Nothing Is Better Than Something

The Fed stirred up market festivity,
In spite of low business activity,
From the joy that relates
To their keeping the rates
At zero, as is their proclivity.

With rates so depressingly low,
Fixed income has nowhere to go
So the stock market beckons
To each one who reckons
The chance that their nest egg may grow. 

It highlights how hard to discern it is
To know when the bond market's turn it is,
But with rates to be found
At the null lower bound,
The Dow lacks investment alternatives.

S&P vs GDP

An analyst pointed out that -

At the risk of provoking a spat - 

There's a gap in demand

Between equities and

The economy, which is still flat. 

Bear Warning

Said one of those skeptical guys,
As the market was hitting new highs:
"The bulls may suppose
The economy grows,
But I doubt that the latter complies."

Market Correlation

Some analysts set about crunchin'
A proven statistical function
For why stocks and debt,
Which used to offset,
More recently move in conjunction.

At the end of it all they succeeded,
Having crunched all the data they needed,
Finding no other fact
So truthfully tracked
As expected expanse of QE did.

Soros' Penney Shares

Said a billionaire octogenarian
Of a much-unloved stock he was carryin':
"What's the use of my hoard
If I cannot afford
To indulge in a bet that's contrarian?"

A Short-Lived Hoax

A group of young hackers from Syria,
Who set off a market hysteria,
Confounded the Street
With a single, fake tweet;
One may ask: were their motives ulteriah?

If their hoax has turned out to conceal
An elaborate insider deal,
They'll have done an offense
For which there's a sense
Of prosecutorial zeal.

They'd have carried it out with impunity
If they'd sunk the financial community,
As there's many a name
That's committed the same
And seems to get off with immunity.

High? What High?

Said a really curmudgeonly guy
On the Dow Jones Industrial high:
"It's still quite a ways
From the Internet craze,
When adjusted for core CPI."

Dow Jones Record High

Despite the new highs in the Dow,
Economists still disavow
The hope that those wishin'
To find a position
Will likely be getting one now.

The stock market's rate of return
Is based on what companies earn.
As long as it's more,
On the stock exchange floor,
Employment's of little concern.

The $137 Billion Question

There's a question for Cook and his board
Arising from Apple's cash horde:
At exactly what height
Of liquidity might
Alternatives best be explored?

Said Einhorn: "I'm finding absurd
All the dividend plans that I've heard.
If shareholder value
Is your rationale, you'll
Agree that my way is preferred."

Dow 14,000

The last time around that the Dow
Hit the level it's gotten to now,
The market was brisk
By taking on risk
As much as the law would allow.

In one sense, 14,000 has no significant meaning. You should not buy or sell based on the Dow Jones Industrial Average reaching this level on the way up, or down. It ain't nothin' but a number. In another sense, any sort of round-numbered market milestone affords the opportunity to reflect on how far we've come, or in this case, come back. At the time of the Dow's previous 14,000 milestone in October 2007, the US market and economy were full of financial hubris, if not outright fraud (at least in the mortgage sector), and headed for a great fall.

This time around, the market's climb reflects the slow receding of fear and building of growth, helped along by the Fed's generous monetary stimulus and shunting of savers into riskier asset classes. While it's not a completely beautiful picture, on balance, things seem less likely headed for a fall than last time around.

Small Investors Jump In

At times, when the stock market rises,
The basis for all the new highs is:
Investors who yearn
For a better return
Than the interest-rate outlook advises.

The billions investors have shifted
To stock funds effectively lifted
The market's appeal
(And also, the deal
That avoided the big Fiscal Cliff did.)

There's a saying that's really akin to it,
From traders who've commonly been to it:
On the stock market floor,
According to lore,
You get out of it what you put into it.

I guess by now almost everybody is aware that we are in a bull market for US stocks, and one would expect a surge of small investor interest to follow this realization.  However, according to the Wall Street Journal, a massive inflow of retail cash into equity mutual funds also preceded and contributed to the market surge.  On Tuesday, the Dow Jones Industrial Average rose 72 points to close at 13,954, its highest level since October 2007.  The Dow has risen 850 points - or 6.5% - in January, a New Year's achievement not seen since 1989.  As shown by the graphic, this strong performance was helped by $6.8 billion of investor cash flowing into equity funds in the first three weeks of the year, after years of massive outflows.  No doubt some of the recent inflow manifests the public's relief that the federal government did not take the economy over the Fiscal Cliff in January, and is thus a rebound from the fearful, exaggerated December outflow.  However, in the market, optimism may create its own reward by boosting demand for assets (stocks) and hence, their prices; proving, once again, that you get out of life what you put into it.

Core Cash Flow Multiple

Said a notable stock-pickin' man:
"Of $AAPL I'm not such a fan,
But the price is so low
Compared to cash flow,
I'm buying as much as I can."

Hedge fund manager and blogger James Altucher posted an amusing take-down of the bearish Apple sentiment in Seeking Alpha yesterday. The gist of it is that six times cash flow is too little to pay for the shares of a company whose revenue is still growing at 20%, so the recent fall to $440 from $600 a share is just noise.

Says Altucher: "I own Apple since my initial $1000 call and anyone who did is well in the money. Meanwhile, I also own Google and Amazon. These companies are going to keep innovating past each other and by the time they are through one of them is going to make a time machine, the other is going to put a phone into our neurons, and the third is going to let us spend the rest of our lives in drugged out virtual realities while we fly around in pilotless spaceships. So I'm staying long."

N.B. Altucher's investment horizon is five years, so this is not exactly a day-trading recommendation.

Handel's Big Trade

When Handel composed The Messiah,
The markets were caroling highah.
He sold, shouting "Boo-yah!
Now sing Halleluia!
To be a contrarian buyah."

For many investors at this time of year, 'tis the season to review portfolio investments that hath been exalted, or laid low. If unto you a gain has been given, shall the government be more upon your shoulder this year, or next?

One man who handled such questions adroitly was George Frideric Handel, according to Jason Zweig of the Wall Street Journal. Mr. Zweig says that the renowned composer "never went Baroque" because he knew when to get into and out of the hot investments of his day. The greatest investment bubble of the early 1700's was the South Sea Co., driven by the mania of colonization. Mr. Handel played the South Sea Co., but acted earlier than contemporaries such as Sir Isaac Newton, buying his shares at lower cost and selling them before the bubble burst. It is estimated that Mr. Handel doubled his South Sea investment, making a £15,000 profit, roughly 2.9 million in today's dollars. At the end of his life, Mr. Handel's estate comprised about £20,000 ($3.8 million today).

As a footnote to this Yuletide tale, we must ask whether the German-born Mr. Handel came to the market with a natural advantage: his name, in his mother tongue, means "trade."

Inside Tip

Justice is always condemning
Insider activity stemming
From positions of trust,
Indiscreetly discussed
By monitored phones and IM'ing.

But let me say more than is minimal,
Lest my message be seen as subliminal:
When it comes to affairs
In the trading of shares,
Information asymmetry's criminal.

On the trading floor, all electronic communications - be they phone, e-mail or IM - are recorded and retained, just in case any questions arise later on. Sometimes, though, folks can get complacent and indulge in an instant message chat much like the following:

Weishaus: we should get [RR3] to buy a f***load
Conradt: jesus don’t tell anyone else
Weishaus: like, [RR3] buy 100000 shares
Conradt we gotta keep this in the family
Weishaus: dude, no way
i don’t want to go to jail
f*** that
Conradt: jesus christ
Weishaus: martha stewart spent 5 months in the slammer
Conradt: does [a friend] know?
Weishaus: and they tried to f*** the mavericks owner

This was the dialogue between Thomas C. Conradt and David J. Weishaus, brokers at Euro Pacific Capital, after they came upon the privileged information that IBM was about to purchase SPSS, Inc. for $50 per share. Their chat was not only colorful, but actionable.

Just in case anyone infers here a subscription to the "don't-get-caught" school of insider ethics, let me say plainly: insider trading is theft. To trade on information which one's counterparty could not be expected to know is literally stealing value. Don't do it, folks.

Bad Search Results

An Internet stock tumbled early
When missed earnings leaked prematurely.
It's bad to surprise,
But if profits should rise,
The stock would go up again, surely.

The stock market was gripped by a thrill of panic Thursday, when Google's 3rd quarter earnings announcement was leaked during trading hours instead of after the 4:00 PM close. However, it was not just the slip-up by $GOOG's financial printer R.R. Donnelley that roiled the market, but the news itself: a 20% fall in profits and slowing revenue growth. Like fellow internet behemoth Facebook, Google is having some challenges in building ad revenue from increasingly popular mobile usage to the extent that it has from the desktop. There is hope for the future, though; CEO Larry Page, on the earnings conference call, enthused over the "tremendous innovation in advertising, which I believe will help us monetize mobile queries more effectively than desktop today." So, $GOOG shares, which closed down 8% on the day, may soon resume their upward trend.

In the meantime, the company has built up its cash pile to $45.7 billion, an amount large enough to -

• Pay for all of the e-commerce in China during the second quarter of this year;
• Bail out Bank of America;
• Close the funding gap in the Michigan Public School Employees Retirement System.

Small consolation for an earnings disappointment.

Proceed Cautiously

The economy, generally dreary,
Brings occasional news that is cheery,
But consider all facets
Before moving assets
Because of a bull market theory.

Marketwatch reports that "Asian stock markets were bolstered [today] after the U.S. economy added more jobs than expected in July." According to Paul Ashworth of Capital Economics, “The bigger-than-expected 163,000 increase in U.S. non-farm payrolls in July, alongside the small rise in the ISM non-manufacturing index, should ease fears that the U.S. economy is following Europe into recession.” However, there are three good reasons to proceed cautiously in reacting to a single, positive datapoint:

1. The July number does not confirm a positive trend; the average NFP increase over the last three months is only 105,000, at the lower end of the 100,000-120,000 monthly increase considered necessary to accommodate new jobseekers. 
2. The unemployment rate went up; unemployment is calculated based on a household survey "of people who are without jobs, who are available to work and who have actively sought work in the prior four weeks, and that number rose in July—by 45,000 to 12.8 million," says the Wall Street Journal's Phil Izzo. NFP is calculated from the number of jobs reported in a survey of businesses, so workers can be counted twice. 
3. A single datapoint may be influenced by one-time factors; in this case, auto manufacturing layoffs that normally occur in July did not happen, raising the possibility that they may do so in August, depressing that month's jobs data.

Bringing Down the Price of Oil

When there's negative news from abroad
And the US recovery's flawed,
It precipitates shocks
To oil and stocks
In Chicago, New York & Riyadh.

"Be careful what you wish for; you just might get it." Everybody wants cheaper oil, but it often comes with a cloud over it, bringing lower stock prices along for the ride. On Thursday, the Dow Jones industrials fell 1.96% as negative economic news from Europe and China combined with the announcement of a manufacturing slowdown in the Philadelphia Fed district to cast a pall over US growth prospects. US crude oil prices responded to the weak data by falling to $78.20 a barrel, a new low for the year.

Is It Just an Expression?

Investors incessantly say:
"Sell in May, and then go away,"
And stock market nerds
Who heeded these words
Are 6% richer today.

Via the FT's Alphaville blog, we learn that May 2012 was a very bad month indeed for US equities:

The Dow Jones Industrial Average had its worst month in two years in May. The index fell 6.2 per cent, the largest decline since dropping 7.9 per cent in May 2010 (Wall Street Journal). Closing down 0.23 per cent at 1,310 on Thursday, the S&P 500 had its worst month since last September (Reuters).

A strict observance of the "Sell in May then go away" rule, executed on the first of the month, would therefore have yielded the best results.

Loss of Face in the Options Market

An Internet social sensation
Went to market with high expectation;
Before many fortnights,
The traders had bought rights
To sell it (without obligation).

The Wall Street Journal's options reporter Kaitlyn Kiernan writes that the put-call ratio on shares of Facebook turned decidedly bearish on the first day of options trading after the company's controversial IPO. Options traders bought 20.3 millions puts (the right, but not the obligation, to sell shares at a fixed "strike" price) but only 16.2 million calls (the right, but not the obligation, to buy shares at the strike price). The preponderance of puts indicates the prevailing sentiment that the price of $FB shares will continue to fall. The stock market took note, and Facebook shares slid another 9.6% to $28.84, a 24% drop from the initial public offer price of $38.

On the Down Low at the Roadshow

An analyst had a quick word
With investors his bankers preferred:
"We've cut our projections
For those with connections,
But won't tell the rest of the herd."

The fallout from the Facebook IPO continues. On Tuesday a spotlight was shown on the practice of IPO underwriters' not disclosing their analysts' estimates of companies' earnings, except to a small group of large institutional clients. Already a troubling practice, these quiet revelations appeared to skirt the letter of the law in the Facebook case. Analysts for Morgan Stanley and the other underwriters all made substantial cuts in their Facebook earnings forecasts during the pre-IPO roadshow, evidently based on information quietly provided by the still-private company. Joining Goldman Sachs in contempt for the retail "muppets" clamoring for $FB shares, the Morgans - J.P. and Stanley - have still not disclosed their estimates, as indeed they may not until 40 days after the IPO date. Reuters finance blogger Felix Salmon gives a full explanation of the issues and facts of the case, in a post that is worth the time of those who would like to gain insight into the world of stock underwriting.