Here is something to consider.  The market is still 10% below the pre-Lehman levels.  This was a time when the market was expecting a recession, and some saw a deep one.

The situation is now different.  There is a massive stimulus effort, with more to come.  There are many problems, as we suggested.  It is no longer a question of  just "buying the market" but the story is not over.  There is still plenty of opportunity for those analyzing specific stocks and sectors.

Bringing the Country Together

If you had asked us last night what it would take to get some unanimity from the punditry on any subject, our guess would have been easy:  Some attack on the USA.

President George W. Bush had one of his finest hours in responding to the crisis and addressing Congress after 9/11.

To our surprise, there is an easier way to bring extreme political pundits together -- just award the Nobel Peace Prize to the President!

People cannot agree about missile defense, Iraq, Afghanistan, the economy, and certainly not about health care.  They can agree that they do not like the Obama leadership.  What a change in a few months.

Our Take

On the policy front, regular readers know that we are not surprised at the current criticism.  The problems were large and the Administration was not very fast out of the blocks.  The effort to work with Congress has yielded compromises criticized by all.  We have a particular disappointment -- the decision to pour more investments into banks instead of addressing "toxic assets" directly.

At least we realized that it was a tall order.

On the investment front, there is a naive reaction that has created a promising investment climate.  Those who disagree with the Administration policies, perhaps (like us) on solid grounds, have concluded that "it will all end badly."

Perhaps it will, but the time frame is far longer than that of any reasonable investor.  To pick two examples, we have been lamenting trade imbalances for over 40 years, and imported oil for nearly as long.

Biggest Investor Mistake

We are all entitled to our opinions.  We get to vote and to express our thoughts without fear of reprisal.

Having said this, do you want to get a return on your investments, or do you just want to sound off?

If you are interested in a financial return adopt the following rule:

Do not think about what you believe should happen; instead focus on what will happen.

Most of the buzz is about the former, since everyone can have an equal opinion.  It requires no knowledge beyond regular human experience.  This is why sex scandals are so popular.

Figuring out what will happen requires both knowledge and methods--actual expertise.  The average investor is not interested, mostly because it requires too much work.

The Nobel award has no more to do with investing than did the Olympics decision.  It is better to focus on the corporate earnings season.

Identifying Quackery (and Other Mistakes)

At "A Dash" one of our principal missions is identifying the best sources of information on a given topic.  This is a major source of value, if done accurately.  In the investment blogosphere, however, the ratings mostly reflect the predispositions of the reading public.

The Path to Success in Blogging

It is easy to figure out what works.  One needs only to look at the top-ranked blogs and those most followed on Seeking Alpha.  There is an aggressive cult following (a subject for another day) for specific perspectives on the economy, the role of government, the existence of conspiracies, and the stock market.  If one's objective is high ratings, this is a blueprint for a strong business model.

The Path to Success in Investing

One of our missions is how to profit from this.  It means reading many perspectives and evaluating arguments and data.  As part of our work (eventually a book) we are analyzing various sources, with an emphasis on factual accuracy, freedom from bias, professionalism, and analytical skill.

Do not start with what you believe.  Start with data.

A Case in Point

We offer the interpretation of various polls as a case in point.  This is partly based upon expertise in developing, conducting, and interpreting poll data.  We have done all of these, and most others have not.  Let us consider some experts in action.

Our first expert is Karl Smith, of the University of North Carolina at Chapel Hill, now added to our list of featured blogs.  He has really stepped up his role in blogging, taking an expert public policy perspective on many issues.  He deserves to be widely read.

Smith takes a current poll and does a careful analysis.  The poll purports to show some terrible answers to some obvious questions.  For example, What is the Supreme Law of the Land?  According to the poll, only 28% of Oklahoma students identified the Constitution and some offered up the Monroe Doctrine.

This might be a true result, in a multiple choice test with attractive alternatives.  We once saw a similar survey of undergrads where most thought that the Electoral College was a small liberal arts school in Minnesota!

But Smith delves deeper into the data, which purported to permit free-form answers.  Look at his which is very strong, but here is an example:

Think about this from a student’s perspective. The first question uses the phrase “Supreme Law.” This means that answer has to be something important. The natural thing to do is to answer the most important thing you can think of. From free response I would not be surprised to get answers like “the bible”, “democracy” or “freedom”.  The student might also simply free associate with things that are like Supreme or like Law. Hence, I would not be surprised to get answers like “Federal government”, “Supreme Court”, “Congress” or even “Roe vs. Wade.”

Since none of these answers were given, but Monroe doctrine was. I find this hard to believe unless the poll was multiple choice and the six answers were the only answers a student could give.

He has accurately identified a false note in the poll.

For our second expert we also take note of the fine work from Nate Silver at fivethrityeight.com, now also added to our list of featured sources.  We have occasionally been accused of credentialism in identifying sources, mostly by those thinking that having a PhD in economics is worthless.  Silver is a fine contrary example.  He developed strong expertise in analyzing baseball statistics.  Anyone with statistical expertise can find many applications.  He has done so in election polling and political analysis, useful to anyone analyzing public policy.  We watch his work carefully.

His take on the dubious polling data is summarized as follows:

For me, some of these results don't pass the smell test. I agree that public schooling in the United States needs to be improved, particularly in the areas of government and citizenship. But only 23 percent of high school students in Oklahoma knew that George Washington was the first President? Really? I have difficulty accepting that claim at face value. In 2008, 68 percent of Oklahoma fifth graders passed the Oklahoma Core Curriculum Social Studies Test. You can read some of the questions on that test beginning on page 50 of this PDF; they're generally quite a bit more difficult than the ones that Strategic Vision asks. (For instance, "Which was the most profitable export of the Jamestown settlement?" and "Which group would most likely agree with ideas presented in Common Sense?"). So either those smart fifth graders were really forgetful by the time they got to high school, or there's something very wrong with this poll.

Investment Implications

There is a special skill involved in interpreting data.  Surveys are the source of much of the information that investors and traders try to interpret.  Few are really expert in how the polls are conducted, the statistical significance of results (often not reported by the source), and the reasons and basis for revisions.

It is foolish to identify the source of the poll, and then dismiss the result if one does not like it.

Our example does not have immediate investment implications, and that is intentional.  It is much easier to step away from the economic polling data, looking instead at an obvious error as a case in point.

Then come back to the news of the day.  CNBC featured today a poll with a response rate of 25% of the CFO's attending a convention.  Most of them thought we were "still in a recession."  While we are interested in CFO opinion about current corporate plans, none of them are experts at recession dating.  Mostly they are saying that the economy is still well below trend, something we already know.

There is much more to analyzing polling data than looking at a snapshot of current opinion.  Longitudinal analysis is a starting point, something that most of us do when looking at survey series like the ISM data.

Politicizing the Olympic Decision

Those of us who live in the Chicago area have paid special attention to the Olympic decision.  There are a number of theories about what happened.  There was an especially strong analysis from Dick Ebersol, NBC sports & Olympic Chairman.

Watch the video to confirm, but his key point is that the IOC has a European focus and is unhappy with the financial relationships with the USOC.  There are issues about how much of revenues come off the top, and what other countries get.  Ebersol suggests that without some changes in these fundamentals, also affecting the last bid from New York, it will be many years before we see an Olympics in the US.

His message is that this is an uphill battle -- 18 votes for the US this time, and 19 for NY the last time.  It is a problem -- and one not related to partisan politics.

The Kudlow Spin

Regular readers of "A Dash" know that we view the Kudlow show as a useful source of debate about the economy and the market.  They also know that we are disturbed by the increased injection of partisan politics, often extending to his assignments as a CNBC anchor, perhaps somewhat better since he is no longer a rumored candidate for office.

In tonight's program Kudlow portrayed the President's decision to go to Copenhagen as a big mistake, undermining US credibility.

What if the President not made the trip?  Kudlow might well have blamed the outcome on his failure to participate.  It has become routine for national leaders to make a pitch, but Obama had to trade this off with the health program debate.  Those present at the US presentation uniformly report that the involvement of the President and the First Lady were the best parts.  No one knows what would have happened if Obama had not made the trip, but the critics would have been loud.

Investment Implications?

We understand that Kudlow is competing for ratings, and working in a very conservative time-slot demographic where many are eager to criticize the President.

Briefly put, there are no investment implications from this event.  This piling on by Kudlow and his selected guests is more about partisan politics than the investment purpose of his popular program.

Our own viewpoint is that we should be focused on investments, agnostic about politics, and trying to find the best opportunities.  Our objective is to make great returns regardless of which party is in power.  We seek information that helps in this quest.  Overtly partisan messages do not fit.

Investor Opportunity: When to Look

At any point in time there is a popular thesis, widely shared by those who hold the marginal trading dollar.  For many months, that thesis seemed to recognize that the market had become excessively pessimistic.  Negative news could be shrugged off.

The prevailing thesis can change very quickly.  The daily mantra  now seems to focus on the ending of certain government programs.

• Cash for clunkers.  Sales went up and now have not sustained the gains.  There is an inclination to attribute the entire auto rebound to this program.  In fact, the idea was to stimulate the industry and attract interest.  The jury is out on the continuing effect, but it should not be dismissed out of hand.
• Home buyers' credit.  Once again, the programs have stimulated activity and firmed up pricing.  This is a good starting point for improvement.  Since the program is set to expire, some predict a relapse in home prices.  No one really knows whether that will happen, or whether Congress will extend the program.
• Stimulus spending.  People have strong opinions about the stimulus bill, but most seem to forget that the spending was spread out over three years, just to avoid the appearance of a sudden cutoff.

Whether one agrees or not, the investing and trading backdrop has changed.  For those who see it as an opportunity (like us) it is time to go shopping.  In our next installment on this theme we will discuss how and where to find ideas.  As we noted in an article last week, we were looking to buy RIMM on the decline after the earnings announcement.  We were buying yesterday and today for recent client accounts.  There are many other fine opportunities, if you have done your homework and have a price target in mind.

Time of Opportunity?

Since one of our missions is to find the best sources on any topic, here is a survey of opinion we find quite interesting.

• Abnormal Returns points out that "Sell in September" did not work, citing several sources including their own work.  Our own article on this topic got some nice circulation in Advisor Perspectives.  Tadas repeats his September conclusion:  Ignore the calendar.
• Barry Ritholtz had a nice appearance on the Kudlow show after a long absence.  He adds a nice perspective.  Tonight he clarified his market position, which grew increasingly bullish beginning in February and is now up to 75% long.  While he thinks the rally has more room to run, he is doing some end-of-quarter hedging.  This is a very balanced perspective from a someone noted as a skeptic on the economy and the market.
• RevShark at RealMoney [subscription required] attributed today's selling to a shift in the Goldman forecast of job losses from 200K to 250K.  We do not question his analysis, but we wonder what people are thinking.  This series, as we have frequently noted, has an error band of over 100K jobs  -- and that is just the sampling error.  (We did not publish our own regular forecast, since it depends upon the ISM report, announced today, and we write in the evening.  Perhaps we can figure out a method for doing an update in situations like today, when the ISM leads the employment report by a single day.)

Our Take

The economic news, as we have frequently noted, is not going to show a straight-line march upward.  This is especially true of employment.  For reasons noted by many, some corporations will be slow to re-hire, or to hire new workers.  Note well:  There is plenty of hiring going on, but it does not match the new job losses reflected in the initial claims series.  We expect continuing increases in the unemployment rate until job growth catches up.

We reject comparisons to a Great Depression situation, as we noted in yesterday's article.  Here is a follow-up to that piece, taken from an authoritative source, The Liscio Report (frequently cited by perma-bear Alan Abelson).  In a nice analysis from January, they looked at the Great Depression and current unemployment rates.  They debunked those who saw unemployment as at Great Depression levels, noting that there was no measure of unemployment at that time.  Any data series must try to reconstruct data from that time and patch the series together.  Like us, they see the BLS as doing a good job in providing unbiased information for this analysis.  Read the entire article, but here is the key chart, carefully merging data series.

Investment Take

As we enter the new earnings season, where we have seen relatively few negative pre-announcements, we expect continuing skepticism.  Since we regard employment as a lagging indicator, it is still a time of opportunity.  Investors should note that consumer spending has remained fairly strong, to the surprise of many.  The tipping point may come when corporate executives start to see more opportunity.  It remains a matter of psychology.

We plan to discuss further some specific stocks for investors to consider.