A Dash of Insight

Has the Market Already Made the High for the Year?

Market followers love to make timing predictions.  They come in all time frames and flavors:

• The market has made the high for the day, and will now trade down.  Or the opposite.
• This is the bottom.  Or the top.
• We have seen the highs (or lows) for the year.
• Or when the Dow was at 9500, would we see 10000 before 9000?

Bold Predictions

Doug Kass, on August 26th, called the high.  He was off by a few weeks and a few percentage points, but he has continued to argue for this viewpoint in columns at TheStreet.com and in appearances on CNBC.

His colleague Jim Cramer has now agreed, and recommends reducing portfolios.

James Altucher sees explosive potential, after reviewing a list of inaccurate bearish predictions, writes as follows:

The economy is recovering nicely, says Altucher, and 2010 is going to be a huge year.  Companies that stopped making things and fired thousands of employees last winter out of fear of a second Great Depression will restock their shelves and start hiring like mad. The federal stimulus, which has barely kicked in yet, will really get cranking. Consumers will find jobs much easier to get, and the resulting optimism (and income) will prompt them to start spending again.

And the market?

It's going to the moon, says Altucher.

Ken Fisher is looking for a 20-25% gain "by January" which is not quite the end of the year.  Fisher earns one of the highest ratings from CXO Advisory, one of our featured sites.

Less Bold Predictions

Barry Ritholtz on October 27th predicted a possible 5% to 15% correction, after leaning bullish for much of the year.

Our own official predictions, recorded weekly, were correctly bullish through September, but shifted to neutral two weeks ago.  We use a three-week time horizon for this forecast.

What Does it All Mean?

It all depends upon one's time frame.  Are you trying to trade the market intra-day?  Are you using a one-month time horizon?  Do you have the long run in mind?

Each investor is different -- different in risk tolerance, time to retirement, time to a need for college funds, mix of asset allocation.  It is not all about market timing.

In my conversations I find that most investors are missing the big picture.  Peter Lynch (with the Dow at 4000 or so) famously noted that he could not predict the next 1000 point move, but he was confident of the next 10,000 points.

I agree, and here is the main problem:

Most investors are still responding to fear.

The current fear dates from last year, causing most to miss the market rebound.  Now many feel that they have "missed the move" and what they read reinforces the fear.

Here are some thoughts that I am sharing with my own clients:

• My initial target for this year was the pre-Lehman level from last fall.  We have not yet reached this target, but we will.  We have averted the Great Depression that the market was forecasting at that time.
• There are many attractive stocks.  I am selling some holdings only because there are others that offer even better chances.  Try to focus on specific company chances instead of general market commentary.
• The analysis of economic prospects is polluted by political punditry.  Many commentators have a vested interest in a certain political outcome.  Others are trying to sell books or high commission products.  It is a minefield for the general and inexperienced reader.
• Economic data continues to improve, despite a well-orchestrated chorus of critics.
• The stimulus efforts have worked, and there is plenty more in the pipeline.  Most of the pop economists have the viewpoint that the stimulus will stop and the economy will fail.

Reactions on the Economy

Stimulus efforts may jump start a real move.  Check out today's auto sales data, after the cash for clunkers initiative, and you will see a real improvement -- small, but a start, not a bubble.

1. Most of the stimulus funds are still in the pipeline.
2. The Obama Administration is committed to keeping this going until it works, including things like the incentives for home buyers.
3. The major complaints -- deficit spending -- are in a different time frame.
4. Watch Warren Buffett, who made the deal of his lifetime buying a railroad today.

It is a time to separate one's political viewpoint from one's investment viewpoint.  Those who are fighting the Fed, fighting Obama, and fighting Congress are spitting into the wind.

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.

And That's the Way it Was

This weekend everyone is hearing a lot about a giant of journalism, Walter Cronkite.  For a generation of Americans, we could not imagine that a space launch could succeed without Walter helping it along.  We were all crying with him on the day of the Kennedy Assassination.  We loved him even more because he was human.

His career spanned a turning point in journalism.  His approach was to provide factual coverage, reflecting every viewpoint.  This extended to an interview with Mayor Daley at the scene of the Democratic Convention in Chicago in 1968, an event that independent parties later determined to be a "police riot."  Cronkite reported the story, and then offered a platform to Mayor Daley.  They shook hands, because it was possible to have differing viewpoints and still have mutual respect, or "be friends" as they called it.

There was a tipping point during the Vietnam War.  As the war progressed, the overall sentiment in the country shifted.  Walter Cronkite saw all of the data and all of the news.  He was better informed than anyone, since he had to take complex stories and turn the result into something that the average viewer could understand in a few minutes.

When Cronkite came out against the war, it was a sharp break from his past approach and a change in the practice of journalism.  Here is a good summary:

After the Tet offensive of 1968, it was Cronkite who dropped his trusty mask of objectivity, risking everything with one line: “It is increasingly clear that the only rational way out will be to negotiate not as victors but as an honorable people who lived up to the pledge to defend democracy.”  This brisk summing-up of disaster prompted President Lyndon Johnson to despair with perfect accuracy, “If I’ve lost Cronkite, I’ve lost Middle America.”

A few years later, he took a similar approach on Watergate, raising the issue in the consciousness of the people.  It spelled the end of the Nixon Administration.

Here is the key.  This was not a man starting with an opinion.  It was someone watching the drumbeat of facts on an issue of national importance.

Cronkite was the most trusted man in America because people accepted his objectivity.  He was like them -- examining the facts, but better informed.

And Now.....?

There no longer seems to be a market for objective, non-partisan analysts.  Those invited on TV are encouraged to have a controversial viewpoint.  That is what the viewers want -- at least the remaining few who are still watching.  The TV hosts and anchors often have a viewpoint, aggressively stated.  They have an audience with an appetite for their position.

The Internet and the blogosphere have democratized commentary.  Nearly everyone participating in this free-for-all thinks it is great.  Few weep for the demise of the newspaper.  The traditional media sources are all imitating the blogs:  fast reaction, instant analysis, emphasis on conflict.

There has been a major shift from what is factual and important to what is popular and will garner a big audience.

We are all the losers as a result.  We miss you Uncle Walter....

Timing the Trade in "Obama Stocks"

The insatiable hunger for stories motivates financial media.  At the first hint of a new development the process begins -- hard news, analysis, critics, and long-term effects.  The cycle is so fast that we sometimes get the criticism before most have digested the original news.

This is the nature of a highly competitive news environment where everyone wants to get a scoop.  It is completely understandable both for mainstream media and for bloggers who all want to weigh in on the story of the day.

Is this a useful time frame for market participants?

For traders, the answer might be "yes."  There will be opinions and reactions.  Anyone who can "game" the market reaction may make a point or two in trading profits.

For investors, we believe the answer is "no."  The initial, knee-jerk reaction may have nothing to do with the actual investment potential.  Let us consider a current example.

The Obama Health Care Trade

Understanding public policy can provide a real advantage in predicting policy outcomes.  Since that is the starting point, let us review what we expected about Obama and health policy.

1. We understood the difference between campaign issues and actual policy.  There are many steps and many compromises.
2. We noted the early reluctance of Congressional Democrats to get on board with Obama health initiatives.
3. We have been skeptical about the ability to put together the coalition necessary for a "big" health policy bill.
4. There is growing attention to future budget deficits.

These conclusions would not be surprising for anyone who has studied Congress and health policy.  In our case, we have done it  since the days of Wilbur Mills, but analysts with less experience might easily reach the same conclusion.

Contrasting the Media Time Frame

Media needs relate to the story of the day.  If President Obama is giving a speech on health policy in Green Bay, Wisconsin (a wonderful town!) then that is the media story of the day.  The Fast Money gang brings on their go-to guy, Dan Clifton, and asks what stocks will be affected by the Obama plan.  Clifton, whom we respect and cite frequently on our sister site Election Stocks, gave exactly the answer we would have given -- as the question was posed.    He was invited to comment, and he answered the questions from the gang.

The problem is the context.  We would have emphasized that many of these changes were unlikely.  In particular, the health insurance companies will do well if the final plan generates more customers, a result we see as likely.  Briefly put, anyone following the media take would have been an instant loser.  The insurance stocks rallied ten percent as news of opposition emerged.  Anyone looking at the actual politics can see the potential for these companies.  (We are analyzing and shopping for our clients.  There is plenty of potential.)

Conclusion

The health policy issues are one of many initiatives where investors can score some big gains.  It is a complex political situation, and it will change during the summer.  There is no official Obama plan.  It is not easy to follow, and that is the source of the opportunity.

Cost control seems to be a part of any proposal, and that weighs on existing pharma, new products.  and aspiring pharma (biotech).

This is a minefield for the media and for casual observers.  It is an opportunity for anyone following the nuances of the politics, picking the right time to get involved.

Obviously, this story has many more twists and turns.  Finding the right time to play is crucial.  The major media time frame is quite wrong, and provides an opportunity for long-term investors.

There are numerous other policy issues, all of which we are tracking closely.

How to Profit from the Obama Stocks

Understanding public policy decisions is crucial to investment success.

This has never been more true.  Government intervention is changing the nature of every business.  As an investor, you need to figure out what is going to happen, and whether it affects the companies in which you own stock.

Over the last several days we have emphasized how easy it is to make mistakes in the minefield of politics.

• You can misunderstand the difference between politically controlled agencies and the civil service.  We will explain how to tell the difference.
• You can confuse your role as citizen with your desire to make money as an investor.
• You can ignore good sources of information, just because you disagree with their politics.

We have some more mistakes to highlight in this series, but there is a positive side.  We strongly encourage readers wanting to follow this approach to review the links above.

We are going to show how to figure out where to get information, and how to use it.  Part of our success in client portfolios relates to a disciplined approach to public policy analysis:

We want to succeed no matter who is in power.  We put personal opinions aside.  We analyze the likely results, and figure out which stocks will gain.

It sounds simple, but hardly anyone can resist the temptation to confuse opinion with analysis.  Most of the current pundits are offering opinions about politics at the very time that stimulus dollars are starting to hit.  This is good for their ratings, but bad for your portfolio.

They jumped the gun months ago picking "Obama stocks" on his inauguration.  The earnings effects have yet to show.  Meanwhile, companies have gotten lean and mean.  Many are showing reasonable earnings even in a time of economic distress.  Let us find these winning stocks.

As background, here is a recent article we wrote for TheStreet.com's RealMoney site.  It is a bit  introspective, but regular readers of "A Dash" may find it useful.

From RealMoney.com, 4/30/2009

When I started writing for RealMoney, I had an idea: I wanted to study how the nexus of politics, public policy and specific stocks could provide a big edge to readers. Almost two years ago, I launched a Web site, ElectionStocks.com, and hired some staff support. Since I watch political news and the markets for most of the day, I feed ideas to the team; I also write some pieces and review the work.  We started by covering about 20 candidates from both parties. We identified issues and stocks for each of them. As the field narrowed, we focused on stocks that could work regardless of who was elected. I was looking for names I could suggest as good stocks with great potential political drivers.

The Best Advice?

Sometimes the best advice is a warning against any particular action. We had no precedent for an election and transition in the middle of an economic crisis. Many analysts and researchers were going on TV with their "Obama stocks" at the time of the election, at the start of the year and on the day of the Inauguration -- the election cycle offered three chances for publicity.

The cold reality? This time was really different. Even when the election results were certain, no one could know which of the Obama proposals would survive in the Senate, nor how quickly they would be passed. More important, a single issue dominated all others: dealing with the "toxic" assets. The new administration did not seem to understand that this was the keystone for all problems. The first approach to the problem of price discovery was Treasury Secretary Tim Geithner's maiden voyage ... and a stock market disaster.

The biggest Obama mistake has been the failure to deal with this problem; no one on the team appreciated the significance. The result? We are getting the announcement about the particulars of the Public-Private Investment Program on May 15, more than six months after the election; Hank Paulson went to Congress in September. This will go down in history as one of the worst responses to a financial crisis, partly caused by the transition in administrations.

Simply put, this was not a time to buy stocks because of the winning candidate's positions. Those who did so had big losses, because the general economic questions overwhelmed any specific stock ideas.

I've been watching elections for 40 years and studying how the election cycle affects stocks for more than 20 years -- I taught political science and public policy for 13 years before entering the investment business in 1987. I also devoted particular focus to this cycle -- I'm confident that I'm among the most qualified analysts on the subject -- and still I refrained from pushing the investment ideas our team developed.

It was not right, and I knew it.

How to Make Money

Part of investment success is avoiding losses. I hope that readers of my commentary on Obama policies have shared my caution. When the stimulus package was passed, we identified some stocks that would benefit. As is often the case, the problem was the time lag. While the market attempts to look ahead, there are very few experts on government spending. It is very complicated. I follow everything said about Obama and stocks and filter the prospects through almost 40 years of training and experience. Here is my general conclusion:

• Initiating new policies is more difficult than you think -- much more difficult. Be skeptical.
• I always look for the "default policy" -- what will happen if nothing changes in the law.

Now Is the Time

It may seem silly to some, but now -- 100 days into the administration -- is the correct time to start thinking about Obama stocks. Here's my reasoning:

• The stimulus package was widely dismissed by market pundit, mostly because it did not do what they preferred. The actual spending is starting to hit, and will show up in corporate earnings.
• The budget process is prolonged. The Street hated the proposals as "too liberal." We are now about to learn -- for the first time -- what will really get passed. It is time to pay attention.
• We are getting policy details. People do not realize how long it takes to make a transition. The new secretary of Health and Human Services was approved just yesterday; how could we project health policy before this? The Specter party switch also affects prospects, especially for every health stock.

Unless you are monitoring factors like these, you are out of step with reality.

What to Buy

Over the next few weeks I plan to highlight several different groups of stocks, each of which may benefit from Obama policies. I will downplay those where I think congressional prospects are poor and emphasize those where prospects are good.

Meanwhile, my team has constructed a stimulus package portfolio. We have carefully monitored opinions from a wide range of experts featured on financial media. (RealMoney's own James Altucher's ideas are prominent in the portfolio.) The portfolio has had a positive result, but the results are nothing special so far. That's good -- most people bought the Obama stocks too early, got discouraged, and bailed out. This relative loneliness in the space provides a good opportunity.

Here is a preview of our coming articles:

• Health care: Information technology stocks will definitely do well. Other health stocks depend upon the yet-unknown details of the plans. Look at Athenahealth (ATHN) 
• Alternative energy: We like First Solar (FSLR) , and it is part of the portfolio. A number of other good choices (courtesy of James A.) are also included. 
• Infrastructure: There are several choices in this space -- check out KBR (KBR) . 
• Defense stocks: This is a surprise to many who see Obama as cutting defense, but cutting the costs for Iraq may not translate into lower returns for specific contractors. We see good prospects for many defense holdings. Jim Cramer also is noting this strength on earnings calls.

It is hard to believe. I would not have predicted it in advance. The best time to buy the Obama stocks is after the first 100 days. Stay tuned for more specific picks and how you can use Obama's policies as you craft your portfolio.

Why There is No Bottom: Politics

Here at "A Dash" we have argued that resolving the problem of troubled assets, called "toxic" by most and "legacy assets" by Geithner, was Job One for the Obama Administration.  We understand that a new President has many jobs, including in this case, the stimulus package, dealing with auto companies, a housing program, proposing a budget, and presenting to a joint session of Congress.  This agenda is dictated for a new President--dictated by circumstances, tradition, and the budget process.  It is not really a matter of choice.  The market does not distinguish between the broad agenda, which may or may not happen, and immediate plans -- those completely under the control of the Obama Administration.  Market participants are woefully ignorant about the norms of politics.  As a result they misinterpret many routine actions.

Unfortunately, a normal transition does not fit the current times.  Compared against other transitions, this one has been fast.  Given the crisis circumstances, it is still too slow.  It will be a great dissertation topic for doctoral students in public policy and political science.

Our take is that Geithner came in with an idea about troubled assets, got involved in his own confirmation issues, could not staff up quickly enough, and is still working on the details of a plan.  We like what we have seen so far, but the market will be very skeptical given the mis-steps and the delay.  We still await the details.

The failure to deliver on the most important issue has opened the door to criticism.  As the stock market declines, it is viewed as a referendum on the economy.  The average person interprets the stock decline as strong evidence about the economy.  It is a negative feedback loop.

Persuasive Presentation

While we are not regular viewers of Jon Stewart's The Daily Show, perhaps we should be.  (Thanks to a helpful reader for alerting us!)  It would be nice to have a great audience and a staff that could dish up some exciting video clips.  We also lack the wit and skill of Stewart.  Let us compare his take and ours.

The Santelli Tea Party

In our pondering professorial style, we suggested that Rick Santelli was playing to an atypical audience.

Jon Stewart, who invited Santelli to the show, made the same points.  We especially like the cheers from his audience, in contrast to the cheers for Santelli from our friends at the Merc.  Some of the comparisons and clips are unfair and out of context, but the concept captures the idea.

The Stock Market as a Tracking Poll

We characterized the market as a demanding, self-centered girlfriend.  Jon Stewart shows the ticker in the background in every Obama appearance, and even suggests that it be super-imposed upon his forehead!

Multiple Bailouts

We have suggested that it is past time to deal with troubled assets once -- and move on.  Jon Stewart, interviewing Joe Nocera of the New York TImes, does a funnier and better job using the AIG example.

Conclusion

We hope readers will watch the segments cited, or watch the entire show.  We enjoyed it, and so will you.

So what is the investment take?  This is Part 2 of our projected four-part series on why we cannot find a stock market bottom.  Each segment provides a clue about what might change, and how we might find a catalyst.  (Valuation and Technical Analysis on the agenda.)

For now, the failure of the Obama team to deal with troubled assets at banks has opened the door for criticism from all sides.  This failure has extended the attack on financial stocks and the overall market.  This allows critics to suggest all sorts of alternative causal models that do not really fit.

Like all investment managers, we continue to watch for more details on the Geithner plan.  When we get it, and when it is understood, it will be a winning trade and investment.

Did President Obama's Speech Cause the Market Decline?

Two things happened at the same time:  President Obama delivered his inaugural address and the stock market declined.

Two things happened at the same time:  The rooster crowed and the sun rose in the East.

This is an enduring logical fallacy.  It endures because of the insatiable human appetite to  impute causality, even when data are lacking.

The Worst of CNBC

Here at "A Dash" we have often endorsed the end-of-day CNBC show hosted by Larry Kudlow.  It generally has a diverse group of guests, and Kudlow acts as the point guard on an NBA team, dishing the ball for effectiveness.

We are therefore disappointed at the shallow analysis of today's trading.  The stock market was weak from the outset because of another around of concerns related to banks, and more pounding by bank analysts.  The decline seemed to be "on hold" during the inauguration, but resumed in late trading.

Larry Kudlow was disappointed that President Obama did not reaffirm his commitment to markets and tax cuts, the Kudlow theme.  His guests agreed that the market had rendered a verdict.  Here is the video, with the key discussion at about 1:15.

Too bad that Kudlow did not make these expectations clear in advance.  Any expert in political science would know that an inaugural address is not going to take on specific policy matters like a State of the Union speech might have.

The point of the speech is to inspire, draw people together, and look ahead.  The Obama speech did all of these things.  We doubt that stock trading had much to do with it.  If it did, it was because of the lack of knowledge of the market pundits.  Sophisticated observers should have known what to expect.

The Obama plan will emerge in good time, and much more rapidly than is the typical case.  If big shots like Kudlow do not understand, that is a better chance for the average investor.

The Best of CNBC

The Maria Bartiromo program's interviews once again reflected the best of CNBC.  She asked some challenging and deft questions to her guests.  In her interview with Richard DeKaser, the award-winning economic forecaster from National City Corp., her expert guest did the two things that we all should emulate:

1. He looked at current data, and noted the grim prospects;
2. He looked ahead to the massive government programs in the pipeline.

Regular readers of "A Dash" will note the familiarity of this theme, described at about 40 seconds into the video.  Please watch it all, to see the best CNBC moment out of a long day.  The interview is remarkable both because of the very sensible conclusion -- that forecasters are not, and cannot include the impact of policies in the pipeline -- but also because he was courageous enough to do take his principled position on a day when the market declined.

Our Take

Once again, the Wall Street pundits and journalists are a bit full of themselves.  This was not a day about the stock market.  Choosing a President involves issues of war and peace, social justice, Supreme Court nominees (and other judges), dealing with crises, allocating resources.  Most importantly it means exercising leadership.

This does not mean following the dictates of any particular interest group.  It means analyzing problems to discover solutions -- answers that will work, and will be acceptable to the people.

President Obama was elected because an overwhelming majority of people believe that he can do this.  The punditry makes money -- from page views, subscription sales, TV ratings -- by selling fear.

Shouldn't we all give the new guy a chance?  At least for a few weeks?

The TARP Debate

We plan to cover this more extensively, since it is at the forefront of market concerns.  To get started, here is a summary of the situation.

Monday's Bernanke speech at the London School of Economics raised the  key  point-- the need to address troubled assets at banks, the original TARP concept. We are all getting an object lesson in what happens when valuation of financial assets becomes nearly impossible.  Despite evidence to the contrary, including the initial Bear Stearns assets, media coverage labels anything related to mortgage holdings as toxic waste and nearly worthless.

There is universal criticism of TARP since the banks "are not lending." Their required regulatory capital continues to be at risk whenever some other institution sells an asset. Until we address this problem, existing bank assets will disappear faster than we can thrown new TARP money at the problem.

Many vocal observers, including Meredith Whitney, insist that banks should disgorge these assets for whatever price they can get.  Rick Santelli, gaining stature at CNBC, endorses writing assets down and adding capital, whatever the cost.  Santelli is a champion of traders, so his viewpoint reflects most of those driving the market.

Is there an Alternative Solution?

The political pressure is to do something for Main St., since TARP One was for Wall St. Political compromises address root causes only by accident. It is not an analytical process. Bernanke is trying to refocus attention on the causal relationship between troubled assets and future lending. It is exactly what I wrote my own open letter to the President-elect the day after the election. Two months later, the need is becoming more obvious.

There are three good alternatives.  Investors should watch for some sign that any of the three is getting traction.

1. Suspend mark-to-market accounting, at least through the crisis.  Information about individual companies could be revelaed in SEC filings without forcing changes to regulatory capital.  This approach was rejected by the Bush SEC, but is likely to be raised in confirmation hearings for the Obama appointees.

2. Use TARP II for price discovery.  That is the message of our letter to Obama.  We beat Bernanke to the punch by two months.  Many rejected the idea in favor of public investment in banks.  How is that working out?

3. Adopt a good bank/bad bank approach.  This would put the troubled assets into one account, with government involvement.  It would permit resumption of normal bank lending.

Conclusion

This problem will not be solved until policy makers start to address causes rather than effects.

We are moving to a model where we make public investments in private companies, creating tension between the profit motive and regulatory oversight.  We are  engaged in instructing companies about salaries, bonuses, private planes, and mergers.  This is not a good task for Congressional oversight, since committees are not good managers.  Who knows best what it takes to get good managerial talent and to use it effectively?

Government aids private business best when it creates financial incentives, solves financial problems, and allows managers to manage.  Consider the examples of Fannie, Freddie, Amtrak, and the Postal Service.

Here at "A Dash' we emphasize investment knowledge rather than policy prescription.  Sometimes the two themes are congruent.

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.

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.