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With the debt ceiling debate/government shutdown now behind us, at least until the end of the year, we can now return to normal programming. Next week will be a rash of economic data that was pent up by the government shutdown from employment to inflation data. However, in the meantime, here are four things to ponder over this weekend.
1) The "Taper" Is Dead Until Next Year
I discussed in mid-September the real reason that the Federal Reserve did not "taper" their current Quantitative Easing program at their FOMC policy meeting despite wide expectations to the contrary. I stated:
"The problem for the Federal Reserve currently is that they are once again facing an issue that nearly cratered the markets, and the economy, in 2011. As we quickly approach the limit of the government's borrowing capability the threat of a government shut down and 'debt ceiling' debate once again looms. Bernanke remains fearful of such a repeat event given an already weak economy coupled with rising interest rates. Any shutdown of the government, fear of 'default,' or other restrictive fiscal policies, could collapse what incremental recovery there has been to date."
With the debt ceiling debate only postponed until early 2014 this puts the Federal Reserve in a "box" of being unable to reduce the monetary support for the markets at the current time due to the threat of potential disruptions from the Government. Richard Fisher from the Federal Reserve affirmed this idea via Bloomberg last Thursday:
- FISHER: FISCAL SHENANIGANS HAVE `SWAMPED' QE TAPER PROSPECTS
- FISHER: HARD TO NOW ARGUE TO CHANGE COURSE OF MONETARY POLICY
- FISHER HAS FAVORED TAPERING FED MONTHLY BOND PURCHASES
- U.S. FED'S FISHER REPEATS BEST TO 'STAY THE COURSE' ON BOND BUYING AT OCTOBER FOMC MEETING
Of course, more QE means higher stock prices. I discussed last week:
The Federal Reserve's ongoing QE program has continued to increase excess liquidity in the financial markets. That liquidity provides a significant catalyst for an upward push should a resolution clear the way for the financial markets in the days ahead. If a deal is struck; it would not be surprising to see the financial markets break out to new highs and approach 1800.
The 1800 level on the S&P 500 is something that I proposed back in August when I wrote "Could Stocks Be Ready To Melt Up?"
Joe Calhoun of Alambra Partners concluded:
"The stock market loved the deal although it is hard to see why. The only thing I can come up with is that three more months of budget wrangling means QE goes on and in the math of Wall Street that means higher stock prices. QE and more budget negotiations won't produce more economic growth or better earnings but for some reason the stock jocks have decided that QE will keep stocks going up for as long as it persists. So far they've been right but I do wonder at what point the actual fundamentals will have an impact. And on that front, I don't see much good coming down the pike"
2) Sign Of A Bubble - "Athlete IPO's"
In 1999, it was "anything" that had a ".com" attached to its name. In 2007, it was all about real estate and sub-prime debt. Each of these instances of speculative greed was an early sign of a market peak. Last week a company has figured out how to capitalize on selling shares of popular athletes to individuals.
"Thanks to Wall Street, fans can buy a stake in their favorite player.
On Thursday, a start-up company announced a new trading exchange for investors to buy and sell interests in professional athletes. Backed by executives from Silicon Valley, Wall Street and the sports world, the company plans to create stocks tied to an athlete's financial performance.
The company, Fantex Holdings, has grand ambitions beyond a Foster I.P.O. — it hopes to sign up more football players and other athletes, as well as celebrities like pop singers and Hollywood actors. But if such an investment sounds speculative, that is because it is. In a filing for the Foster deal with securities regulators, Fantex laid out 37 pages of risk factors, including a possible career-ending injury or a performance slump.
'You are potentially one hit away from losing your money," said Bradley Shear, a sports management professor at George Washington University. "On any given Sunday, anything can happen to any player.' (Here is a list of 36 risks via Business Insider)
Risks aside, the offering is intended to capitalize on the mammoth popularity of the National Football League and fantasy football, where fans draft players and score points for touchdowns, yardage and other notable plays during the season.
If thousands of fans are willing to pay as much as $250 for an Arian Foster jersey, the thinking goes, why wouldn't they pay up for a few shares of Arian Foster stock?"
Ideas such as these usually only gain traction when speculative greed is running near extremes. Remember the "bit-coin" frenzy?
3) Why We Sell Winners And Hold Losers
This was a really good article on why, as investors, we always tend to do the opposite of what we should do as the emotions of "fear" and "greed" overtake logical decision making processes.
Consider these two problems
Problem 1: Which do you chose? Get $900 for sure OR 90% chance to get $1,000
Problem 2: Which do you chose? Lose $900 for sure OR 90% chance to lose $1,000
Think for a minute before reading further. For problem 1 most of us will chose the option of getting $900 for sure. We avoid risk when a sure gain is at sight. For problem 2 most of us will chose the option of 90% chance to lose $1,000. When a loss is looming around we chose to gamble and seek risk.
You were probably risk averse in problem 1, as it is the great majority of people. The subjective value of a gain $900 is certainly more than 90% of the value of a gain of $1,000. Now examine your preference in problem 2. If you are like most other people, you chose the gamble in this question. The explanation for this risk seeking choice is the mirror image of the explanation of risk aversion in problem 1: the (negative) value of losing $900 is much more than 90% of the (negative) value of losing $1,000. The sure loss is very aversive, and this drives you to take the risk.
The image given below shows the psychological value we associate with gains and losses.
4) A Dozen Things I've Learned From Benjamin Graham About Investing
25iq posted a great list of investing wisdoms from Benjamin Graham on value investing. With the markets currently being lofted into the atmosphere from excess liquidity, and few headwinds at the moment, it is a good time to remember what is important about investing for the "long term."
- "The last time I made any market predictions was in the year 1914, when my firm judged me qualified to write their daily market letter based on the fact that I had one month's experience. Since then I have given up making predictions."
- "Abnormally good or abnormally bad conditions do not last forever."
- "The function of the margin of safety is, in essence, that of rendering unnecessary an accurate estimate of the future."
- "The speculator's primary interest lies in anticipating and profiting from market fluctuations. The investor's primary interest lies in acquiring and holding suitable securities at suitable prices."
- "The investor's chief problem – and even his worst enemy – is likely to be himself."
As we proceed through the rest of this year it will become an increasingly interesting debate between the economic and fundamental data versus ongoing asset speculation driven by excess liquidity.
Originally posted at Lance's blog: STA Wealth Management
(c) STA Wealth Management