Hoisington Q3 Letter

Downturn

Negative economic growth will probably be registered in the U.S. during the fourth quarter of 2011, and in subsequent quarters in 2012. Though partially caused by monetary and fiscal actions and excessive indebtedness, this contraction has been further aggravated by three current cyclical developments: a) declining productivity, b) elevated inventory investment, and c) contracting real wage income.

Constant Contact

I don't do much advertising on this blog, but I do want to provide a link for a service that I highly recommend, Constant Contact. I've been using their service for a few months and I've found it very useful. If you want to try it, both you and I can get a $30 credit if you sign up by clicking on the banner below (or the one on the right side the blog). I use the 'Email Marketing' service and use it to store contacts and send out emails to those contacts.

New Nobel Laureate Warned Against Obama Stimulus Package, Calling It ‘Surprisingly Naïve’

Thanks to Kent for passing this along.

No matter how skeptical one is of the authority of “experts,” it’s hard to avoid paying at least some attention to the people who award the Nobel prize — especially when they give one to someone who tends to support some things one tended to believe already.

So it is in the case of Thomas Sargent, the New York University professor who was announced Monday as a winner of the Nobel in economics. An interview of Professor Sargent by the Minneapolis Fed in August 2010 summed up some of his contributions succinctly: “policymakers can’t manipulate the economy by systematically ‘tricking’ people with policy surprises. Central banks, for example, can’t permanently lower unemployment by easing monetary policy, as Sargent demonstrated with Neil Wallace, because people will (rationally) anticipate higher future inflation and will (strategically) insist on higher wages for their labor and higher interest rates for their capital.”

Chanos on China Banks, Real Estate; U.S. Politics (video)

Oct. 11 (Bloomberg) -- Jim Chanos, founder of Kynikos Associates Ltd., discusses China's economy, banking and real estate industries. Chanos, speaking with Michael McKee from the Global Alternative Investment Conference in New York on Bloomberg Television's "In the Loop with Betty Liu," also talks about his investment strategy and the 2012 presidential race.

Volatility, Thy Name Is E.T.F. - By Andrew Ross Sorkin

Did you watch the markets on Monday? In the last 18 minutes of trading, the Standard & Poor’s 500-stock index jumped more than 10 points with no news to account for the rally. If you were left scratching your head, you were not alone.

Almost every day there is an article in the newspaper trying to explain the stock market’s wild swings, or volatility, and often the explanation is inconclusive, involving everything from Europe’s banking problems to new fears of recessions.

Through the summer and into the fall, I, too, have been pondering the gyrations in trading, especially the late-day sell-offs and rallies that seem always timed perfectly to coincide with the closing bell. Rarely do the rallies or sell-offs, which invariably start after 3 p.m., justify 3 to 4 percent moves in the indexes. The swings have a deleterious effect on the markets because they undermine confidence and investors start sitting on the sidelines.

And then I started talking with investors like Douglas A. Kass, a longtime Wall Street denizen who is the founder and president of Seabreeze Partners Management.

He says he knows the culprit behind the late-day market swings: leveraged exchange-traded funds or E.T.F.’s.

…

Mr. Kass, who has written about this topic for TheStreet.com, may be right: at the end of every day, leveraged E.T.F.’s have to rebalance themselves by buying and selling millions of shares within minutes to remain properly weighted. If the E.T.F. made money that day, to remain balanced it has to reinvest the proceeds and leverage them again. In many cases, leveraged E.T.F.’s use options, swaps and index futures to keep themselves in balance.

You might consider the E.T.F. the new derivative.

“It is these derivatives and not the phenomenon known as high-frequency trading (H.F.T.) — commonly critiqued as contributing to the ‘flash crash’ of May 6, 2010 — that pose serious threats to market stability in the future,” Harold Bradley and Robert E. Litan of the Kauffman Foundation wrote in a controversial white paper last year. “The S.E.C., the Fed and other members of the new Financial Stability Oversight Council, other policy makers, investors and the media should pay far more attention to the proliferation of E.T.F.’s and derivatives of E.T.F.’s.”

…

I took an informal poll of a half dozen brand-name fund managers and virtually all of them agreed with Mr. Kass. But some of them said that high-frequency traders, which themselves trade E.T.F.’s, could be magnifying the problem.

“We know E.T.F.’s are the dominant factor in the marketplace,” Mr. Kass said. “In the ’70s and ’80s it was the mutual funds, in early 2000s it was the hedge funds. Now it’s the algorithms running the E.T.F.’s.”

Howard Marks Quote

From his March 2002 Memo “Learning from Enron”:

“Security analysis and knowledgeable investing aren't easy. Investors must be alert for fuzzy or incomplete information, and for companies that don't put their interests first. They must invest only when they know what they don't know, and they must insist on sufficient margin for error owing to any shortcomings.”

Nassim Taleb - AntiFragility: Thales’ Secret, or The Intelligence of Antifragility

Link to: AntiFragility: Chapter 4. Thales' Secret, or The Intelligence of Antifragility

Hussman Weekly Market Comment: Talking Points for the "Occupy Wall Street" Protesters

We're all for a good peaceful protest. As long-time readers know, I've been an adamant critic of the bailouts of mismanaged financial institutions, as well as various illegal policy actions that have been pursued by the Fed since the financial crisis began in 2008. Undoubtedly, there is good and bad on Wall Street, and we know a lot of smart, well-meaning financial advisors who go to work every day with the goal of improving the financial security of their clients, who do careful research, avoid speculation, and provide a service to others through their profession. A functioning economy needs to allocate capital effectively, and there Wall Street can be essential.

Unfortunately, over the past 15 years or so, the basic function of the financial markets has been corrupted into what I've grown to view as a self-serving carnival of speculation, where many participants are interested in nothing except getting the next rally going at public expense, regardless of how badly market signals are distorted, how recklessly capital is misallocated, or even whether what they do has any positive effect on the economy or the country (some of the sleazier ones even have their own shows on basic cable).

There is no single source of this transformation. Part of it is a remnant of the dot-com and technology bubbles, when market valuations moved to nearly triple the historical norm, and investors began to view perpetual market advances and high returns as a birthright. The subsequent decade of zero overall returns for the stock market largely reflects a reversion to more normal (but still cyclically elevated) valuations.

Another part of this transformation is due to the activist policies of Federal Reserve, which has continually attempted to short-circuit every instance of short-term economic discomfort by distorting the menu of investment returns (e.g. zero interest rate policies) in an effort to provoke investors to accept fresh speculative risk. Ironically, the long-term effect of distorting market signals has been to drive good, potentially productive capital into wholly unproductive uses - the housing bubble being a prime example. As a result, real U.S. gross domestic investment has not grown at all since 1998, and the portion financed by domestic U.S. savings has collapsed, so much of the new capital we've accumulated is owned by foreigners.

Undoubtedly, one of the greatest rhetorical victories of Wall Street has been to successfully plant in the minds of the public the idea that some financial institutions are simply "too big to fail," and that the "failure" of "systemically important" institutions will result in global financial meltdown and Depression. The reality is much different.

So, with the hope of providing the Occupy Wall Street protesters with some talking points, what follows are some perspectives that might be useful in framing the issues that we are facing as an economy.

Eddie Lampert on Long Term Investing (video)

Found via Santangel's Review.

Oct. 3 (Bloomberg) -- Billionaire hedge fund manager Edward Lampert, Former U.S. Treasury Secretary Lawrence Summers, and Google Inc. Chairman Eric Schmidt talk about long-term versus short-term investing.

John Mauldin: An Irish Haircut

Just as only four short years ago it was All Subprime, All the Time, and then it was the Credit Crisis, now it is Europe. (When) will Greece default and which banks will implode as a result? Is there another banking crisis in our future? I just came back from a whirlwind four-country visit to Europe, and I will try to offer a few insights. This week we start with Ireland, move to the problem of Europe at large and, if we’re not out of space (and your patience!), we’ll visit some last-minute data points.