A Dash of Insight

Bias in Bernanke Coverage: Does it Matter?

There is a lot of biased news coverage these days.  Some of it its intentional, and some of it is not.

Today's example is the coverage of the Bernanke reappointment hearings.

The Reality

From the perspective of those whose opinion matters, this is a foregone conclusion.  Chairman Bernanke showed real leadership when it was most required.  Under his guidance, the Fed took many creative steps to avoid an economic collapse.

If one looks to objective sources from both parties, the conclusion seems obvious.  Bernanke was appointed by President Bush and reappointed by President Obama.  His support is broad-based and extensive among professional economists.  He will be confirmed.

As is often the case these days Bob McTeer has the strongest analysis. He provides a good case for the Bernanke reappointment.  Anyone wanting a reality check should watch the video here and read the article here.   Since I know that many readers will not click through to the links (although they should) the following captures the gist:

What I don’t understand is why politicians think their deviant behavior is so appealing back home. They apparently don’t have a very high regard for the home folks, especially those in Kentucky and Vermont. My guess is that those folks are better than their Senators give them credit for. Surely blue grass and autumn leaves have some calming effect.

To my way of thinking, Chairman Bernanke (and Secretary Paulson) deserve the highest praise for saving our financial system and avoiding another great depression. I’ve defended Bernanke in blogs, speeches and TV appearances (see previous post). So have wise people like Warren Buffett. But our way of thinking, apparently, is not making any headway.

I heard yesterday that a major poll showed a majority against Bernanke’s reappointment. I guess that shows the power of financial TV and its guests who compete with each other in outrageousness hoping to be invited back.

We got to watch Congress in action.  Hearings provide a platform for those with eccentric views to spout off and get publicity.  Even the most lightweight of Senators gets to have his moment in the sun.

The practical result?  Some Senators have made an issue of the reappointment, placing a "hold" on it.  This means that there will be a real vote, not approval by voice vote.  It is quite possible that the vote for approval will be lower than in past instances, as noted in this WSJ article.

The Fiction

Internet readers got a totally different picture.  At Seeking Alpha, where I am a contributor, the big story was the "Bruising of Bernanke."  (I want to make it clear that Seeking Alpha tries to present a balanced view of stories.  Most likely the articles showing some balance did not come through in time to provide this balance. Mea culpa -- I could have written about this yesterday, but other duties impinged. The editors react to the flow of stories.  Perhaps they will square it up a bit in the future.)

But let us look at the result of the Bernanke bashers, including the writers of the featured stories and a few others.

When you get criticism of an appointment, it is news, but we need to look at the sources and the biases.  For investors, I recommend looking  beyond the salacious stories and focusing on what is really going to happen.  The attack stories get headlines, similar to the media frenzy about Tiger Woods.  It is good for page views, but not really helpful in understanding the reality.  The critics include the following:

Those running for office.  Some commentators have a clear political agenda.  They think that it would have been a wonderful cleansing experience if the Fed were not to have fought the onset of a depression.  It will be interesting to see how this platform plays in front of the electorate.

Those who have a book to push.  Some pundits lay all of our troubles on past Fed mistakes.  Everything they write is colored by support for this viewpoint.  While their followers accept the premise, the verdict of history will be rendered by those with a more objective stance.

Those who have a blog based upon attacking the Fed.  Most of these arguments include rather simplistic and often inaccurate accounts of the Greenspan Fed, now extending to the Bernanke Fed.  There is little effort to distinguish between the actual tools available, and what was needed when confronted with the collapse of Lehman.

Those citing public opinion.  This is very interesting.  The public can name the Three Stooges, but not the three branches of government.  Any time an issue is technical, we expect true leaders to look beyond polls.  Many of those citing public opinion take the other side of the argument when politicians react to polls.  They call it "pandering."  In fact, most officials make some careful distinctions.

The amateur political scientists.  This includes the commentator who has no known experience in actually making public policy decisions who declared Bernanke to be "politically naive."  He is swinging out of his "happy zone" as the Splendid Splinter called it.

And others with a hobby horse.  This includes the "live blogging" on Bernanke at TheStreet.com's Real Money site (usually helpful when focusing on stocks) where some commentators thought that their own personal viewpoints about public policy should be accepted by all.  The assertion that Bernanke was telling lies was particularly offensive.  One should never substitute personal opinion for fact.  The Bernanke testimony is available to all -- subject to objective analysis.

A Credibility Test

When I read those commenting on economics, I employ a simple test which I recommend for readers.  I call it the "Chalk Test."  Economic analysis can be controversial.  The "big minds" can and do differ, but they share certain basic skills.  If you gave them a piece of chalk and asked them to do a simple problem -- a supply and demand curve, and analyze the effect of an excise tax -- they could all do it.  Most of the popular blog writers cannot pass this test.  They write about economics, but they do not know the basic skills.  Their real skill is in dishing out pop concepts to a group of readers who already agree with their conclusions.

This is dangerous for the average investor -- very dangerous. 

Investment Conclusion

The bashers of the Fed have been wrong for a long time.  Essentially, they argued that the Fed was in a box, and would be ineffective in staving off a depression.  They were wrong.

Instead of recognizing the error, they now want to vote out the leadership and change policy to suit their own viewpoint.  They are wrong again, since this will not happen in the case of Bernanke.

Since the Internet audience is not a representative sample (think about the Dewey defeats Truman headline, where the polls had an unrepresentative sample), the flow of stories, augmented by thumbs up, thumbs down, conveys a false impression to the average investor/reader.

Most of the same sources now suggest that the Fed will soon make many other mistakes (beyond my current scope, but more later).

Repeating an important recurring theme at "A Dash", I suggest that investors should be politically agnostic.  It is better to make money regardless of who is in power, than to lose money, or miss opportunity, while complaining about politics.

Health Care Legislation: Our Prognosis

There is an interesting development in the health care debate.  Action by the opponents of health care reform may actually be counter-productive to their avowed interests.

Background

From my perspective, trying to help investors, the analysis of health care legislation has not been very good.  Most analysts were slow to grasp the fact that many committees had some power.  Eventually there was recognition that the bottleneck might be in the Senate, and everyone focused on the 60 votes needed for a cloture motion -- cutting off a filibuster.

The Wall Street firms and the media alike have really cut back on staffing, so there are few genuine experts in political science who are working on this problem.  This makes it an opportunity for investors with some real insight.

Recent Developments

Last week the Senate passed the 60-vote hurdle on Majority Leader Reid's plan.  That will now be the subject of a full debate.

Does it mean that there are enough votes for the plan?  No.

Does it mean that the public option will be included?  No.

One of the best sources of insight into the process comes from Nebraska Senator Ben Nelson, who is not in favor of the overall legislation, but nonetheless voted with the majority to move to a full debate.  Sen. Nelson wrote an op-ed piece in the Omaha World-Herald last week, explaining his vote for last week's motion. There is a very nice analysis of the article on our sister site, ElectionStocks.  (I set the agenda for this work and always review the output.  Investors who want to know how policy-making may affect their investments should add the site to their readers.  There is plenty of information about policy initiatives and which stocks could be winners and losers.)

Some Predictions

Regular readers of "A Dash" understand that we do not advocate particular policy positions.  We have opinions, of course, but that is not our mission.  We aim to enlighten readers about the stock implications from what is likely to happen.

With that in mind, here are some of my own fearless forecasts:)

• Some health reform legislation will pass this year.  There is a lot at stake for the President and the Congress.  Delay simply means defeat.  They will do whatever it takes.
• The legislation will meet the test of the "minimal winning coalition" which we described here.  It will be a compromise, with whatever inducements are necessary to get the needed votes.
• Most pundits will hate the compromise.  That is the nature of policy-making in a pluralistic society.  This is not recognized by the Wall Street analysts or Internet pundits.  Many have a political agenda, so there comments will relate to their interpretation of the merits, not the likely outcome.  Others view the wheeling and dealing that is essential to legislative action as some defect in representative government.  They need to take a class; it is covered in Poli Sci 101.  If you don't like it, find your favorite dictatorship.  It is how legislatures work in representative democracies.

The Twist

Here is the interesting part for political observers.  The Senate debate will attempt to gain a 60-vote majority, to avoid a filibuster.  Some liberals insist on the public option.  Some marginal voters want a trigger mechanism.  Others are adamant in opposing the public option since they see it as the start of a government takeover of health care.

If these opponents all hold firm, the most likely outcome at this point, the 60-vote requirement will not be met.

In this case, the Democrats might try to pass legislation through the reconciliation process, a budget procedure intended to facilitate tax cuts and spending cuts that otherwise could not get the 60-vote margin.  Sen. Reid has publicly disavowed this strategy, but the Nelson article makes clear the existence of this latent threat.

Health care legislation through reconciliation would be stripped of many specific provisions, but a public option would probably be included.  Why?  This may pass the test of a budget-cutting measure.  Other provisions would fail on a parliamentary challenge.

The Result

To understand the likely result, one has to have the reconciliation "twist" in mind.  It is possible that some  marginal voters will realize that they can have more leverage over the final bill by avoiding the reconciliation alternative.

We are going to see a few weeks of debate that will determine the final shape of the bill.

Stock Implications

So far in the process, many health care stocks have remained undervalued because of uncertainty.  Typically, they rally when chances for passage seem dim.

Our analysis is that there may be a dip as the market senses the likelihood of passage.  Then, whatever the specific outcome, there will be a rally in many of these stocks when the uncertainty is lifted.

We will go shopping in the health group, with specific sub-sectors and names in mind.

How I Pick Stocks

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

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

Mission and Audience

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

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

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

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

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

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

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

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

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

My Approach

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

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

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

My current themes include the following:

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

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

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

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

Specific Ideas

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

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

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

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

A Final Thought

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

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

Analyzing Cash for Clunkers

The CARS legislation, popularly known as "Cash for Clunkers," now appears certain to get additional funding.  The program provides an excellent example of a typical public policy question and the dilemma for decision makers.

Any new program has a range of impacts.  Some of these are obvious to all.  It is easy to trace cause and effect for these highly visible results.

The professional policy analyst has a more extensive tool kit.  The range of questions is wider and the analysis is much more sophisticated.  The average person may not find the results of this analysis to be persuasive.

A simple example is policy to expand free trade.  Jobs put at risk from foreign competition are highly visible.  Anyone can understand the consequences for domestic workers.  Jobs gained from increased exports and an improved economy cannot be "proved" to the satisfaction of the lay observer.  It is  an issue where there is a great discrepancy between the views of professional economists, who overwhelmingly favor free trade, and the average citizen.

Cash for Clunkers

The CARS legislation provides an incentive payment to people who trade in a vehicle that gets poor gas mileage for one that is better.  This might still be a 15 MPG SUV, but it is better than the trade-in vehicle.  To make sure that the old vehicle is taken off of the road, the engine must be destroyed.  The incentive ranges from $3500 to $4500.

From a policy analysis perspective the CARS program seems dubious, involving many significant questions.

• Does it really help the environment?  Nina Shen Rastogi, writing for Slate, suggests that the cost is ten times too much, when one considers the environmental impact of building the new car.

Was spending $1 billion a particularly cost-effective way to achieve those CO₂ reductions? Probably not. Assuming the above calculations are correct and that each consumer keeps his or her car for 10 years, then the total savings should be a little less than 5.7 million tons of carbon dioxide. That means each ton of carbon dioxide would be worth about $175.53 to the U.S. government. As the Washington Policy Center pointed out on its blog in June, a ton of CO₂ currently goes for about $17.50 on the European Climate Exchange.

• Does the program really add new sales?  How many?  Avery Goodman suggests that the program cost is actually more than $45,000 per vehicle.  Citing data from the online auto service Edmunds.com, Goodman makes a key point.  The program pays off even for those who would have bought a car anyway, not just for the incremental buyer.  If you look at the "counterfactual", what would have happened in the absence of the program, the net gain in sales is much smaller.
• The overall program is small.  Doug Kass suggests that this is a minor and temporary stimulus to the economy, although the psychological effect might be important.
• James Hamilton laments the waste from destroying the old engines. 

One of the more embarrassing features of the New Deal was the Agricultural Adjustment Act of 1933, which paid farmers to slaughter livestock and plow up good crops, as if destroying useful goods could somehow make the nation wealthier. And yet here we are again, with the cash for clunkers program insisting that working vehicles must be junked to qualify for the subsidy.

• Bob McTeer says it best:  "What was the evidence of success? What lesson was learned?  Well, apparently, if the government offers to give people money, quite a few of them will take it."

The Popular Viewpoint

If one looks only at the highly visible policy results the story is different.  The program created a buzz in dealerships, including traffic from those who might not qualify for the program.  The plan is working in a way that is more obvious than other "shovel-ready" programs.

There are highly visible benefits for consumers, car makers, auto workers, parts makers, and the local economies in the auto states.

These stories are easy to present in the media, and easy for political leaders to embrace.  It is no surprise that the GOP leadership is going along with the extension and expansion of the program.

Our Take

We cite this as an example of how public policy decisions are reached.  While the program has many flaws, it illustrates the reality of the policy-making process -- a compromise where there are obvious beneficiaries.

Individual Investors and the Information Barrier

Here at "A Dash" we see the Summer of 2009 as a key time for investors.  Doug Kass is calling the summer a "snoozefest" but there has been plenty of action within a broad trading range.  Some themes have been working.  How shall we find new ones?

We started our summer research by identifying and highlighting the most important issues in a quiz format.  (While official entries have closed, you can still benefit from recording your own answers first.   As we take up each topic, we will reveal the "official" answers.

Background

Finding the right information is always a big challenge for investors, but the current circumstances have created a perfect storm .

Consider these sources:

• Political pundits.  Some want to find any possible basis for criticizing the President.  Here at "A Dash" we separate the citizen role from the investor role.  We hope to continue our long-term results -- making money regardless of which party is in power.  Consider the current dilemma.
  
  • The opposing pundits see no hope for any success.
  • The "supporting" pundits think that Obama has not gone far enough.
  • The impression for the individual investor is that nothing will work.
• Market pundits.  Some of these sources are selling a book, an idea, or a web site.  The information is not partisan, but it is biased.
• Economics pundits.  In the ongoing debate about policy, the reader can choose from among Keynesians, Monetarists, New Keynesians, or those from the Austrian School.  And we are just getting started!

Many of these ideas may seem tempting.  The results range from heart-felt opinions with an emphasis on one viewpoint, to mistaken information, to blatant misinformation.  It is a perfect storm for the average investor -- dubious information from all sides.

Pradeep Bonde, one of our featured sources, made this important point in a recent article:

There is always a bull market in conspiracies.Some of the popular investment blogs are active peddlers of conspiracy theories. In fact if you want to quickly become popular in trading blogosphere you should peddle conspiracies.

The article deserves a wide reading, so check out the whole piece to see if you can guess the leading conspiracies.

Let us illustrate with one example, the Fed's monetary policy.

The Critics

The many critics suggest that the Fed is making a big mistake.  They are  "debasing" the currency (this word is always present in the critical commentaries) and they have no exit strategy from their policy of monetizing the debt.

The most aggressive criticism illustrates a spike in the money supply.  This accusation comes from a noted political commentator who uses charts with no scales and no background.  Many investors watch this information on the original source or on youtube.  For those who have no money to invest and merely want reinforcement of their political views, this is good entertainment.  Anyone trying to get an investment return, is watching the wrong source.

Who would be better?  Try Bob McTeer, another of our featured sources.  He has the actual Fed credentials lacked by the wannabe commentators, and he is also a political conservative.  As we seek out good sources, we consistently find his observations to be the most sensible and most helpful.    Here is what he says about the money supply, a subject where he is an expert.....

The money supply spiked, and then flattened out. Pre-spike until now still gives us pretty big numbers, but they are getting smaller every day. Yet, commentators treat the money growth statistics as if the rapid rise is ongoing.

and later....

Turning to the different subject of how to lie with statistics, I've seen lots of graphs lately that have had the horizontal axis squeezed together to produce scary money-growth graphs. The most egregious is probably the graph of the monetary base growth dramatic enough to make You Tube. Shame!

As usual, the entire article is worth reading.  More people should read Bob McTeer.

The Data

To support the McTeer viewpoint, we need a simple chart.  Here it is, from the St. Louis Fed.

 

There are two obvious conclusions:

1. A log scale (showing the true percentage relationship over time) and a bit of history shows a very different picture from that of the critics.
2. The money supply spike came at the time of the Lehman failure, not during the Obama administration.  The Fed reacted to an emergency, and is now adjusting policy.

Investment Conclusion

There are plenty of things to worry about.  Fed policy is not one of them.

Many people need to rebuild their retirement accounts.  This means understanding how to interpret information.

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.

Street Fighters: Good Information and Good Fun

Kate Kelly's book, Street Fighters:   The Last 72 Hours of Bear Stearns, the Toughest Firm on Wall Street,  now on our recommended reading list, is a great source of information and fun to read.  It is well-sourced, authoritative, and always interesting.

Does it provide, through a look at Bear, the answers to our financial crisis?  We think not, but that is part of the fun.  The reader can collect information -- raw data -- with real confidence.  There will be many accounts of the financial crisis.  Anyone seeking a complete understanding should consult many sources.

The Approach

Street Fighters tells an engaging tale focused upon how a mighty firm was reduced to rubble in three days.  You know the ending before you start reading, but it is no less engaging.  The author has a nice sense of the characters and has done extensive research into backgrounds.  We not only learn about the major players, we learn what everyone else thought about them.

Such an approach is open to challenge.  Kelly provides footnotes for sources, and acknowledges disagreement.  It is convincing support  for her narrative.

The Result

The reader is treated to a view from several perspectives.  It is an insider's take on the politics within an investment bank.  There is genuine conflict over risk and which products to feature. Even the most jaded reader may have some sympathy for a wealthy guy who spent a lifetime building up his company and his position, only to lose it all in a few days.  This is "inside baseball" at its best.

The story is dramatic and well-told.

Assorted Insights

The reader has raw data to draw conclusions on several interesting points.  Here are some that stood out for us.  Yours might be different.  Please consider the following:

• Significance of CNBC.  David Faber had a story about firms not trading with Bear.  It was big news, but it was later denied by those in question.  The damage was already done.   The issue is how much information one needs to go with a story like this, when the story itself can affect the outcome.  Should Faber have verified more completely before going with this story?  Would it have made a difference?
• Significance of Kelly and the WSJ.  Many readers will already be familiar with the three-part series in the Wall Street Journal.  In the book, Kelly asserts that the series itself -- criticizing Cayne's leadership -- had an impact within the firm.
• Hank Paulson's Role.  Paulson is portrayed as dictating a punishingly low stock price for Bear.  Historians will combine this information with additional information, includeing his reversal on the use of TARP funds, the decision to force TARP on all of the major banks, and other similar decisions.  From our perspective as public policy experts, this is an extraordinary and arbitrary use of powers.  It is on a scale that is without precedent for a Treasury Secretary.
• The Fed Role.  The decision of the Fed to expand lending to include investment banks, only two days after the Bear failure, was extremely arbitrary with respect to timing.  We should all be concerned when public officials make decisions about which firms (and which investors) live or die, and do so without clear rationale.  Bear was allowed to die while others were saved.

Conclusions

Kelly's conclusion is that Ace Greenberg built a firm on some principles and Jimmy Cayne violated those and lost it all.  We are not convinced.

We can now see what happened to many other firms.  It would not have mattered if Bear's leverage and risk had been a little less.  Kelly is probably right in suggesting that Bear was an unloved firm on the Street, and therefore first to be challenged.

It was beyond her scope to consider other causes, although there is a paragraph or two on the trading in Bear stock.  This was something we watched daily on our trading screen.  Those betting against the firm could trade in the thin Credit Default Swaps market (CDS), buy puts (where premiums exploded in issues that were far out of the money), short the stock, pull your hedge fund accounts, and spread rumors.

These events were all taking place.  The sequence of causation will never be determined.  What we do know is that any business depending upon confidence and credit can be destroyed in three days. Those aiding the destruction can make millions as it happens.   If that is a verdict on a business model, the entire banking industry is in question.

Final Take

The book is fun to read and has plenty of raw data with authoritative sources.  You should read it, and combine what you learn with other information.  The story of the 2008 crisis is complicated.  We look forward to reviewing other books on the subject.

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

Does Blogging Enable Market Manipulation?

The greatest strength of financial blogs is also a potential weakness.  There is so much information that readers frequently rely upon the interpretation of the writer.  Most people do not click through to the supporting links.  They go to their favorite sources for information, and generally rely upon the interpretation of the writer.

We know this is true from our own stats, even when we strongly encourage readers to check out an entire article.  Readers rely upon us to make accurate representations of source material.  We are expected to provide a fair summary and accurate illustrative quotations.

Fair enough.  No one has time to check out all of the sources, no matter how carefully we try to document.

This is in sharp contrast with mainstream print sources, where editorial procedures review material before it is published.  Not so in the blogosphere.

The issue can be simply stated:

Blogs with a wide following have a special responsibility to check and re-check accuracy before posting.  If the authors do not do so, there is an easy means of manipulation.

Step one:  Get a dubious story out there somewhere -- anywhere.

Step two:  Get a noted blogger or pundit to mention the story.

Step three:  Mainstream media sources race each other to be first with this news.

Trust in link sources is vital.

Strong Sources

We feature several blogs where the authors provide plenty of links and summaries.  Some of the sources are anonymous bloggers.  We believe this conveys a special responsibility, since the reader does not know the background or skill of the writer.  It takes more evidence to be convinced of these sources, but the proof is evident in the work.  If one checks out the links, the accuracy proves out.

Here are examples of sources where the links are fairly interpreted with very high reliability:

• Abnormal Returns.  The summary tells you what you will see.  You can choose whether to read it.
• Charles Kirk.  Always interesting, always accurate.  Many interesting links.
• Alea.  Anonymous, but with special insight on credit markets.
• Calculated Risk.  Respected by everyone -- earned through accuracy.
• Paul Kedrosky.  Especially useful in finding interesting academic papers.
• The Big Picture.  Barry has a viewpoint, but his sources are always carefully documented and accurate.
• Muckdog.  We like the "everyman" viewpoint, which often captures the spirit of the market.  The links support his statements.
• Dr. Brett.  Unchallenged authenticity, with widely varying interests.
• David Merkel.  What you see is what you get in links at The Aleph Blog.
• Adam Warner.  The quotes are always representative.

We are leaving out many, of course, but this is designed to illustrate.  The WSJ blogs, for example, are carefully sourced.

The Jury is Out for Some

Like many others we follow the work of the anonymous blogger "Tyler Durden."  Seeking Alpha assures us that this person is an authority. He has rocketed to a high level in the new Seeking Alpha rankings -- a position of influence and responsibility.   Many of the articles display interesting and informative insight concerning the inner workings of big firms and hedge funds.

Since there does seem to be a viewpoint in the Durden work, we have great interest in the sourcing and evidence.  Let us look at an example of links from the prolific Durden.

Must read on CNBC propaganda: "Immelt and NBC Uni CEO Jeff Zucker supposedly told top CNBC executives and talent to be less critical of President Obama and his policies" This explains why nobody with half a brain watches CNBC anymore (THR hat tip Guest)

Since we have opined on CNBC politics, this was of great interest.  Our viewpoint is that opinion shows like Kudlow's in the evening are interesting and informative.  Viewers know what they are getting, and it is a lively debate.  We do not like the intermingling of politics and journalism during the business day, when CNBC anchors get to interview authoritative guests.  We are not very interested in the opinions of the journalists, and viewers should not be either.

If one reads the link, one can readily see that the quoted section does not accurately represent the article.

First up was a woman asking about a reported meeting in which Immelt and NBC Uni CEO Jeff Zucker supposedly told top CNBC executives and talent to be less critical of President Obama and his policies.

Immelt acknowledged a meeting took place but said no one at CNBC was told what to say or not say about politics.

During the woman's follow-up question, her microphone was cut off.

The key point is that Immelt denied the charge in the Durden quote.  Perhaps he suggested that journalists should be journalists in non-opinion shows.  We do not know, of course, but that would be a good thing.  Helping investors to separate political decisions from their finances is good advice, as we have frequently suggested.

Even more telling is this section from the rest of the article:

Later, during the umpteenth question about MSNBC, another shareholder's microphone was cut, according to multiple attendees.

"The crowd was very upset with MSNBC because of its leftward tilt," one attendee said. "Some former employees said they were embarrassed by it."

One specific complaint about MSNBC concerned Keith Olbermann's interview of actress Janeane Garofalo, who likened conservatives to racists and spoke of "the limbic brain inside a right-winger."

We spend very little time on MSNBC, but from what we have seen, we can understand the criticism.  Once again, the key is whether the program purports to be journalism or opinion.  This part of the article is exactly the opposite of the theme of the Durden quote.

Briefly put, we do not think that the Durden summary of the link is a fair and accurate representation of the article.

Another recent  example is the unsourced claim that SPY is hard to borrow.  This was challenged by Doug Kass (full disclosure -- Kass is a valued colleague at TheStreet.com).  Kass checked this out and found no problem with a borrow.  Here is the Durden response:

Update 4: Doug Kass disagrees:

I have received emails from several trading sources, stating that the market is rising because the SPDRs (SPY) are hard to borrow now and arbs are being squeezed.

This story is hogwash, as I just tried to borrow 500,000 SPDRs and had no problem doing so!

Position: Long SPY; short SPY puts and short SPY calls

Maybe Doug can disclose at what term and rate he got the borrow. Doug - I am dead serious - can I borrow 5 million SPY right now at 0% from you? Hell, will give you 1%

We expect to hear more about this dispute.  Meanwhile, anyone wanting to short the market can do so through a futures account.  There is no problem in "borrowing" e-mini's to go short, the method favored by those of us in Chicago.  There is an arbitrage opportunity with SPY.  The claim of a problem in shorting does not have face validity, so we look forward to some evidence.

Our Take

It is easy for investment readers to be swept up by apparent authenticity, especially from a source that everyone seems to follow.

We hope that "Tyler Durden" will balance frequency of posting with accuracy in representing links.

We have a continuing concern about the "leaked stress test" story, where he is a supporter of a dubious source.  That is a question for another day.

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.