A Dash of Insight

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.

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.

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.....

Can Investors Learn from the Lottery?

On a recent trip to Wisconsin we chanced upon a television commercial for the Wisconsin Lottery.  It was insidious, offensive, and probably effective.

The commercial was for a crossword scratch game, the kind where you can be an instant winner.  It showed a nerdy guy doing a regular crossword puzzle, and then turning his skill to the lottery version.  He was a winner.

Here is a look at the card:

If one looks at the back of the card, there is a different message.  The overall return on this "investment" is 3:7 to 1 against the player.

Overall Odds	1:3.7
Odds	$5 1:7 $10 1:16 $15 1:61 $20 1:51 $25 1:50 $50 1:90 $100 1:1,500 $500 1:44,445 $5,000 1:600,000 $50,000 1:600,000

We purchased a ticket and got an "oh, so close" experience.  When we inquired about the game, the vendor asked, "How many?"   He was surprised that we took only one.

There are several themes here:

1. The "investment" appeals to someone who needs/wants to hit it big;
2. There is an illusion of skill in the game;
3. There is a poor perception of the actual chances of victory.
4. The game itself is designed to nurture the worst instincts of the player.

Other Lottery Examples

There is an occasional case where a lottery has a positive expectancy because of a carried-over jackpot.  We remember when a group of bored CBOE traders sent a clerk to O'Hare with instructions to fly to Pittsburgh.  He went to a nearby lottery vendor and bought tickets for hours before flying back.  No luck, but at least the play had edge, even with the cost of the plane ticket.

Normally the lottery is a straightforward losing proposition.  Despite this, various promoters offer lottery strategies and analysis of the "tendencies" in various state lotteries.  The vendors of strategies use the terminology of successful players in other sports, e.g., they "wheel" a key number.

Over twenty years ago there was a publication called Gambling Times.  Most of the authors wrote about games where it was possible to achieve a positive expectancy  -- sports betting, blackjack, horse racing, and poker.  There was some treatment of craps, where you could get a lot of play while losing little edge by following "best" strategy.

And then there was the lottery "expert".  She was something of a joke with the other authors, since everyone knew that her methods had no edge.  The magazine ran her columns because they were popular, not because they provided any "investment edge."

There was one quotation, going something like this ----

"In the Pennsylvania Lottery, certain numbers like to come up with their near neighbors."

Wow!  What an incredibly dumb statement!  This was long before Fooled by Randomness,  a book we liked so much that we bought multiple copies as gifts for clients.  Anyone who understood odds knew that this claim was completely bogus.  It was an early example of the fact that people can see patterns in anything.

Whatever one thinks about the methodology, this was a successful business model.  She now has testimonials from many winning players, used as evidence for her newest work.  No one knows how much was invested to generate those winners since losers do not write letters.

Lessons?

It is our expectation to draw upon this article, showing the similarities with many other investment decisions and the sort of information provided in support.

While we have strong feelings about the public policy implications of states exploiting the poor for additional gambling revenues, that is not our focus.  We write about investments and about how people can get the information they need.

Meanwhile, we invite reader suggestions for their own similar experiences.

An Interesting Sentiment Indicator: Seeking Alpha

Here at "A Dash" we were early supporters of Seeking Alpha.  We have had a constructive relationship with the site and their leaders.

We congratulate them on their success, and their growing readership, becoming a top-ranked site in the ratings.

The Seeking Alpha Difference

There are some interesting metrics that one can derive from Seeking Alpha.  These stem from their approach, embracing the blogosphere and highlighting the news flow.

This is dramatically different from mainstream media sources, where writers choose their subjects and editors review the overall balance.

Please understand that this is not a criticism of the Seeking Alpha model.  We merely point out the difference.  The articles appearing there reflect blogger opinion and news flow, and it is done very accurately.

Why This is Helpful

The objective stance of Seeking Alpha helps us to gauge what people are thinking.  There are two excellent metrics.

Most Popular Articles

The ranking of most popular articles shows what people are actually reading.  Here is the current list (skipping the excellent daily briefings):

The Worst Case Scenario (Someone Has to Say It)

A Bull Market That Few Are Buying

Dollar's Purchasing Power Annihilated - The Chart They Don't Want You to See

Book Review: Great Depression Ahead

A Summary of Q1 Bank Earnings: World, You Just Got Hustled

Most Recent News

The site picks up news flow, as it happens.  Here is the current list:

A Summary of Q1 Bank Earnings: World, You Just Got Hustled

This sure smells like a sucker's rally,

Even GM (GM) can't figure out why anyone's still buying its shares,

will oil prices throttle the economy again?

Our Take

The overwhelming impact of these stories is self-evident.

Once again, we repeat that these stories are not a discretionary choice of the Seeking Alpha editors, who do a fine job.  It is an accurate reflection of reader sentiment and news flow.  That is what makes it so interesting.

While we have picked the leading articles from today, it is quite typical of the pattern throughout the recent rally.  It shows bloggers and readers, all fighting the rally.  It is a strong example of the wall of worry that we described a month ago.

If we looked to the most popular authors and commenters, we would see a similar pattern.  It is an accurate reflection of the skepticism of those active in online writing and commentary.  This might be a better sentiment indicator than Investors Intelligence or other similar choices.

Many people are wondering whether it is too late to buy stocks.  This is one indicator.

We think, like traditional sentiment indicators, it is a contrarian signal.  If and when the top stories, authors, and articles are all bullish -- well, that would be the time to think about taking profits from the recent rally.

Should You Own Junk Bonds?

At "A Dash" we think the time is right for high-yield bonds.  We hold profitable positions in these securities in personal and client accounts.  The yields offer an attractive alternative to most of the common shares, and have less chance of default or dilution.  Naturally, we are very attentive to comments on prospects for these securities.

Our attention focused on this item from Zero Hedge:

...everyone is ignoring that 20% of these names will be bankrupt by year end, unless Obama and TTT nationalize everything, in which case look for the first 5 year plenary session some time in December, complete with parades by the 91st and 341 Missile Wings showing off their Minuteman III arsenals (reduced to single warhead delivery to comply with START I).

Unlike most readers, we click through to the source, which reads as follows:

“Champagne might be a little premature,” Gregory Peters, head of credit strategy at Morgan Stanley in New York, said yesterday in a Bloomberg Television interview. “You’re still facing the biggest distressed default cycle that we’ve ever seen.”

Moody’s is forecasting the default rate among high-yield companies globally to soar to 14.8 percent by year-end from 8.3 percent in April as companies that financed a record amount of high-yield, high-risk debt leading up to the credit crisis struggle to refinance.

Our Take

A key skill for investors is to verify the accuracy of sources and their evidence.  We highlighted this problem, and noted the difficulty when readers uncritically accept the summaries provided by popular sources.  The summary from this author is not accurate when one looks at the source material.

The other key point in this case is the intermingling of a political viewpoint with investment advice.  There is plenty to analyze about the Obama Administration.  We work on this daily at our sister site, ElectionStocks.com, where we link policy proposals and decisions to stocks.  Our approach is strictly analytical.  We note successes and failures, and did the same for various candidates and the Bush Administration.  Our approach is not partisan -- strictly oriented to investment success.

Those who start with the conclusion -- an attack on government policy -- and then look for evidence, may be in for a long four years of bad investment decisions.

Long  PGF

David Merkel's Tour de Force

W always read with great interest the work of David Merkel at The Aleph Blog, a featured source since inception.  He has produced a tour de force.

Everyone is interested in AIG, but no one really understands the issues.  Here at "A Dash" we try to recognize the leading experts on any subject.  The work on the AIG issue is truly exceptional.

First, it required the vision and determination to request data and to follow through.  Somewhat to David's surprise, the company complied with a truckload of documents.  No one else thought to seek these data.

Second, it required the skill to analyze all of the underlying company relationships and their holdings.  Few have the requisite skill -- certainly not your average financial blogger.

Finally, it necessitated many hours of analysis for each few lines of results.  This is hard work.

The Result?

The Merkel Analysis is a fine piece of independent research.  It provides conclusions that we can (and should) all understand, with plenty of supporting evidence.

We taxpayers are now all investors in this company.  Few of us are qualified to do an independent analysis, but we can all read and understand David's fine work.  He clearly identifies which AIG subsidiaries are sound, and which are not.  He highlights future issues.  Read the report if you wish to be informed.

We also encourage David to develop a list of key questions for the upcoming House hearings.

There may be good answers on the counter-party risk issues.  Nonetheless, the questions should be asked, and the questioners should have solid backup information.

Successful Financial Blogging

Let us suppose that one wants to start a successful financial blog.  The start up costs are low, so many will take a shot at this. What defines success?

Part of our experience is advising early-stage companies.  It is a good model for a blog.  What should one do?

• Learn the market.  The blogger needs to understand the readers -- who they are, their viewpoints, and what they want to hear.
• Understanding behavioral finance.  Most readers track on what worked most recently.  That is how the heroes are found.
• Go for the rankings.  The various ranking services start -- and mostly end -- with traffic.  If you write something that appeals to the online audience, you have a better chance of success.  Most of those doing rankings are not qualified to evaluate the content, so ratings dominate.
• Post frequently.  The more you write, the more people visit your blog.  Many raters use frequency of posting as a filter.
• Exchange links.  Be willing to trade links with nearly anyone.  Offers abound.

Identifying the Online Audience

Here is a dramatic example of what works online.  The best example is the recent online poll by Time.com.

In a stunning result, the winner of the third annual TIME 100 poll and new owner of the title World's Most Influential Person is moot. The 21-year-old college student and founder of the online community 4chan.org, whose real name is Christopher Poole, received 16,794,368 votes and an average influence rating of 90 (out of a possible 100) to handily beat the likes of Barack Obama, Vladimir Putin and Oprah Winfrey. To put the magnitude of the upset in perspective, it's worth noting that everyone moot beat out actually has a job.

This tells us very little about who is most influential, but a lot about those taking the poll.

The frequent polls on CNBC and other sites tell us a great deal about the trading audience -- what they believe, their positions, and what they expect.  These polls are mostly skeptical of any government program, the future of our country, and the prospects for the economy.  They are widely divergent from polls that use a scientifically selected group.   These polls show a wide acceptance of Obama and his policies.  This is not a political statement, but merely a look at some facts.

It pays to cater to the online audience.  Andrew Leonard's Prophets of Doom list is also a list of the most popular blogs and commentators (with a few prominent omissions).

Popularity Pays -- for Someone....

Popularity clearly pays for the bloggers.  They are wisely following a successful model for an early-stage effort.

Our mission is quite different.  We attempt an objective interpretation of data, an effort to find the best sources, and a willingness to alter short-term perspective.  In particular, we are skeptical of sources swinging outside of their "happy zone" (hat tip to Ted Williams -- click through to see the famous strike zone picture).

For the individual investor trying to find help from the Internet, this is a minefield.  The information from the popular sources is unrelentingly negative.  Meanwhile, the real story is not so clear.

Investors should pay attention to data, not opinions -- and especially not political opinions.  There is a time lag in the impact of government policies.  It is time to start monitoring the lagged effects of lower interest rates, innovative Fed policies, and the stimulus package.

Interpreting Government Data: Is a Conspiracy Afoot?

Nearly everyone agrees that there are many economic issues and that government policies are an important part of analysis and forecasting.

So much for the non-controversial statement.

Investors Need to Know

As investors, the key questions we all face involve interpreting data.  We want to know whether there are signs of a change in the economy.  We want to know what data can be trusted.

When it comes to interpreting government data, we find three different groups:

1. Those who see a conspiracy around every corner.  They believe, to take a prominent example, that the Bureau of Labor Statistics (BLS) is a pawn of any President.  They watch too many "B" movies and have never taken a class in political science.  They have a ready audience of those who already share their opinions.  It is like the Rush Limbaugh of financial blogging.  We have no idea how much market power these folks have, but we have no hope of convincing them, whatever our evidence.
2. Those who are intent on serving investors and have the purest motives, but who suspect BLS data.  This is an honorable group of commentators.  We disagree with them.  We should all understand that disagreement is OK.  It gets issues out in the open for forthright discussion.
3. Those who are political science and/or public policy experts.  As far as we know, we are alone in this category.  The Street seems to feel that there is nothing special to learn from those who actually know about government.  We note the many blogging economists and the dearth of  blogging public policy or poli sci types.

The Public Policy Perspective

In understanding government data, there are a few key points to keep in mind.  Let us begin with a story from our days in Wisconsin.  We were once invited to a meeting in the office of a key legislator, the Chair of the key committee with oversight of the state's Department of Revenue.  On the wall of his office was a row of pictures -- many pictures.  One of us inquired about them.

"These are all of the Revenue Secretaries who served while I have been the Chairman."

If you understand this statement, you have taken a long step to understanding how government actually works.  For example, President Obama cannot dictate to the executive agencies on data, nor to legislators on policy.

The BLS

The single most important concept to grasp about those generating government data is that it is NOT like a private company.  The government workers have tenured civil service jobs.  The administrations come and go, but they have career positions.  If you talk to them, as we have, you would understand that their career objectives are geared to a high standard of professionalism.  They do not flip around with each new administration.  They certainly do not sit around tweaking data to fit the needs of "bosses."

Anyone who suggests this is showing a lack of experience with actual government agencies.  As part of our service to government, we worked with these people.  They all knew that they would be around long after the political leaders were gone.  They were doing a job as well as they could.

Investment Conclusion

Now more than ever it is a time to understand economic data.  There are many who disparage official reports.  It empowers them to use non-quantitative evidence.  Following this lead is a mistake for investors who are wondering when the economy will turn.  If one is free to reject actual data, the field is open to opinion and preconceived notions.  It empowers those who do not do quantitative research, relying instead on impressions.

It is one of our missions at "A Dash" to engage those whose disagree, but have who have pure motives.  We seek to convince them, and through them, their readers.  We often send emails to economic observers whose well-intentioned efforts miss the mark.

We will have some future specific posts where we cite those who disagree.  This should be interpreted as a mark of respect.  If we did not think that these influential pundits sought the truth, we would not bother with them.

We look forward to some constructive discussions.  Those who want some good background should revisit this article, where we discussed the conspiracy issue.

Parsing the President

In a state of economic crisis, it is natural for investors to pay attention to any public statement by President Obama.

There is a natural sequence of timing to the moves of the new administration.  Some policies can be changed by the stroke of a pen, through Executive Orders.  These are Presidential directives that have the force of law.  They state how the government will implement existing law.

Today's News and Market Action

The President issued some widely-expected executive orders today.  These involved some changes in signs at workplaces and relatively minor rules on how union informational costs were allocated.  For example, one of the rules has bounced back and forth -- from the first President Bush, to Clinton, to the next Bush, and now to Obama.  It is a natural partisan shift.

The announcement, symbolically important to organized labor, was made to an audience including labor representatives.  The President was speaking to the audience in front of him, including core supporters, and not to the market.  In a typical over-reaction, the market commentators flipped out as President Obama talked about the importance of organized labor.

Separating Rhetoric from Substance

The real market test of the Obama Presidency will come on the key issues of taxation of dividends, capital gains, and free trade.  We believe that the course will be a moderate one.  Our conclusion is based upon the Cabinet appointments and the strong overtures to Republicans.  We shall see.

Those with a bias, perhaps anti-union, are hard-wired to see the worst in any statements, no matter what the significance.  There were many such commentaries today.

The Bad Bank Plan

A similar scenario is playing out on the so-called "Bad Bank" plan.  We are encouraged that the Obama Administration is looking to a root cause -- the hard-to-value assets held by many financial institutions.  There are several ways of addressing this problem.  Regular readers of "A Dash" know our priorities:

1. Best -- a suspension of mark-to-market accounting.  Provide plenty of footnotes.  Heaven knows there will be plenty of attacks on the footnoting firms, so investors will be informed.  The key is that there will not be the destruction of regulatory capital, so "sensible lending" can resume.
2. Second Best -- a method of price discovery.  Since the securities on the balance sheets are complex, we need a good method of finding a true market price,  one which reflects the value if held to maturity.  This is not reflected in existing markets.
3. Third Best -- the "good bank, bad bank" idea.  If this concept is to get traction, the participants must quit thinking of the taxpayer as an investor, trying to make an astute buy.  The only justification for taxpayer involvement is the systemic effect.

Conclusion

There is a valuation for troubled assets that is both fair for the taxpayer and also acceptable to banks.  There is no more important problem for restoring economic strength.  There are many wise people on the Obama team, and they are consulting with key players.

We expect a favorable conclusion, but it will face a skeptical audience.  This helps to explain why we continue a generally bearish short-term market stance, while believing that the entire year will be quite positive.  The heavily biased Wall Street audience will remain skeptical.