More Questionable Financial Coverage on CNBC

I've never really liked CNBC's equity options programs. The original, Fast Money, once hosted by now-departed Dylan Ratigan, airs after the market's close, with a 12:30PM spinoff, as well. It's not because of Melissa Lee, Ratigan's replacement, for whom I actually have great respect as a reporter and anchor. Nor several of the program's continuing contributors, including John Najarian.

It's just the fact that the network airs two programs on the topic of short-term options trading. As I've written elsewhere in a few prior posts, I don't believe many, if any, retail investors have any business dabbling in equity options. Beyond relatively safe strategies, such as covered calls, it is mostly likely an expensive waste of time and money for most retail investors. Something like 90% or more of all equity options expire without gains.

To me, the Fast Money programs aim for a rather odd segment. Few retail investors are probably interested or sufficiently confident to try to follow any of the advice emanating from the program's personalities. Institutional investors would be unlikely to need such advice- they either already have their own professional opinions as options pros, or don't go near the instruments.

Now, an even more troubling asset class is looming on CNBC's horizon- foreign exchange.

Within the past week, I was asked to complete a CNBC survey on the topic. The network's surveys are typically pretty obvious in their focus. This one probed my unaided recall of advertising by various FX trading vendors, then segued into how I felt about the companies and the concept of CNBC airing an FX trading program.

You can see what's coming here. One or more retail FX platform vendors approach CNBC about sponsoring a program focusing on their instruments. With all the cross-currency plays available, plus various forces- interest rates, trade, intervention, etc.- driving FX valuations and expectations, there would be a lot to discuss.

That's also the downside- for retail would-be investors. FX is a dicey area for professionals. Never mind allowing retail investors loose in this toxic candy store.

I continue to feel that CNBC knowingly entices retail investors to believe they can and should engage in investing activities for which they are unsuited. Most retail investors should stick to managed equity and fixed income funds. Few really have the time, knowledge and skill to add unique value by selecting individual equities or bonds, let alone derivatives thereon. For CNBC to devote so much air time- as much as 2 1/2 hours now, including two Fast Money programs and Cramer's Mad Money- is, in my opinion, irresponsible. To add FX to this brew is even worse.

Repercussions of Meredith Whitney's Muni Bond Default Warnings

Only Monday I was writing of Meredith Whitney's warnings on impending muni bond defaults, putting her publicly at odds with PIMCO's Bill Gross. Further, Whitney explicitly called Gross on the motivations behind his rosy view of such fixed income instruments.

Yesterday on CNBC, Doug Dachille provided his usual scintillating and informative remarks on the fixed income market.

For starters, he agreed with both Gross and Whitney that there will probably not any US state defaults. Dachille then launched into a unique analytic description of how state tax-exempt munis play a part in financing vis a vis tax increases and defaults. Specifically, he noted that most holders of a state's bonds are wealthy state residents, because of the tax exemption. Thus, Dachille noted, a default was as good, or bad, as a tax increase, because, either way, it came out of the same pocket. However, he explained, when a state cut services to fund bond payments, that was essentially regressive, as the state's lower-income residents probably got disproportionately hurt, while the wealthier households continued to enjoy their interest payments without tax increases.

Very interesting insights on income redistribution, taxes, budget cutting and public finance bonds.

Then Dachille told a story that reinforces my belief that retail investors should never, ever, directly purchase bonds. He described a NY city waste treatment plant bond which provided for interest payments before the city was paid its operating expenses. Thus, he noted, the bond was doing nicely at 5+% and had a nearly zero chance of default. But, he cautioned, you had to do your homework to know this. Not all bonds are equal.

Exactly. Which is why when friends talk to me of building bond ladders, I cringe. Unless you are talking very plain vanilla corporates or Treasuries, you're playing with fire. Not to mention the brokerage fees hidden in the spreads when buying individual bonds.

Then Dachille pointed out another important feature of bonds, i.e., with rates so low, and nowhere to go but up, a non-defaulting muni has only its total cash flow as its maximal value. Thus, he said, investors have to realize that muni bonds aren't going to be growth instruments yielding 12% return rates, as equities might.

In sum, he painted what I think is an accurate, often missing picture of fixed income investing as much more risky for retail investors than is generally realized. And why well-managed bond funds serve an important function.

Steve Jobs' Medical Leave, Cash Levels & Apple Pundits

Since I wrote this morning's post over the weekend, I didn't include the recent news of Steve Jobs' latest medical leave. Nor this morning's Wall Street Journal pieces concerning Apple. One focused on new Android devices, the other on an institutional manager's fury over the tens of billions of cash on the firm's balance sheet.

Of the three developments, I'd say that Jobs' departure will be the most critical. As expected, it knocked some value off of the equity's price this morning, causing a 3.7% drop by 11AM, as I write this post. As a growth equity, it's understandable that uncertainties over Jobs' future at the company will affect the forward-looking component of its price. So even strong quarterly performance reports will probably be overshadowed by these worries.

As to the cash concerns, I continue to be surprised by whining fund managers who can't simply make a buy/sell/hold decision. They keep wanting to push management by complaining in public, whereas simply dumping the equity if they really object to Apple's financing policies would probably have far more effect. Until these managers mount an Ed Lampert-style takeover of Apple, however, they'd be better off just voting with their trades.

As to Android-based smart phones, the back page piece in the Journal's Money & Investing Section didn't really impress me all that much. The major gripe the author had was that, like its laptops, Apple commands a high price premium for its iPhone, making Android devices more attractive to carriers for discounting. But at the very end of the piece, he admits that Apple's apps are triple the current number for Android phones.

Isn't the real issue, however, growth of Apple's iPhone base, not total market share? Apple's share of PCs and laptops hasn't been dominant, but their sales certainly have continued to help fuel the firm's revenue and income growth.

I remain comfortable trusting the management that brought Apple to its path of consistently superior performance. If Steve Jobs becomes unavailable in the long term, that will probably affect the company's share price and, thus, it's implied performance for shareholders. It's a self-fulfilling prophecy that could very well remove Apple from my equity selection process' results. So be it.

But the other concerns seem, to me, pointless. Such second-guessing is akin to trying to influence the same management which has produced the results which drive investors to buy the equity in the first place.

More of James Stewart's Questionable Investing Advice

I have had the occasion to answer some investing questions from friends as the new year begins. Having been professionally involved in equity and options investing for nearly 15 years, and in the financial sector for much longer, my advice is typically simple.

Avoid individual equities unless it's speculative money. If investing for a longish term, stick to dollar-averaging the S&P500 from a low-cost fund complex. Any other sector bets are best made via Vanguard or comparably-priced, passive index fund complexes.

The dirty little secret of investing is that non-professionals should steer clear of individual equity, bond or option trading and, for that matter, trying to chase the, on average, 25% of actively-managed publicly-available funds which manage to beat the S&P500 Index each year, because they are usually a different 25% the next year.

So I found a recent Wall Street Journal column by its official investing guru, James Stewart, particularly disheartening. Stewart spent most of the article's ink fretting about Apple's continued dominance and growth prospects. After much 'analysis,' Stewart confided that he'd sold some options on the firm's equity recently, content with the profits. His other recommendation involved Google and the new Motorola Mobility. About Apple, Stewart concluded,

"I see only one problem: I'm not sure what worlds are left for Apple to conquer."


Then, in classic fence-sitting fashion for a market pundit, he adds,

"I haven't given up on Apple. I still own shares and another set of call options that expire in January 2012. But the market recently hit one of my selling thresholds, and I feel comfortable taking some profits."

Clear on that now? Me neither.

But here's what really stuns me. Stewart holds options expiring a year from now. That means enduring a lot of potential price volatility. And he doesn't mention any sort of time-dimensioned discipline.

The problem with the price-targeting he uses is that it isn't referenced against a market index level. It's just free-floating, as if that's adequate.

My own equity approach holds portfolios for less than a year, but more than a few months. Shorter than that is to be nearly a market-timer, which doesn't work consistently over long time periods. Longer, and you are asking for trouble due to changing company situations. I don't mind holding the same equity for over a year, so long as the decision is made month by month to do so, for the entire planned duration.

With investing technology and institutional money management having evolved as they have in recent years, the notion that you can buy and hold technology issues for the long term is misleading. Even more so when the Journal recently published an article describing how concentrated many large hedge fund holdings are in just a few equities, often in the technology sector.

But I approach this from a professional perspective, and Stewart ostensibly writes market advice columns for a living. His readers, however, presumably have day jobs.

They have no business sinking substantial amounts into individual, volatile equities. Most of his readers are probably best off dollar-averaging their way into ever-increasing S&P500 Index positions, with some diversification into perhaps one or two passive sector funds and a corporate bond fund.

Many years ago, when I was just out of graduate school, I read the chilling, sad Wall Street Journal stories of how so many retail investors lost everything on WPPS bonds. The infamous Washington Public Power Supply debt wasn't actually federally guaranteed, but had been sold as such by unscrupulous brokers.

The moral of the story for me, however, was simply this. For many investors, just keeping their capital over their investing horizon probably puts them far higher in the distribution of retail investor returns than many would care to admit. Chasing tempting returns on individual technology equities merely adds to the risk.

Which is why I think Stewart's column is inappropriate for the Journal. But, as I wrote at the beginning of this post, that's the sector's dirty little secret. Most retail investors have no business even bothering over individual equities or debt issues.

That's what low-cost, passive index fund complexes, staffed by professionals, are for.

Meredith Whitney Speaks Truth To Power a/k/a PIMCO's Bill Gross

For once, someone is speaking honestly regarding PIMCO's bond gorilla Bill Gross. MeredithWhitney accused Gross of having Pollyanna attitudes on US municipal defaults because he holds so many of their bonds.

Yes, at last, some truth about Gross' shameless pumping his own book and positions on CNBC. Whitney was on the network last week as a guest host. I believe that's where she made her comments regarding her differences of opinion with Gross on the default question. It was picked up in a weekend Wall Street Journal piece, as well.

In that latter article, Whitney is quoted as agreeing that we won't see state-level defaults. But she is clear in believing that there will be a fair number of municipal bond defaults.

This isn't the first time Gross has used CNBC to advance his firm's positions. A few years ago, when the Chinese were questioning US backing of Fannie Mae bonds, Gross asserted unequivocally that the bonds were explicitly backed by the US government, despite evidence to the contrary. In the event, the administration buckled and reassured the Chinese, and Gross. But in the interval before that public statement, Gross did his best to talk up the value of the bonds in question.

This time, however, he's up against a well-regarded, objective analyst. Whitney's warnings on credit card policies by banks in light of new regulations was prescient. Her work on municipal bond safety is looking pretty good, as well. And she recently intimated that her firm will initiate muni credit ratings very soon.

It's refreshing to see someone in the financial sector have the courage and ability to challenge Bill Gross' contentions. Especially when he hasn't exactly provided evidence for his views, other than a general knowledge that his firm's book drives his publicly-expressed opinions.

Investing In US Financial Companies

I continue to find remarks on CNBC regarding investing in the equities of US banks to be suspect.

Consider, for example, the nearby price chart for BankAmerica, Chase, Citi, Wells Fargo, Goldman Sachs, Morgan Stanley and the S&P500 Index.

Despite what you may believe from the daily cheerleading by CNBC equities reporter Bob Pisani, simply holding a basket of these largest six (surviving) equities for the past five years was worse than holding the anemic S&P index.

Yes, Pisani is largely valueless as a reporter, because he's really just an equity markets shill. But it's a deeper issue than that.

First, as I noted, there's the survivor bias. Wachovia acquired itself out of business, while Bear Stearns just imploded. Merrill Lynch and Countrywide are gone, now part of BofA.

Even if you knew in advance which large financial institutions would survive, you'd have to be pretty fortunate to randomly pick the winner- Goldman Sachs. Chase and Wells Fargo basically tied the S&P with no price appreciation over the period. It's difficult to credit those latter two CEOs with being paid handsomely for simply tying the index. If they were hedge fund managers, they'd be pilloried on Capitol Hill.

Citi and BofA remain, of course, unholy messes. The former should have been allowed to fail, so that better management could have gained access to that large asset base. Morgan Stanley continues to limp along, performing like a badly-managed commercial bank, but with the business mix of Goldman Sachs.

If you look back just about a year, you see that, in general, prices have either flattened or actually dropped. So timing didn't really get you much in a year when the S&P rose 15%.

Then there's the sector's prospects for 2011. Here, Goldman is again probably the best-advantaged of a mediocre bunch. With no asset base like a true commercial bank, it doesn't own mortgage portfolio valuation risks and, if it behaves as it has in the past, may even bet on further declines in related assets. For the commercial banks, recent housing price weakness, noted recently in posts here and here, portend another round of punishing valuation plunges reminiscent of late 2007.

Between that imminent risk, and the uncertainty of rebuilding fee income in the wake of the Dodd-Frank bill, commercial bank revenues are not so, well, bankable. Plus there's the reality that bank profitability historically rises with rates...which are ultra-low and show no particular sign of rising.

Unless you feel lucky about timing financial equities, there's not really much positive in the outlook for financial equities.

All of which leaves me critical of CNBC's ceaseless pumping of financial equities. At least Kelly Evan's recent Journal piece on the upcoming earnings season cautions on financial sector equities.

Confusion Over Apple As An Investment

I've noted with interest this past week's flurry of comments about Apple as an investment for 2011.

In my own equity strategy, which is outperforming the S&P for the year by roughly 25% to 11%, Apple would now be a holding in four of the currently active six portfolios. Apple trails the index slightly in two recently-formed portfolios, and outperforms in the other two.

While I can't predict with certainty, I'd expect that Apple will be part of the January 2011 equity portfolio, as well.

The nearby price chart for Apple, Google, Microsoft and the S&P500 Index reveals how dominantly the former has outperformed the latter three entities, Google and Microsoft being two of the more popular alternates in the technology sector.

What surprised me somewhat is how comparatively anemic Google's performance has been, when viewed with Apple's. The S&P's and Microsoft's track records for the past five years isn't all that unexpected.

Listening to many pundits, it's tempting to believe that Apple's performance is a purely technical feat, with a parabolic curve that must descend soon.

However, on the several bases in my quantitative equity portfolio selection process, Apple probably has some life left in it. Moreover, I've seen broad consensus on prior growth equities be wrong. For example, in 1998, Dell was viewed as overpriced and unable to sustain its then-torrid fundamental growth. It ended the year as one of the S&P500's top ten total return issues, so I was thrilled to have followed my portfolio selection process and held Dell for the entire year.

Ironically, as I observed back in the late 1990s, the bulk of the analyst community views equities in aggregates, often with some technical perspective. Thus, the individual merits of many attractive equities are lost amidst broad comparisons and conventional 'rules of thumb.'

Thank God for that.

As I consider why Apple, with its lofty share price and steady march upwards in price since January of 2009, may continue to outperform the S&P500, several reasons come to mind.

One, of course, is the firm's clear, successful focus on consistent innovation and evolution of well-received products. Those products have achieved high brand preference status. Additionally, they are typically in price ranges that have made them less vulnerable during the recent US recession and continuing economic weakness. With Steve Jobs' continued leadership, the firm may outperform expectations for a little while longer still.

And, finally, there's something which many investors fail to grasp. That is, even broadly-followed, popular firms can outperform. What is required is unexpected excellent performance. Firms like Microsoft, Dell, Kolhs, in the past, and, currently, Apple, have achieved this. It can never last forever, but it can often outlast ill-informed, generically-based expectations.

What Google does seems to be less unique with time, while Microsoft has been mismanaged for over a decade, with no sign of significant change in that important parameter.

The bottom line for me is that I don't subjectively select equities. But I can and often do interpret why my quantitative approach selects those equities which appear in portfolios. And from post hoc, informal inspection, it's easy for me to see why none of the recent portfolios have held Google or Microsoft, while many have included Apple.

The Sudden Emergence of Contentions of 'the End of Savings Glut'

I have read two separate articles in the past week concerning a contended coming 'end of savings glut.' One piece, by David Wessel, appeared in the Wall Street Journal, while the other was in a recent edition of The Economist. Both cite McKinsey & Co.'s McKinsey Global Institute as the source of their articles.

Seeing McKinsey's institute cited twice in a week on the same topic makes me suspicious that the consulting giant is once again gearing up its media machinery to stoke demand for projects based on yet another shocking 'finding' from its 'institute.'

I recall when McKinsey created its institute many years ago. At the time, I was with Andersen Consulting, now Accenture, which, belatedly, I believe, created their own allegedly-separate research arm, as well. Back then, it was relatively easy to identify McKinsey's 'institute' concept as simply a way to refashion certain publicly-releasable elements of their confidential client work, the better to get free media attention and put forth an image of doing independent research. I said as much to senior executives at Andersen at the time, but it took quite a few years for them to come around to the McKinsey concept.

Whether this latest shocker from the consulting firm is the result of its deliberate consideration of the question, or simply an agglomeration of various client work elements, is not clear. Or even if it's mostly some deductions made from combing through available OECD information. Reading the two derivative articles suggests it could easily be the latter.

Rereading those pieces, I find myself rather unsurprised by McKinsey's alleged 'findings.' It doesn't take a genius to see that wealthier developing nation consumers will both attract more investment to build infrastructure to serve their evolving needs, as well as provide some savings from their accelerating incomes.

Are the estimates of global investment, savings, and growth from McKinsey accurate? I don't know. Why should they be any more accurate than those of other pundits, researchers and observers?

Here's a sample of Wessel's interpretation of the McKinsey report,

"The global savings glut could easily become global savings dearth. And that would mean substantially higher interest rates.

If long-term rates, adjusted for inflation, returned to the 40-year average, McKinsey estimates, they would be 1.5 percentage points higher, a big jump from the current 3% or so yield on 10-year Treasurys. And rates could go up more if emerging markets try to step up infrastructure and other investments faster than U.S. and other rich countries increase their overall saving, which could be an unwelcome brake on global growth."

Funny, I thought the US is dissaving to the tune of a trillion dollars of federal deficits per year, plus various municipal pension funding gaps in the tens of billions.

The fuzzy forecasts for various constructs- savings, investment, economic growth- combined with whether various rates rise, or fall, makes the whole notion of declaring a savings shortages a joke.

I'm not saying their won't be an 'end of savings glut,' nor that their won't be a rise in rates. But so much depends upon the movement of many inter-related factors that it's really just impossible to know, isn't it?

But, then, that's probably McKinsey's objective. To create some newly-imagined risks of uncertainty, the better, well, to go hire those supposedly-smart folks who wrote that study. Just in case there's new uncertainty.

This is classic consultant marketing. I can well-imagine the hours of conference-room sessions at McKinsey dreaming this one up. Corral a bunch of publicly-available statistics, use a lot of beach-time among under-employed junior staffers, and demonstrate the possibility of some shocking headline. Doesn't really matter what the headline is, so long as it's a shocking departure to something current. Change is news, change brings risk, and perceived new risk just might bring in some new assignments to assess various companies' risks to these new, possibly-changing facets of the global economy.

And McKinsey is doubtless counting on getting their share, or more, of those assignments. Regardless of whether there is going to be a dearth, or glut, of global savings on the horizon.

Tyler Mathisen's Stupidity Is Showing On CNBC Today

Tyler Mathisen managed to demonstrate his incredibly stupidity and failure to grasp the difference between trading and investing this afternoon on CNBC.

It's about 1:40PM as I write this, and Ol' Ty just made a monkey out of himself.

Beginning an on-site report from a conference in Boston, he sputtered, to paraphrase,

'With all these sophisticated, fast trading algorithms, a staid old mutual fund doesn't stand a chance!'

For a guy who has ostensibly been reporting on financial markets for years, Ol' Ty really showed his lack of knowledge in that statement.

One thing which needs to be understood is that no matter how fast and complex the methods that trading desks use will become, they don't have appreciable effects on investments which are not fast-trading strategies.

It's not to say that buy-and-hold for years still works. But failure to buy an equity at the same price as some institutional trader, and paying a few cents more, won't matter much over months.

Of course, if you're Ol' Ty, and work for a network, CNBC, which insists on characterizing every investment decision with the nearly-trademarked phrase,

"So, what's the trade?!"

you wouldn't realize this.

It's bad enough that Ol' Ty can no longer distinguish between institutional trading and retail investing. It's worse when his ignorance and stupidity cause retail investors to misunderstand the markets and panic.

Good job, Ty. Looks like you've earned your money today.

Dangerous Advice From The WSJ's James Stewart

The Wall Street Journal employs a particularly inept and whiny investments writer named James B. Stewart, author of its "Common Sense" column.

I last wrote of Stewart's dubious credentials here, in August, in regard to his having fallen victim to the auction rate securities mess. In that post, I observed,

"Which brings me to a hilarious companion piece in the same WSJ edition.
It seems that James B. Stewart, a regular investment columnist who writes "Common Sense," lost his. He spent yesterday's column bitching about his lack of satisfaction as a 'victim' of the ARS mess.

But, back to Mr. Stewart. For someone so lofty as to write a column in the WSJ on investing, wouldn't you think he would know better than to offer an excuse like the above for purchasing ARS notes? Really- something for nothing, James?

Free extra returns, just for 'valuable clients?'

I have to laugh, because I've never bought any structured finance instrument in my life. The market-making assurances on these instruments are simply not to be believed.

Anyone with any experience in securities markets would know this.

Should James B. Stewart even be writing a weekly investing column for the WSJ, if he was taken in by such a simple ruse as the ARS game, and went for the old 'something for nothing' con?"

In yesterday's edition of the Journal, Stewart weighs in on those conned by Bernie Madoff. Here are some priceless gems from Stewart's attempt to excuse all those victims of any personal responsibility in the matter,

"Now that some of the dust is settling around the Bernard Madoff scandal, there has been a growing tendency in some quarters to blame the victims, at least in part. According to these theories, they should have recognized that annual returns of around 10% in both good times and bad were too good to be true. They should have been suspicious of Mr. Madoff's vague explanations of how he arrived at those results. And to the extent he described his strategy, which involved the simultaneous purchase of stock and sale of option contracts, they should have noticed that there wasn't sufficient volume in those options trades to account for the reported gains.

The lesson from such criticisms, I suppose, is that we should all turn ourselves into forensic accountants. I find that preposterous, not to mention distasteful, given that some of these people have lost their life savings. After all, consistent returns in good and bad markets are the selling point for nearly every hedge fund. There are plenty that have reported much larger annual returns without raising eyebrows. Indeed, Mr. Madoff's returns were good, but not so spectacular as to raise undue suspicion. As for his vague explanations, they were no vaguer than those of many other hedge-fund managers and even mutual-fund managers."

For someone writing a column entitled 'Common Sense,' it seems Stewart has decided that investors really shouldn't have to bring any to the table. Madoff's return weren't just consistent- they were practically constant and uniform! Big difference!

It's not forensic accounting to observe that returns are too steady in markets that fluctuate, and you can't get a straight, understandable and believable answer regarding how a manager is able to achieve such unwavering results for years on end.

What Stewart does recommend, later in his piece, are basically four things:

-a well-known manager should have a well-known accountant
-diversify your investments among different managers
-remember that above-average returns have above-average risk
-don't use middlemen to find a manager

The second and third points are basic investment truisms. The first is probably a good idea, but might cause you to avoid a credible manager. Everybody starts somewhere, and every accountant has to have a first client. That doesn't make him/her a criminal.

As to using middlemen, that's a tougher call. Some managers can't really be accessed any other way. Most retail investors don't have the time or knowledge to contact individual managers who will give them the time of day. That's why we have mutual funds. For most investors, either a private bank or pension fund offer a pre-screened selection of managers, i.e., they behave as middlemen.

Stewart's final recommendations are, for the most part, either harmless or obvious.

But his worst offense is in the opening paragraphs of his article, in which he effectively absolves investors from having to take responsibility for using common sense to assess the likelihood that an investment manager is engaging in real, verifiable, extraordinary investment strategies.

The Wall Street Journal shouldn't be publishing this dangerous nonsense, or, in my opinion, anything by James Stewart.

Celebrity Investors: Kerkorian vs. Buffett

Kirk Kerkorian made major headlines yesterday and today by announcing the reduction of his stake in Ford Motor Company.

According to most stories, the seasoned investor has lost about 70% of the value of his Ford position, or roughly $690 million on a $1B investment earlier this year.

Kerkorian's Tracinda Corporation, his investment vehicle, is privately held, so we can't really know his, or its performance over the decades during which he has been a prominent investor. He's been at it for quite some time, though. I vividly recall a problem in a graduate accounting course which featured an article detailing Kerkorian's transformation of MGM into his personal money machine. He ended up controlling the company's voting shares in such a way that he could use it as an ATM, declaring a dividend payable largely to himself, at will.

The other celebrity investor who comes to mind, of course, is Warren Buffett. Buffett works through the publicly-held Berkshire Hathaway, and maintains a high profile. He has made himself the darling of the CNBC set, publicly jumping on the Obama bandwagon, and no doubt enjoyed being mentioned by both candidates in a debate earlier this fall.

Nearby is a 5-year price chart for Berkshire and the S&P500 Index. It's easy to see that, despite all Buffett's publicity, you'd have been better off, on a risk-adjusted basis, owning the S&P for most of the past five years. Since 2003 market the onset of the most recent period of an up market for equities, this chart tells you that Buffett, no matter what he might have once done, is no longer a serious outperformer in healthy equity markets.

The accompanying 2-year view of the same series gives a closer look at the split, whereupon Berkshire parted company with the index and began to outperform it.

When the very beginning of the current financial crisis began to be noticeable, in August of last year, Berkshire rose, while the S&P flattened, then, of course, began to significantly slide in the spring of this year.

Looking at just the past six months, in this chart, we see that, even recently, Berkshire tracked the index almost perfectly until the carnage in September. In fact, in the brief period of a 'false positive' in May, Berkshire actually underperformed the index.

My point is that, on evidence of the past five years, Buffett's Berkshire is hardly the paragon of investing prowess that so many believe when referring to him as the "Oracle of Omaha."

Even in recent months, his bets have been focused on lending money, at very high interest rates, to better-quality US firms, e.g., Goldman Sachs and GE. It's a bit galling to hear Buffett mentioned in Congressional hearings by our elected representatives as if he's some sort of investment deity, when, in fact, his record is actually so inconsistent, or, at best, usually mediocre.

Because Tracinda leaves no long term footprints, it's impossible to show a comparative chart of Buffett's and Kerkorian's performance. But I can't help suspecting that Kerkorian has a better, more consistent track record over time.

Call it my innate scepticism, but I'm leery of Buffett's obvious use of his own public image as the best investor on the planet to draw attention away from his firm's actual performance, versus the market, over time.

Ironically, I'm more impressed with the entire Kerkorian saga of investing in the auto sector. I wrote about it, and Buffett's Mars-Wrigley investment, in this post, back in May of this year.

While Kerkorian didn't realize his objectives with his Ford stake, you cannot criticize him for a lack of appetite for risk. A Wall Street Journal article attributed some of Kerkorian's motivation for selling his Ford stake to the recent departures of the CFO and a board member, raising the specter of increased control by the Ford family.

Whatever the reasons, I sense, in Kerkorian's shunning of the public spotlight, a more hard-nosed, focused approach to finding opportunities for investing. I wish we all knew more about his investment performance over the years.

It would be a fascinating comparison.

On Pandit's New Plan at Citigroup

This past weekend's Wall Street Journal edition was full of information regarding Citigroup's CEO, Vikram Pandit, insistence that it will take years to fix the bank.


Sadly affirming the financial supermarket strategy first pioneered by James Robinson at American Express, then lifted by his capital markets hire, Sandy Weill, and ported to Travelers/Citibank, Pandit plans to take several years to get the overly-diverse financial conglomerate on the move in terms of shareholder returns.


Maybe Pandit's drinking whatever his chairman, Bob Rubin's been having, because it takes a lot of chutzpah for a CEO to tell shareholders,


"This will take time."

Apparently, rather than split the sprawling, hapless banking giant into reasonable pieces, such as institutional, consumer, and asset management, in its simplest description, Pandit intends to

"finally merge it all,"

to allegedly finish what Sandy Weill started back in 1998.

Do you know of any other sector in which the rationale for such a major merger is even still valid ten years later, without any changes?

It seems to me that Pandit is demanding, even challenging, his shareholders to stay put and wait a few years to see whether, untested as he is, the former finance professor can actually bring about profitable growth and consistently superior shareholder value at the financial utility.

If it were true that the bank were capable of being fixed to run, as is, intact, yielding consistently superior returns, but it would take some years, then I guess that's one alternative. But in the interim, shouldn't Pandit forgo any significant compensation, since he isn't planning on enriching his shareholders during the time period?

I'm thinking that he would be stripped of all deferred compensation, paid about $350K/year in cash, and, beginning in the year he forecasts improved, superior total returns, deferred stock grants could be paid to him.

If I were a shareholder, though, and heard Pandit's promise of years before a recovery of the bank, I'd just sell my shares and wait for some consistently superior total returns before plunging back in.

Heck, that's what my selection approach does anyway. I don't invest in 'turnarounds.' I only bet on superior operating businesses.

As I noted in this post, regarding GE, if shareholders dumped Citigroup stock now in droves, the price would plunge, actually making it easier for Pandit to earn superior returns in the near future. Provided he actually delivered the promised operating improvements.

Still, it's a pretty galling thing for Citigroup's shareholders to be told to just sit tight, as they have for, what, seven years? And maybe...maybe...this untried CEO will suddenly deliver some better returns than these poor souls could have been getting for the past seven years simply by selling Citi and buying the S&P500 Index.

Investing Options & The Folly of "Corporate Governance"

Thursday night's O'Reilly Factor featured a segment following up on matters at GE. Bill O'Reilly had, as a guest, an institutional investor who holds GE shares and attended the annual meeting in order to ask CEO Jeff Immelt some pointed questions.

During this segment, the audio of the investors was played as he finished asking questions of Immelt and received a reply, including Immelt's contention that the investor had now taken enough of everyone's time.

As I watched O'Reilly retrace some of the same ground he covered in his discussion with me last month, which can be seen in this post, I considered the irony of the situation.

Bill O'Reilly clearly wanted to cover the GE annual meeting and, if possible, capture an unhappy investor closely questioning Immelt, and then interview the investor. This makes sense.

But, then again, it sort of doesn't. Because, as I wrote in this recent post,

"Mr. Effron's email provides at least one answer to Mr. O'Reilly's question of me about GE's equity,

"Who would own this stupid stock? Who would buy it?

People who think like Mr. Effron.

The remaining shareholders would seem to have motivations, valuation and performance criteria similar to those of Mr. Effron.

And that, my friends, is what makes markets. Different views of and valuations for the same instrument.

In this case, we're fortunate to have one of those, in Mr. O'Reilly's words, 'stupid enough to own this stock' actually tell us why he does."

It's one of those Holmesian cases of the dog that did not bark. Only, in this case, it's the investor who was absent.

The investor who was sanguine and realistic enough to have already sold and moved onto better investment opportunities.

So, while I appreciate Bill O'Reilly's desire to deliver good television by interviewing a disgruntled institutional shareholder, I also see that it is very much beside the point.

Further, the institutional fund manager then mumbled something about hoping that the board or shareholders would eventually move Immelt and GE to act in some way that would improve the value of the stock.

I like Bill O'Reilly and I fully understand his reason for covering the GE story on his new program. As I mentioned in this earlier post, he had a trifecta on this topic,

"However, from reading my blog, one of the program's producers, and O'Reilly, further realized that Immelt has continued GE's involvement in Iranian projects while shareholders have lost money, due to GE's dismal total return performance. Meanwhile, as I noted in yesterday's post, and prior, linked posts, Immelt has been wildly overpaid for destroying so many hundreds of millions of dollars of GE shareholder value since he took over the CEO spot from Jack Welch in September, 2001."

How much better can a news story be? A well-known US company, GE, continues to do business which supports the building of the infrastructure of a country, Iran, which is actively engaged in killing American servicemen in Iraq, while the company's total returns languish and the CEO is paid over $120MM since assuming the job in 2001.

But the investment angle of the story, as represented by Mr. O'Reilly's institutional manager/guest last night, now focuses on the wrong point.

The wonderful thing about our American economic system and environment is that you don't have to own GE! Or any other underperforming asset!

There are thousands of investing options available to both institutional and retail investors alike.

Rather than wait, like those poor souls anticipating Godot's arrival, for the seemingly-always-coming 'corporate governance' solution, investors are better off to just sell what they don't like and buy something else.

Look at Ed Lampert. He got fed up with Sears and decided to improve it. When Lampert surfaced last week, he was full of excuses about how Sears' continuing dismal performance is the economy's fault, and he was sure, in time, when that was doing better, so, too, would his newest headache.

Do you think Ed Lampert now wishes he'd avoided the Sears mess and just stuck with conventional hedge fund investing, instead of crossing the line into operating management of his holdings?

Honestly, the more I watch and listen to people hectoring company CEOs and their boards to 'improve governance,' the more I am convinced you should just vote your shares in the market by selling them.

After all, modern American corporations were devised mainly for the companies to attract capital, not in order to provide investors with additional instruments which would also allow them maximal voices in the operation of the firms seeking capital from the investing public.

If our modern publicly-held corporate model were so highly-evolved and optimal, why would private equity firms exist?

Isn't this the non-barking dog? Private equity?

Obviously some investors are sufficiently trusting of private equity managers such that they hand over large sums of money with less apparent influence on management than they would have in a publicly-listed firm.

Doesn't this suggest that there are more good investment opportunities than there are good CEOs and boards? That it's easier to sell your shares in a company which has potentially good positions, but bad management, and find a better pairing of business opportunity and management?

I thought about this on Friday, when I read a piece in the Wall Street Journal concerning Vikram Pandit's impending moves, or lack thereof, with the bloated, overly-complex and -diversified Citigroup. Rather than hope the inexperienced and untested CEO manages to pull a rabbit out of his hat at Citigroup, why not just sell the stock and buy equity in a company that is better-positioned in its sector, with better, proven management?

There are so many opportunities for investment in the American economy that there's simply no reason to hold onto a problematic equity and either hope, yet again, that this year will bring change for the better, or, worse, lobby for 'management change' or 'board action.'

It probably makes more sense to trust the senior management and board of the firm in which you invest to do a great job with the assets under their control than to invest in a company which you think could, or wish would, do better than it has with the company's assets, and then try to change the management and/or board's behavior.

I'm not Bill O'Reilly, nor one of his producers. So I don't know as much about what makes good television as he and his record-audience-producing staff do. But if it were me? The guest I'd have had on his GE-related segment Thursday night would have been someone who sold GE on or before last month's disappointing announcement of the firm's quarterly profits.

Why did he sell? How long had he waited? What did he buy with the proceeds of his GE equity sale?

That's an investor I'd find interesting and credible.

Reader Email Regarding GE & O'Reilly

A few days ago, I received this email from a viewer of the segment on Bill O'Reilly's Fox News program on which I appeared last month.

It Seems Many Do Not Agree with You-see Times Article
From: Art Effron (email withheld for privacy reasons)
To: CNeul@aol.com
Date:Sun, 4 May 2008 9:47 pm

THIS E-MAIL WAS SENT TO BILL O'REILLY TODAY
Bill-
It seems your info relative to Jeff Immelt is quite flawed:

GE IS NOT losing money
GE IS rated very highly among most creditable business and financial institutions
GE has NEVER MISSED a dividend in the history of its existence.
Most business and financial experts recommend GE as a very reliable investment (call your broker).
Your expert,Charles Neul, hasn't the slightest idea about GE and his views have absolutely based on faulty input.
GE's stock has not performed as we would like but only missed its projection in the last quarter.
GE manufactures many medical electronic devices that has saved many lives (maybe some of your family).
Have you really checked on Mr. Murdock's business activities as it related to Iran ?
Jeff Immelt has proven to be one of GE's most successful CEOs(check his track record as to his many
accomplishments).

Bill, I really hope your E-Mail screeners show you my E-Mail.

You are way too smart to believe some of the background information passed to you as true.

Art Effron (email address and phone number withheld)

I wrote in reply,

Dear Mr. Effron-

It's evident from your ranting email that you understand little, if anything, about my approach to equity performance analysis, as expressed on my blog, or the manner in which most successful portfolio managers seek to outperform the market.

The bulk of your points have nothing to do with GE's, and Immelt's inability to earn a total return for its shareholders which is better than that one can achieve by simply buying and holding an inexpensive S&P500 Index fund from one of many fund complexes. Some of your points, while perhaps true, are irrelevant to the matter at hand, i.e., has GE, under Immelt, outperformed the S&P, or not? To paraphrase a business partner of mine,

'Just because we might want to buy a company's products does not mean we want to own it's stock.'

For your information, as I have noted in several posts on my blog regarding GE, my information source for data on GE's performance is from Compustat, which is considered to be the leading institutional-quality source for fundamental and technical data on publicly-held companies. My information regarding Immelt's compensation is either directly from the Wall Street Journal or Forbes, both considered reputable and unimpeachable information sources.

As I mentioned on Mr. O'Reilly's program, the reason many in the media or investment circles do not criticize GE involves their not wanting to see their share of GE's large volume of corporate spending evaporate.

You would probably do yourself a favor in terms of your own credibility if you first gained a better grasp of the issues which were discussed on O'Reilly's segment on GE. Until then, it might be prudent of you to cease broadcasting your naivete.

-CN

I'm not sharing this email and my reply just for fun. Mr. Effron's email provides at least one answer to Mr. O'Reilly's question of me about GE's equity,

"Who would own this stupid stock? Who would buy it?

People who think like Mr. Effron.

'Investors,' and I use the term here very loosely, who mistake profits and the nature of a company's businesses for its ultimate delivered benefit to shareholders- total return.

And, in an ironic way, the fact that people like Mr. Effron choose to continue holding GE is what helps it remain a mediocre performer.

You see, if a lot more investors sold the stock now, it's price would, of course plummet even further than it has in the past year or month. But as the price dropped, it would probably reach a level so cheap that some 'value' investors would begin to accumulate the equity.

Then, GE's continued so-so fundamental earnings performances might justify more investor interest, and, thus, a short-term rise in the stock's price and, with it, a higher total return.

That so many GE shareholders continue to hold it, in effect voting every day to 'not sell' the stock, supports its price in the face of mediocre earnings performances.

The smart money, as I wrote of the sellers of regional bank equities in this recent post, has already left the building in GE's case.

The remaining shareholders would seem to have motivations, valuation and performance criteria similar to those of Mr. Effron.

And that, my friends, is what makes markets. Different views of and valuations for the same instrument.

In this case, we're fortunate to have one of those, in Mr. O'Reilly's words, 'stupid enough to own this stock' actually tell us why he does.

GE On The "Raging Bull"- What Don't They Get?

I have received quite a few visits from this referring site lately. Evidently, due to my posts over the past several years regarding GE, its current CEO, Jeff Immelt, and the man who selected him for this role, retired GE CEO Jack Welch, some of the denizens of this stock message board found my blog and those related posts.



Over the past few months I would see this referring URL occasionally. However, with the recent frenzy over GE's missed earnings number, Jack Welch's comments on the event, my appearance on Bill O'Reilly's program dealing with GE, Immelt and Iran, and the company's recent annual meeting, the number of visits from this message board have picked up in frequency.


Here is what the latest linked page of comments between various posting readers on the message board says (my emphasis in bold),


"Your post got me thinking about a link that I posted not too long ago. It is "The Reasoned Sceptic". I will add the link a little further on. When GE went down, I thought The Reasoned Sceptic would do a writeup on GE/Immelt/Welch. Think I checked too soon after 4/11/2008 and found nothing new. With your post, I checked The Reasoned Sceptic today and found some rather interesting and uncomplimentary information about GE/Immelt/Welch. When you go to the link, scroll down the right side and look for these listings:


GE (25 writeups)

Immelt (19 writeups)

Jack Welch (5 writeups)


- The writeups at The Reasoned Sceptic, the last time I linked to the site, sounded believable. With GE coasting along, you might not really know what to believe about GE. With the miss by GE the writeups seem to have more weight! - The newer writeups were also troubling. You will have to go to the link and do some reading...you really do not want me to explain...this post may get long as it is. It will take some time...but worth reading. As Naz mentioned, read when you get your coffee or tea or whatever you like on the weekends.


- After reading "The Reasoned Sceptic", looking at the YAHOO chart of the GE/funds and the Excel chart of data...here are some thoughts on GE:


1. GE is in a predicament for this year. What will happen if GE "does not" do better than the S&P 500 or get back to last year closing price of $37.07? GE "just might" be the best place to be this year?


2. You would expect Jeff and the board to be pulling out all the stops to make GE move. If not, GE will come under much "greater" pressure! No excuses will fly this year if the market goes up and GE does not!


3. "IF" GE does well this year, maybe Jeff will save his job for another few years? If a CEO change is going to happen, it will take some time. For now, expect GE to continue in its current form.


4. If GE were to finally break up its current structure, "that" will also take some time. Whatever "might" happen to GE, you are looking at one to two years... All depends on how high Jeff can make GE jump this year...in more ways than one.


5. GE is moving very well as of Friday! They lag the market and need to first "catch up" to the market. After that, will GE continue to $42.12 like last year or better? GE needs to make a statement this year and finish with a "BANG"...and I do not mean Jack with the "gun"...then again...


6. It is easy to follow GE on the YAHOO chart with the five funds. I have added all the funds from the GE 401K for more detail and they all are "index funds" or represent the market. GE needs to mix with the funds or "lead" some...if not all going forward.


7. GE has not really been strong through the middle of the year...and last year is questionable to me. It does try to finish the year up. Will there be a run up from here going forward or a year end run up? Just have to look each day!!!


Hope all the links work and "don't" miss "THE REASONED SCEPTIC". May "rattle your cage" on GE, but says a lot that slowly got to me over the years. As mentioned, GE is just a choice...that I have not used very often. It would be a surprise to see GE do very little this year... Look at the links and do some reading. Any and all information on GE is a help if you are in GE or plan to be in GE. "


Here's what I don't understand.


First, how can these readers use terms like 'sounds believable,' or 'interesting and uncomplimentary information,' and 'may rattle your cage on GE?'


All of my posts are based on real performance numbers in the market- total returns and/or price changes of GE, the S&P500, or United Technologies. None use forward-estimates.


One or two have used GE fundamental information from its income statement, in order to compare its performance with benchmarks from my own proprietary research, as well as with the S&P500.


Of course, I do include Immelt's compensation numbers from the Wall Street Journal and, on perhaps one or two occasions, Forbes.


What's not to believe? And be upset? Why? It is what it is. GE has performed badly for shareholders under Immelt, who has been paid more than $20MM in cash, plus another $100MM or more in deferred compensation, and there's just no getting away from that fact.


Second, in what alternative universe are these 'investors' living? They write comments about Immelt and the board really having to 'pull out all the stops,' or makeup in one year for all of Immelt's prior mediocre performance. They toss numbers which I assume are hypothetical GE stock prices around like they have magical properties. As if Immelt or the board can make the buyers and sellers of the company's stock arrive at some magic number, to the penny.


As if, indeed.


Finally, these people chat about GE stock like it's the only investment vehicle in the world. For God's sake, people, have any of you heard of the S&P500?


Quit wasting your time kvetching about the stock of some low-growth industrial conglomerate has-been, and, if nothing else, go put your money into the S&P. On the basis of nearly seven years of data, chances are you'll earn a better total return there than in Immelt's GE.


But, what do I know? I just stick to the numbers and write about what I see.

How New Exotic Investment Products Misled Retail Investors

Last Tuesday's Wall Street Journal carried an article detailing the many exotic financial investment opportunity's available to the average retail investor in today's market environment.

Between ETFs covering many asset classes, mutual funds implying "market neutral" performance, and vehicles allowing relatively easy entry into foreign currency, foreign market funds, and commodities investment/trading, today's retail investor can enter the realm of complex financial instruments, electronically, totally unaided.

According to the Journal story, this is bringing the sort of results you'd expect- margin calls, losses and bewildered retail investors.

What seems to be happening is that uneducated retail investors are entering financial markets which are largely dominated by sophisticated institutional traders and investors. In such environments, it's almost a given that any sort of turbulence, as we have been experiencing of late, will leave the retail investors holding the losses. Typically being late to market gains, and late exiting declining positions.

Then there is the damage done by implying to retail investors that they, too, can construct effective asset hedges. The same non-performing hedged positions which have caused so much financial loss among leveraged institutional investors and traders is, of course, also causing losses among less-leveraged retail investors.

This brings to mind the opposing forces of financial innovation and regulatory vetting of individuals and institutions as qualified to invest in various instruments.

Basically, it's another version of the old liberal versus conservative viewpoints,

'Should we protect people from themselves?'

Liberals would tend to say "yes," while conservatives would tend to say "no."

I'm not sure we can ever really protect retail investors from foolish behavior. Going back to the go-go equity markets of the 1960s, or the Bonneville Power Authority bond defaults of the 1980s, it doesn't take much in the way of financial opportunities to allow average retail investors to lose their money via bad management.

What astounds me, though, now, is how a retail investor can so nearly replicate, albeit at higher costs, the sorts of financial investment and trading strategies which many sophisticated institutional traders and investors also employ. It's a frightening realization.

Risk Week: All Risks Are Not Alike- Lessons From Hershey Park

As this week has worn on, and I have written about risk each day, the US equity markets have exhibited incredible volatility, while probably ending today up as much as 1%. Our equity portfolio has demonstrated similar performance.

We're not down in the double digits of percentage return this week, or this month. We hold large-cap, S&P500 equities, and call options thereon.

We don't sell calls. We don't sell puts. We don't buy or sell on margin. We don't try to hedge different instruments, in hopes of taking advantage of relationships which are, in general, predictable, but perhaps not so during times of financial uncertainty. We buy no bundles of mixed securities, such as mortgage CDOs, or other CDOs, nor do we buy or sell them in pairs, to hedge their returns.

A few weeks ago, as I spent several days with my daughters at a well-known amusement park in the next state, I mused about how my behavior at that park was rather like the investment behaviors my partner and I evince in the equity markets.

Since we only deal in listed US equities, or call options for them, that means we eschew some very unpredictable instruments which lend themselves to pricing and demand irregularities with frightening frequency.

Similarly, I don't take my children to just any amusement park. Some are rather lax in their admissions security checks and general behavior requirements. Others are less well-known, and subject to my concerns about the safety of some of their rides.

For instance, my daughters and I love to ride roller coasters. We are addicted. Thus, we've spent at least a few days during each of the last few summers at Hershey Park. As I am being rocketed around one of the older, more exciting wooden coasters, I regularly consider how little would be left of all of us if the cars left the track. You basically have no chance of survival whatsoever. None.

Thus, while I engage in the, to some, risky behavior of riding roller coasters, I only do it at a park where I trust the management to operate totally safe roller coaster rides. I never worry about boarding any ride at Hershey. Between the park's long reputation for cleanliness and safety, and the related food operations of the parent, I am confident the company's management of the park brooks absolutely no lapses which could lead to any fatalities or serious injuries on the rides.

Each year, there's a story about someone dying while riding and, falling out of or from, some ride at some amusement park somewhere in the US. But never Hershey.

The lesson I draw from my amusement park behavior, and apply to my investment behavior, is that it is important to set hierarchical, conditional criteria for risk.

We don't invest in instruments other than large-cap, US equities, and the purchase of options thereon (calls in markets expected to remain strong, puts in markets expected to remain weak).

Having set that initial criterion, we remain invested through market turmoil such as these past few weeks. My partner and I monitor the conditions that affect the companies whose equities we may purchase, but we don't worry unnecessarily about the trouble other investors create for themselves through injudicious trading and investing in various esoteric instruments.

That is very germane to this week's market activity. Although some extremists, such as Jim Cramer or Gary Shilling, believe there is a global liquidity and capital contraction which is of systemic proportions, I do not share that view.

Global economic growth and corporate activity remain healthy and robust. Profits are up. Most financial instruments- equities, corporate debt, Treasuries- are in good shape.

The genesis of the current financial volatility and perceived liquidity problems lie primarily with those parties who have chosen to buy, hold, and/or depend upon other parties with positions in relatively high risk instruments involving sub-prime residential US mortgages.

Just a week ago, James Cayne, Chairman of Bear Stearns, got the denial ball rolling by alleging that this is the 'worst debt market in twenty years.'

Only if you happen to dabble significantly in the riskiest, least creditworthy, shallow and illiquid parts of it. Which Bear did.

By Tuesday of this week, other scorched trading and portfolio players, also guilty of expecting constant profit from sub-prime debt, echoed Cayne's claim that the market was unraveling, and, therefore, they had not done anything extreme, greedy or unwise. They were merely victims of a bad market.

Someone would have to fix that bad market. Oh, yes, and, in the process, bail out those who chose to play with that brand of fire labelled 'sub-prime.'

As the French swung into action yesterday, with Paribas' idiotic suspension of redemptions in several of its sub-prime-related funds, and the EuroBank loudly announced its provision of liquidity to their markets, the panic began. Cayne, Cramer & Co. had accomplished their objectives, by causing sufficient uncertainty that counterparties to known holders of sub-prime-related issues stampeded out of positions.

As my partner has pointed out, the actual expected loss on sub-prime mortgages, were they simply to be written off, is far, far less than the total amount of market value destruction seen over the past week in the global financial markets.

Over very, very short periods of time, like the past few weeks, the mass of mediocre, poorly-informed and -reasoning investors, analysts, money managers and pundits can cause temporary market behaviors to depart radically from what more reasoned, informed market participants believe is warranted.

As such, as we have seen recently, volatility can soar, and assets can appear to lose even their intrinsic values. But this is a purely short term effect when there is no serious, structural economic problem underpinning the behavior.

Right now, being in US large-cap equities and options has insulated our portfolio from egregiously magnified losses of those experienced in the S&P500. We still have risk exposure, but we feel it is far, far less than that of investors who have engaged in complex, hedged positions which rely on modeled behavior of prices for esoteric, thinly-traded debt instruments.

CNBC's Erroneous Focus on "The Trade"

As the equity index volatility of the past few weeks continues, it makes the prospect of buying or selling equities fraught with concern that the market price is not truly reflective of long term factors.

Rather, the price at which one might sell an equity could be heavily influenced by temporary forces or misconceptions.

As such, it's caused me to reflect on something I see quite a bit these days on the cable business news network, CNBC. It seems that every day, some of the anchors and/or on-air staff will bark at a guest,

'so, if that's true, what's the trade?'

Or a correspondent will breathlessly describe some equity's price movement in terms of 'the trade' between it and something else.

This is a mistake. It's not about the trade. Here's why.

Unless you know what someone already holds in their portfolio, describing 'the trade' is a meaningless term. It is a mistaken focus on 'the trade,' rather than relative buying or selling opportunities.

For example, suppose you and I each hold a single equity. I hold a technology-oriented company's stock, while you hold the stock of a durable good manufacturer.

We are sitting together, watching CNBC, when a reporter announces a significant rise in the price of oil. The on-air anchor then turns to a guest and excitedly asks,

"so, what's the trade here, Ron?"

Well, Ron can't know what's in either of our portfolios. So Ron can only say, univocally for all viewers, something like,

"I can't say what 'trade' to make, Dylan, because I don't know each viewer's portfolio composition. However, given the reporter's news, I would say that this makes energy stocks more attractive, relative to other things consumers might buy. So several sectors may now be less attractive, such as consumer discretionary items, luxuries, durables, etc. However, I don't think it will affect business technology spending."

But "Ron" never actually says something like that. Instead, there will be some platitude about selling this and buying that.

It's just typical business cable "news" network entertainment nonsense.

Last week, I believe, I saw a really excellent few seconds of commentary from CNBC's morning guest host, Liz Ann Sonders, Chief Investment Strategist for Charles Schwab & Co. She basically made light of the current equities volatility, and called attention to the real investment needs and objectives of Schwab's retail base of customers. Sonders noted that, for the average retail investor, or any investor with a long time horizon, this recent spate of market turbulence and volatility are no basis to "trade" anything.

Rather, she argued for simply continuing with existing investment strategies, and ignoring temporary, emotionally-based pricing dislocations and hysteria-based volatility.

I think this is very wise. Volatility is no reason for trading, per se, for most investors. Perhaps for those investment bank and hedge fund trading desks for whom this is their business. But not longer-term investors.

Temporary valuations driven by fears involving sub-prime mortgages, counterparty risks in credit derivatives, and overall debt liquidity, are hardly the stuff on which to base long term investment approaches. These influences on equity prices will be volatile and uncertain during their duration.

Certainly, these factors cannot be the basis for someone in the business media to solemnly announce 'the trade' which is now compelling. At best, their exhortations are simply silly. At worst, they can cause real damage for the unwise, who are not well-advised or knowledgeable as to what, if anything, they should remove from their portfolio, in order to buy the hyped equity.

For investors, trading is simply the means by which our strategies are implemented. We trade when our investment processes indicate to own less of some equities, and more of others. We don't trade simply for the sake of trading.

We invest.