A Dash of Insight

Confidence, the Economy, and the Fed Balance Sheet

Poll reports show that President Obama's confidence ratings are falling.  This should not be a surprise, given the record positive levels at the time of the Inauguration.  Current polls show continued popularity for the man, but increasing skepticism about his policies.

For the economy and for investors, there are some specific issues that will play out over the summer.  We set these up in our "Summer Quiz."  Those who have good information and market savvy will score well on the quiz, and also profit in the markets.  We believe that this summer is a key time for investors.  As we reveal the answers, the significance will become crystal clear.

We will continue to reveal the answers and announce our prize winner at the conclusion of the article series.

Background

Economic growth is strongly related to confidence.  When CEO's get worried, as they did after the demise of Lehman last fall, they cut costs first and ask questions later.  Economic confidence is closely tied to employment, a topic we follow closely at "A Dash."  Employment indicators often lag actual economic progress when employers are quick to fire and slow to hire.

We do not all share a common interest.  It would be nice to think that all hope for an economic recovery, but that perspective is mistaken.  Here are some obvious exceptions.

Political Opponents

Perhaps in a perfect world there would be a few years in a political cycle where everyone in the country all pulled together.  It occasionally happens when there is a specific and imminent common enemy -- after 9-11 for example.  Most of the time private motives dominate over the public interest.

Partisan Politics

Quite frankly, there are many who hope for the economic recovery plans to fail.  There are strong partisan reasons.  The most important members of this group are running for office in 2010.  Their personal stake is huge.  There will be a constant barrage of partisan economic criticism.

Bearish Pundits, Commentators, and Fund Managers

There are many who stand to profit from a market decline.  The many bearish pundits have credibility and book royalties on the line.  The commentators have prestige, jobs, salary, and bonuses at stake.  Sometimes personal motives outweigh a national interest.

Some hedge fund managers have aggressively short positions.  Anyone paying attention knows that these positions are always supported by the Bearish Blogging Network (BBN) where there is direct or indirect compensation for supportive bloggers.

With so many providing so much negative commentary, it is easy to be led astray.  Let us consider a specific example.

The Fed Balance Sheet

A good way to begin is by removing the most obvious issue, question #4 from our quiz.  Information about the Fed balance sheet is readily available, specific, and timely.  Those taking a bearish viewpoint have emphasized the growth in the Fed balance sheet, including loans to various financial institutions.  The critics have suggested that this growth was part of the Obama Administration efforts and also that it puts taxpayers at risk.

Here is a recent report from Macroblog, one of our featured sites:

There are three key facts from this report:

1. The increase in the Fed balance sheet dates from the Lehman failure and the aggressive response, not from the start of the Obama Administration.
2. The overall size is declining slightly.
3. The distribution of assets has shifted from the riskier short-term lending to non-bank financials, moving to agency paper.

Conclusion

From a public policy perspective, the Fed has attempted to restore what we refer to as "normal lending".  The Fed recognized a market failure, where credit markets seized up.  This step is aggressive and temporary.

From an investment perspective it is crucial to understand the nature of the policy.  Some portray the balance sheet expansion as a "bailout" or an unlimited commitment.  This portrayal is calculated to frighten the individual investor.  It it not accurate.

Restoring confidence will be an uphill battle.  It begins with better understanding of the policy.

Full disclosure:  Our current posture, reported weekly, is bearish, reflecting market sentiment.  We see the bearish case as overstated, but realize the evidence will come one piece at a time.

We are working to find the catalysts for a changed perspective.

Interpreting Housing Indicators

Finding the right economic indicators is a challenge for investors.  Often the same data are presented in several different ways.  How does one make the right choice?

Today's data on home prices from S&P Case-Shiller provides a useful example.  As everyone knows, prices are down significantly from peak values and the annual data have a strong seasonal component.  There are three quite different approaches.

Month-over month changes.  The 20-city home price index for April fell by 0.6% from March.  This decline was reported by some media sources, but ignores the seasonality in the data.  When the seasonal effect is strong, it can be quite misleading.

Year ago changes.  Most solve the seasonality problem by comparing the prices in April, 2009, to those in April of 2008.  Sources using this approach cited a price decline of 18.1%.  This ran as a headline on some stories and as a subtitle on CNBC.

The problem with these year-over-year changes is that it is difficult to see improvement fast enough to be helpful for investment decisions.  Let us illustrate this with an unlikely and extreme example.  Suppose that the index went up 10% from April to May.  The year-over-year value would still be a decline of 9.2%.

To avoid this problem, those using the year-over-year method compare the annual change in one month to that of another.  The conclusion often reached is that prices are declining at a lower rate.  This is not correct.  In the example given, prices would be increasing, not declining at a lower rate.  It is not easy to get real insight from a string of year-over-year numbers.

Seasonally adjusted data.  S&P also puts out a seasonally adjusted version of the series.  This allows the user to focus on the month to month change, the real time movement of greatest interest, while removing the regular seasonal pattern.  Using this approach, prices declined by 0.9%, worse than suggested by the other two methods.

Conclusion

Using seasonally adjusted data is frequently the best solution for this sort of problem.  Many of our fellow data consumers are suspicious of any adjustments to raw data.  They are then forced to make their own seat of the pants guesstimates about how important the changes are.

Calculated Risk, a favorite and featured source, also focuses on the seasonally adjusted data.  You can check out the latest update to this series, comparing it to the bank stress test assumptions, in this article.

A Crib Sheet for Government Data

Most sources -- even big-time media types -- provide no guidance about sources of information from the federal government.  There is a a useful advantage in knowing more.

We realize that there are many who reject any government information.  Here at "A Dash" we believe that this is an extreme viewpoint, and provides an opportunity for a trading advantage.

In particular, we distinguish between reporting data and offering projections.  Those rejecting the data reports are just fighting the mainstream interpretations accepted by nearly all economists and by the mutual fund managers.  Projections are quite different.  They come from different sources, and the results vary.

A Reader's Guide

Here are some typical examples of government information.  Our reaction varies dramatically and so should yours.

The Bureau of Labor Statistics (BLS).  This is a non-partisan agency.  The key professionals have tenure and earn respect from peers and supervisors by doing a good job.  A new President cannot fire them nor significantly affect their pay.  From their perspective, Presidents come and go but their work goes on.  They try to do a good job, and we think that they generally succeed.  The methods are subject to great debate before acceptance.  Once accepted, they are followed in a rather mechanical fashion.  Those suggesting that these reports are subject to partisan politics are just wrong.  They simply do not understand how government works.

The Office of Management and Budget is under the control of the current Administration, so it is partisan.  This does not mean that forecasts and comments are wrong, but consumers must consider the source.  At this time it means that forecasts reflect the Obama perspective.  Any forecasts should be carefully tested against outside sources.  For an illustration of how OMB can be slanted to a particular perspective, we recommend the Reagan era example of David Stockman.  In an interview he admitted a clear bias in forecasts and was "taken to the woodshed" by the President after he spilled the beans.  We are not suggesting that Obama is "cooking the books" with current forecasts, but we view them with appropriate skepticism, testing against other sources.  We plan to write much more about forecasts from the Administration.

The Congressional Budget Office is a source deserving respect.  We call this a bipartisan source, since it must earn and keep the respect of Congress, no matter which party is in power. Initiated in 1975 under the leadership of Alice Rivlin and later Rudolph Penner, the CBO analyses earned the respect of both parties in Congress.  Any young professional wanting to do objective policy analysis should see the CBO as a dream job.  In the current policy debates the CBO is responsible for evaluating every proposal.  This is especially crucial to the health care initiatives and the Congressional agreements concerning PAYGO, where there must be a revenue offset for new initiatives.  Here is a great current example.

Summary

The mainstream media does not explain these differences nor reflect them in reports.  A CNBC anchor recently kept referring to the CBO as the CBOE (an options exchange).  A top source at TheStreet.com recently attributed a CBO analysis to the GAO, even using the "old name" for the GAO.

They just don't get it.  The big-time sources do not distinguish between various government sources.  They do not provide any background or context.  They do not grasp the distinctions.

You can do better!  You can start by printing out this article and using it as a handy reference.

Summer of '09 -- A Crucial Time for the Investor

Investors face some important decisions.  For those approaching retirement it is a crucial time.

There is plenty of advice.  The television commercials, blogs, and email messages include a variety of appeals:

• Those telling you to buy an annuity to lock in your income, marketing to the fear of market losses, and perhaps playing down the death by a thousand cuts from inflation.
• Those telling you that you can do better than your financial advisor.  Go on your own!  You have a "feel" for the market.
• Those advising gold.  Everything is about to go wrong, so you need to have hard assets.
• Those offering speculative gains.  Here are some stock ideas that are "home-run" ideas, where you can triple your money in a couple of months.  Often these are penny stocks.

Any of these strategies could be right --- as a part of an overall plan.  For those with adequate resources for retirement, a defensive posture might be correct.  Some investors might be willing to learn what they need to know and execute with discipline.  Inflation protection will play a role at some point.  Some speculative ideas will work, but most will not.

It is a minefield.  You need a plan.  Here is a nice article asking a key question about when you should plan to retire.

You also need to know how to interpret data and modify the plan as the evidence changes.  Many of the sources of information are selling something -- annuities, brokerage services, gold, or complex structured products that play upon investor fear.  In a typically excellent article, David Merkel writes as follows:

I have three bits of advice for readers.  First, don’t buy any financial instruments tht you don’t understand well. This especially applies when the party selling them to you has options that they can exercise against you.  Wall Street excels at products that give with the right hand and take with the left, so beware structured products sold to retail investors.

Read the entire article for some additional helpful advice.

Our Approach

Every investor has a different problem and requires a specific plan.  All face the same challenge, but individual needs, goals, and risk tolerance vary widely.

We must interpret a recession that does not fit the prior molds very well.  The causes were complex with many interactions.  The attempted solutions are also complex.  It is not a cookie cutter where we can say it will all play out like some prior year.

Many make predictions with great confidence, often drawing more from their political opinions than economic evidence.

At "A Dash" we are seeking objective economic indicators with proven value.  No one knows how it will all play out, so it is a week-by-week process.  The answer will come from a combination of interpreting economic data in a dispassionate manner and recognizing the effect of public policy initiatives.

The Investor Challenge

Any investor navigating the minefield must do three things, all major themes at "A Dash":

1. Overcome the psychological pull identified in the behavior finance literature.  These are the reasons that most investors significantly lag market averages.
2. Monitor economic data in an objective fashion, getting past both the "green shoots" crowd and those who always find the worst take on any information.
3. Put politics aside, figuring out how to make investment returns no matter which party is in power.

In an effort to help investors with these points we suggested a little quiz.  Apparently we did not present the problem effectively, since our fine editors at Seeking Alpha did not see the significance of the questions.  We know from our classroom days that everyone hates quizzes, especially when they do not know the answers!

Perhaps we should have stated it more strongly.  Anyone who cannot do well on the quiz, and we strongly believe most would fail, will be out of touch with the economy and the market over the next few months.  They will also make psychological mistakes that will lead to failure.

We were alarmed that our smart neighbors had so many ideas -- most of them wrong -- and were all acting decisively on their opinions.

Over the next two weeks we will reveal the answers to the questions -- each of which was carefully chosen to reflect an important issue.

We could have just written an article about "The Eight Big Mistakes You are about to Make."

Our experience in education tells us that people learn more when they try to answer a question themselves before getting the answer.  It is a tried-and-true technique.  We urge readers to take a look at the quiz and make some private notes of the answers, even if they do not choose to enter the contest.  Official entries for our prize will close on Thursday.

As we explain each answer, the significance of the questions will become clear.

And finally, while our focus is on the individual investor, most of the concepts are equally important for traders.

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.

Summer Quiz

Some neighbors had a block party last night.  Our neighborhood has many intelligent people.  While there is plenty of diversity in race and religion, there are many shared values about kids and community.

Nearly everyone is a successful professional person.  There were plenty of opinions about the economy and the current investing climate.  Partly (but not entirely) from this experience, here are a few questions.

1. We have an honest coin which we flip 20,000 times.  We keep a running count of whether heads or tails is in the lead.  How many lead changes would you expect?  (A good ballpark answer could be the winner here).
2. The M1 and M2 measures of money supply have increased dramatically this year, in response to the Obama budget and stimulus spending. (True or False)
3. The number of "jobs created" last month was negative.  Over 300,000 jobs were lost, and this number was skewed by imaginary jobs from something called the "birth death model."  How many jobs were really created?
4. The Fed balance sheet has ballooned since Obama took office. (True or False)
5. You get the chance to be on a game show.  The host lets you pick one of three doors for a prize.  One door has a great prize and the others have trivial rewards.  You make your pick.  The host (who knows where the real prize is) reveals one of the two alternatives and offers you the chance to switch your choice.  Should you do so?
6. The percentage of those currently unemployed rivals the figures from the Great Depression.  (True or False).
7. The government stress tests for financial institutions have something called an "adverse scenario."  The conditions from that scenario have already been met, or nearly so.  (True or False)
8. From the peak, how much have personal consumption expenditures declined?

If you think you are smart and knowledgeable, send us an entry at falin at newarc dot com.  We will give a nice prize and some recognition to the winning entry.  We have a couple of days of travel, so you have some time to submit your answers.

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.

How to Make Money on Barney Frank

Barney Frank, (D Mass), the Chair of the House Financial Services Committee, is a polarizing figure.

He is the bête noire of the conservative punditry.  Whenever he does or says anything, there will be a chorus of objections from those who disagree with his politics or his lifestyle.

Over at Zero Hedge, one of the several "Tyler Durdens" managed to work in a couple of offensive remarks in a very brief post.  (We're not repeating them.  It will be interesting to see if the Seeking Alpha editorial team publishes this one!)

The issue?  CNBC scored one of their "First on CNBC Interviews" by getting Rep. Frank on Squawk Box right before the hearing on executive pay.  It all started OK, but then Mark Haines started to weave from straight questions into a discussion of his own opinion.  He often does this, and his viewers like it.  With a rookie on the show, it can be devastating.  With Barney Frank, who showed very little tolerance for this.  In fact, he seemed pretty testy about the questioning.  For CNBC, it just meant that they lost the interview.

You can see it yourself right here:

Why Listen to Barney Frank?

Barney Frank is one of the most polarizing figures in Congress, at least to a national audience.  His constituents think he is great, and he has a very safe seat.  (This means that those who believe that he took various actions for small campaign contributions do not understand the political process).

As a funny-sounding, very liberal, and openly gay member of Congress, Frank is an easy target.  He is no stranger to controversy, providing more ammunition to right wingers and gay bashers.

Our question is the same, practical, relentless one we have been offering for some months:

Do you want to make a political statement, or would you rather make money?

The blog writers who want some boo-yah's from their audience bash away on Barney.  While avoiding explicit criticism of Frank, Mark Haines probably scored points with his own audience by offering his personal viewpoint on executive compensation and shareholder influence.

The Attitude of the Smart Investor

Let us suppose for a moment that you do not agree with Rep. Frank's politics.  Here are a few facts:

• He is one of the most powerful people in Congress, at the epicenter of various decisions on financial regulation;
• He is (perhaps) the smartest person in Congress, according to a poll of Congressional staffers.  (If you do not see this, then maybe you need to review your personal biases.  He regularly runs rings around interviewers, as he was doing with CNBC this morning.)
• He has been accepted by the Street and the GOP (Hat Tip Charles Kirk).

Here is what Crains New York has to say:

Just about everyone in banking wants to be Barney Frank's friend nowadays......

Mr. Frank ambles around the halls of Congress in the type of pin-striped suit familiar to any banker—although his untucked shirt betrays any notion that he might be one. Yet financial executives credit him with reining in his fellow Democrats' angriest impulses about how to handle Wall Street. He can charm Republicans, too: Last month, he was the only congressman ranked among the “most partisan” and the “most bipartisan” in a survey of members by The Hill newspaper.

“He finds a way to negotiate,” says Scott Talbot, senior vice president of government affairs at the Financial Services Roundtable.

Of course, it also behooves bankers to play nice with Mr. Frank. Asked if bankers have come to grips with new realities, he tartly answers: “I think they understand a new set of regulations is coming. And it's better to sit down and get it right than get it wrong.”

You really need to read the entire article to understand how serious financial executives view Frank.

The Simple Question

So it is a pretty simple question.  When you are watching CNBC do you want to hear the viewpoint of one of the most powerful Congressional leaders, or do you want to hear opinions from Mark Haines?

Do you want to read some politically oriented bashing of Barney, or would you like to make money?

Investors should be agnostic with respect to politics and to life style.  Those who insist on injecting politics as part of their analysis are facing (at least) four tough years of investing.

There are investment stories that will work.  It does not matter if you agree with Frank, or Pelosi, or Obama.  As long as we can predict what they will do, we can find an edge.  Even though we absolutely hate government control of business, we have found winning investments this year.

How?

Be practical, not political.

The Importance of "Being Right"

A few days ago, Abnormal Returns raised the interesting question of whether it is more important to be right or to make money.  The article cited past work, correctly noted that one could be dollar positive while losing in most cases, and showed behavioral finance literature on the concept of sticking with a thesis, even when it is losing.

This was a great article.  As a front-line investment manager, we know that it is a crucial factor in the thinking of many individual investors, the people we are trying to help.

As an aside, we congratulate Tadas on his new business relationship, and wish him the greatest success.  He has provided an extremely valuable service to investors and deserves some recognition and compensation.

An important bonus from his new approach is that we can now hope to get more such articles -- provocative questions, actually stimulating the rest of us to think and to respond.

The Merkel Response

Another of our featured sites, The Aleph Blog, took a different perspective.  Here is how David Merkel responded:

I’m going to take the other side of this one. This is a bear/choppy market argument. During a sustained bull market, being right makes lots of money.

When I choose stocks, I do all that I can to have the odds tipped in my favor — industry analysis, earnings quality analysis, valuation analysis, balance sheet analysis, free cash flow use, and even a review of the anomalies like momentum, volatility, balance sheet growth, etc.

It’s not perfect, but I typically have 70% winners, and my winners are larger than my losers. Being right helps make money… does anyone doubt that? But hubris destroys.

Does that mean I give up my risk control disciplines? No. I get things wrong, and when I am wrong, I cut my losses. Every 20% move down requires a review — if the thesis is intact, I buy enough to rebalance. If not, I sell.

Also, my methods continually improve my portfolio, selling things with less potential to buy things with greater potential.

Our Take

There was a lively response to the original article, with many good ideas.  It is a timely and complicated subject.

We often approach questions like this by stepping away from the instant question, looking at extreme examples from our own experience.  Let us take companies that are about to go bankrupt.

Experts know that the common stocks in these companies generally go to zero.  The common has no value, since the bankruptcy forms NewCo and the bondholders get equity.

This is very difficult to explain to investors.  The sentiment of the market often is focused on the general business of the company -- often with good potential -- rather than the economic fundamentals of the stock.

We have had several cases where investors wanted to buy a penny stock, about to go into bankruptcy.  We warned that the stock was worthless.

In several of these cases, all high volatility situations, the stock doubled after our advice.  Eventually , it went to zero.

Did we give poor advice?  Our experience and knowledge -- an understanding of the process -- was correct.  Anyone following the advice would have eventually been proven right.  Meanwhile, major gains were missed.

Could anyone predict that the stock of a bankrupt company would double, say from 75 cents to a dollar fifty?  Perhaps, but that is not our method.

The story of being right versus winning is far more complicated.  The emphasis on last year -- a single point in history -- has a special significance since the results were so dramatic.

We plan to revisit that question.  For now we wish to highlight a single point:

What is the long run?

A casino has a small edge, but makes money because there are many relevant bets.  It is more difficult for the individual investor.  The edge might be significant, but the occasions for testing it are smaller in number.  When does one see the "long run?"

Put another way, how many major financial crises have there been?  What constitutes a good record?

There is an obvious advantage to methods that get quickly into the long run.  Is there a way for the individual investor to participate in this approach, controlling risk, while getting good returns?

More examples and discussion to come.....

Popular and Critical Acclaim

Over at The Big Picture Barry Ritholtz has some great suggestions about improving financial television.  We agree with the entire list, but especially like the following:

1. Stop Yelling. Stop interrupting. Stop Talking Over Each Other:  This is not Jerry Springer, its serious business. People’s retirement and investments are at stake. Please treat it that way.

5.  Lose the Octobox. Fire whoever came up with the Decabox.   ‘Nuff said.

6. Separate the Signal from the Noise.  Understand that most of the day-to-day action is simply noise. Look at a long term chart, you can barely see 9187 or 9/11. If those major events get lost in the long term trend, what does the intraday jags, kinks and reversals mean? Very little. Recognize that not every data release, slice of news, or rumor is at all significant. Stop treating them as if they were.

7.  Fact Check: An awful lot of things on air get stated with authority and confidence. Much of them are little more than junk or pop myths. Why is it that the more dubious a proposition is, the greater the confidence the speaker seems to muster? Consider fact checking as much of the statements that are made on air as possible, and making frequent corrections.

9. Bring Back Louis Rukeyser: Not the man, but rather, his style. Wall $treet Week — Rukeyser hosted it from 1970 to 2005 — was plain-spoken, thoughtful and accessible. Quiet, contemplative, discussions, with intelligent market participants, revealing helpful information. The investing public would appreciate something of that sort — again.

Improvements Unlikely?

There is a reason for the current TV programming:  Ratings!

The experts know what sells.  Everyone on TV is asked to state an aggressive and controversial opinion.  It is entertainment.

Would the current investing world give a high rating to Uncle Lou, no matter what the quality of the program?

Popular versus Critical Acclaim

We recently watched an old film for which a reviewer had noted that it achieved both popular and critical acclaim.

That is certainly great news for a movie, and one can easily see the distinction.  At nearly any time one can find a very popular movie (the "date movie" from back in the day) that has little artistic merit.  At the same time, there is something playing at the local Art Theater that scores high on artistic merit, but does not attract many teenagers.

It is a delight when a film can satisfy both criteria.  It is also a great challenge.

The Investment Audience

Here are a couple of key facts about the audience for investment news:

• Individual investors have dropped out.  (We'll get them back after another 25% or so in the major averages).
• Most readers are obsessed with the negative.  That is how to seem smart at a cocktail party.
• One can measure this with objective indicators, like our Seeking Alpha sentiment indicator.

The reader will note that we are moving beyond financial television, and considering all sorts of information.

The Conclusion?

With newspaper ad revenues disappearing, MSM are all turning to blogs.  Blog revenue is all about hit count.

If times were more prosperous, business managers could afford to think about the actual merits of analysis.  In times of stress, they look for the most popular.

So what happens?  We all know from behavioral finance that investors chase what worked most recently.   Today, that means that all of the doom-and-gloom predictors are geniuses.  Many of those writing and appearing on TV search relentlessly to find the most negative spin on any piece of information.

It is those people who are now featured.  It is not because of editorial bias on the merits.  It is financially driven.  These are the writers who are "popular."

This is what happens editors become pollsters.