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Blog Posts in Market Commentary

The CPI Lie

PART I: INTRODUCTION

There are lies, damn lies and then there are statistics!

- Mark Twain -

Have you noticed that what you pay at the pump or the check-out counter seems to have little correlation with government inflation figures? Does it seem that prices for daily necessities are going up at a rate far greater than 4%/year? Well, the following will attempt to explain why your experience is far different than what the government is telling us. Over the past 20 plus years, the government has made several “adjustments” to the primary measurement of inflation known as the Consumer Price Index (CPI). In this article, I will explain what those adjustments are and why they have resulted in the significant understatement of the CPI. If I were a lawyer (which I’m not) and if I were prosecuting the government, the first steps I would need to take is to establish that the government and more specifically the Bureau of Labor Statistics (BLS) has both the means and motive to manipulate inflation statistics.Read more

The Tower of Babel Indicator

3 They began saying to each other, “Let’s make bricks and harden them with fire.” (In this region bricks were used instead of stone, and tar was used for mortar.) 4 Then they said, “Come, let’s build a great city for ourselves with a tower that reaches into the sky. This will make us famous and keep us from being scattered all over the world. - Genesis 11: 3-4 - New Living Translation

On September 13th, 2007, the Associated Press reported…Read more

"Quant Fund Pain" Story on CNBC

By proceeding, I acknowledge that I have read and understood the Disclaimer, Performance Reporting Disclosure and Copyright Statements

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“This is the worst 5 days that [quant funds have] seen in the last 20 years.” David Faber – CNBC – 08/08/07

If you would like to see the video, Click here to watch. This morning, another CNBC commentator blamed part of the market’s problems on some Quant funds that have gone south which has led to people liquidating their shares. I’d argue it is quite the opposite - the market is going south which is resulting in Quant fund underperformance. Due to the irrational nature of the market, Quant funds should be expected to perform poorly. This was a theme that I started to watch in August of last year. If you would like to take a look at my post from August ’06, simply click here. My take on Quant Fund performance (or lack there of it) is merely another indicator that we are in the initial stages of a bear market. Two things take place at market tops that handicap Quant strategies.

  1. Market Breadth deteriorates meaning the majority of stocks decline while a few large names hold up the cap-weighted indexes.
  2. Investors are irrational during inflection points.
  3. Read more

New Home Sales vs. Housing Starts?

This morning, the commerce department reported that new home sales came in at an annualized rate of 858,000 - 23.5% below last March’s figure! This decline is partially offset buy an increase in median sales price of 6.4% since last March. (BTW, incentives are not deducted from the sales price, therefore, margins or profitability may not be moving up in line with sales price.)Read more

REIT Yields: The Frightening Truth

When I turned on CNBC this morning, two subjects dominated the headlines. First, CPI came in a bit hotter than expected (not good for REITs or anything else for that matter). Second, Novastar Financial (NFI) was down over 30% in pre-market trading after reporting significant losses that stemmed primarily from nearly $45 million in accounting charges the company recorded anticipating many borrowers won't be able to repay their mortgages. The report goes on to say that the company was in jeopardy of not being able to pay dividends going forward.Read more

Breakdown in Quant Funds

By proceeding, I acknowledge that I have read and understood the Disclaimer and Copyright Statements .

Market inflection points (tops and bottoms) are characterized by extreme irrationality on the part of investors. At The MAC, we track several indicators that measure how “irrational” the market is being. In June, these indicators turned decidedly bearish. However, they have recovered over the last couple of months which would mean that the market is acting more “rational” and signal that the likelihood of an imminent bear market is seemingly diminishing. However, before I turned bullish, or at least neutral, on the market I discovered a strange occurrence that has made me increasingly skeptical of this bull market’s ability to rage on.Read more

The Bizarro Rule of 72

By proceeding, I acknowledge that I have read and understood the Disclaimer and Copyright Statements . (This is a long one, but well worth it.) For quite some time, I have argued that the stock market is relatively expensive by historical standards and will therefore experience below average returns for the next decade. Recently, I developed a new and very simplistic means of calculating expected stock market returns in light of valuation. I’ll refer to it as The Bizarro Rule of 72. I’m assuming that you know of the Rule of 72. If not, it goes like this. If you want know how long it will take for you to achieve a 100% return on your capital given a specific interest rate, simply divide 72 by the interest rate. It’s real easy. Say you have a bond that pays 8%. Divide 72 by 8 and you get 9, therefore, you’ll receive interest equal to your original principal in a span of 9 years. At an interest rate of 12%, it will take you 6 years and so on. For whatever reason, people in my profession love to quote the Rule of 72 but to be honest, I find it mundane. So, rather than be conventional, I’d like to examine the inverse of the Rule of 72. In honor of Seinfeld, I’ll refer to it as The Bizarro Rule of 72. Rather than starting with an assumed rate of return for stocks to figure out when I’ll get all my money back, I’m going to figure out when I’ll get all my money back to calculate an assumed rate of return for the market. You follow?Read more

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