Six ‘Investment Potholes’ That May Hinder the Stock Rally

By Steven Russolillo

While the stock market is taking a breather today from its marathon rally off the early-October lows, investors still remain pretty upbeat about the future.

There’s still lots to like about this market. The economic recovery keeps puttering along, Europe’s sovereign-debt crisis has simmered down and major stock indexes have returned to levels last seen prior to the financial crisis. The S&P 5o0 is up about 12% this year 28% from early October.

Everything’s all good, right? Not quite, says Nicholas Colas, chief market strategist at ConvergEx Group. He outlines six potential “investment sinkholes” that could derail the current rally.

Read the rest here.

Saudi Arabia is taking steps to cool the overheating global energy market, boosting its exports to the US and re-opening old oilfields to expand production, as the world’s largest oil producer tries to prevent damage to the global economic recovery.

The Saudi cabinet on Monday said the kingdom would work “individually” and with others for the “return [of] oil prices to fair levels”. Riyadh recently said it aimed to keep oil prices at $100.

Read the rest here.

Will this year’s release from the SPR be any different from last year’s? Some charts and commentary attempt to answer this question…

For several weeks now, the “dumb money” has been extremely bullish and the “smart money” has been extremely bearish.  These are signs that we are closer to the end of the rally as opposed to the beginning.

Read the rest, and see the very informative graphs, here.

A great study by Birinyi Associates showing what has happened over the next six months after volatility drops the way it has recently.

With prominent managers calling for a top in equities and the indices up over 100% since the March 2009 lows, Ritholtz asks, and then answers, “What’s an investor to do?“

By C. Thomas Howard, Ph.D.
March 13, 2012

Investors who avoid concentrated equity miss out on the triple benefits of excess returns, lower risk, and lower correlations. A portfolio concentrated in best-idea stocks has an excellent chance of generating excess returns. In turn, the cumulative excess return to investors lowers the risk of underperformance over time. Finally, a portfolio comprised of a small number of stocks is characterized by a low stock-market correlation. Thus the concentrated equity triple play: higher returns, lower risk, and lower correlations.

I will discuss each of these benefits separately. But first, let me address the widespread misconception that an investor can only properly diversify a portfolio by including a large number of stocks.

The diversification-volatility myth

Many believe that concentrated portfolios are much more volatile than are broadly diversified index portfolios. It turns out the diversification benefit of adding additional stocks to a one-stock portfolio is largely captured within the first few additions, as shown in Figure 1 below.

Read the rest of the article and the explanation, here.

Read a great review of this relatively new performance ratio, via ETF Prophet.

A new white paper is here. Abstract is below.

Abstract:
I present evidence that a moving average trading strategy dominates buying and holding the underlying asset in a mean-variance sense using monthly returns of value-weighted decile portfolios sorted by market size, book-to-market cash-flow-to-price, earnings-to-price, dividend-price, short-term reversal, medium-term momentum, long-term reversal and industry. The abnormal returns are largely insensitive to the four Carhart (1997) factors and produce economically and statistically significant alphas of between 10% and 15% per year after transaction costs. This performance is robust to different lags of the moving average and in subperiods while investor sentiment, liquidity risks, business cycles, up and down markets, and the default spread cannot fully account for its performance. The substantial market timing ability of the moving average strategy does not appear to be the main driver of the abnormal returns.

An interesting read and some graphs on the continuing short squeeze in TVIX.

Gary Stix

Almost six years ago, I was the editor of a single-topic issue on energy for Scientific American that included an article by Princeton University’s Robert Socolow that set out a well-reasoned plan for how to keep atmospheric carbon dioxide concentrations below a planet-livable threshold of 560 ppm. The issue came replete with technical solutions that ranged from a hydrogen economy to space-based solar.

If I had it to do over, I’d approach the issue planning differently, my fellow editors permitting. I would scale back on the nuclear fusion and clean coal, instead devoting at least half of the available space for feature articles on psychology, sociology, economics and political science. Since doing that issue, I’ve come to the conclusion that the technical details are the easy part. It’s the social engineering that’s the killer. Moon shots and Manhattan Projects are child’s play compared to needed changes in the way we behave.

A policy article authored by several dozen scientists appeared online March 15 in Science to acknowledge this point: “Human societies must now change course and steer away from critical tipping points in the Earth system that might lead to rapid and irreversible change. This requires fundamental reorientation and restructuring of national and international institutions toward more effective Earth system governance and planetary stewardship.”

The report summarized 10 years of research evaluating the capability of international institutions to deal with climate and other environmental issues, an assessment that found existing capabilities to effect change sorely lacking. The authors called for a “constitutional moment” at the upcoming 2012 U.N. Conference on Sustainable Development in Rio in June to reform world politics and government. Among the proposals: a call to replace the largely ineffective U.N. Commission on Sustainable Development with a council that reports to the U.N. General Assembly, at attempt to better handle emerging issues related to water, climate, energy and food security. The report advocates a similar revamping of other international environmental institutions.

Unfortunately, far more is needed. To be effective, a new set of institutions would have to be imbued with heavy-handed, transnational enforcement powers.

Read the rest here.

When the agents of totalitarianism come to crush you, they will do it not with tanks and guns but with electric meters and bike paths.

And your plight, according to that view, will be the work of a United Nations plot for world domination called Agenda 21.

Tea party members and others concerned about Agenda 21 are increasingly popping up at local government meetings to rail against proposals they see as part of the plot.

Among the measures they have tied to Agenda 21: growth plans for Chesterfield and Mathews counties; concerns about rising sea levels along the Middle Peninsula; the Chesapeake Bay cleanup; open-land protections; modern electric meters in homes; and things such as bike paths that are labeled “smart growth” or “sustainable development.”

“It is a methodology that has been devised to promote control over resources, the environment and ultimately, people,” said Andrew Maggard, a Mathews retiree and avid battler against Agenda 21.

In addition to tea party activists, those opposing Agenda 21 include the John Birch Society, GOP presidential hopeful Newt Gingrich and the Republican National Committee.

Professional planners and others who have looked into Agenda 21 say the alleged plot is a nonsensical conspiracy theory stemming from long-held fears that the U.N. is bent on ruling the planet under a world government.

“The fact that local governments believe in things like smart growth, livable communities and planning for climate change … doesn’t mean that local governments are part of a nefarious U.N. plot to take over land-use decisions,” said Noah M. Sachs, a University of Richmond law professor and environmental expert.

Agenda 21 — the term means an agenda for the 21st century — is a nonbinding set of U.N. guidelines for protecting the environment, Sachs said. It was ratified in 1992 by more than 170 governments, including the U.S. during the first Bush administration.

“Agenda 21 has been a dead letter for 20 years,” Sachs said. “Its recommendations have not been implemented by most governments, and the U.S. has largely ignored it.”

Read the rest here.

Cap and trade programs to reduce emissions do not inherently provide incentives to induce the private sector to develop innovative technologies to address climate change, according to a new study in the journal Proceedings of the National Academy of Sciences.

According to a press release just issued, we’ll all find out about “the outcome of the Company’s discussions” tomorrow on a conference call with CEO Tim Cook and CFO Peter Oppenheimer at 9AM ET. What does $100 billion or so of iMac, Macbook, iPhone and iPad money buy? Speculation has already included dividends for investors, a spending spree of acquisitions or even a dip into philanthropy.

Source

The giant bond fund PIMCO said Europe has not yet tamed its debt crisis and will soon face a “second Greece” in Portugal as the country’s economy spirals downwards.

Drew Zahn

The White House’s late-week release of an executive order has sent the online community into an uproar, worried that President Obama had secretly provided himself means to institute martial law in America.

In the common practice of dumping government documents on a Friday afternoon, just as the news cycle is wrapping up for the week – a move critics say allows the administration to avoid widespread coverage of embarrassing actions – the White House released an executive order on “National Defense Resources Preparedness.”

Filled with language about “government-owned equipment” and a “defense executive reserve,” among other vague statements, rumors began to spread that the executive order expanded the president’s power to do everything from seizing whole industries to drafting private armies.

A Canada Free Press article titled “Obama Executive Order: Peacetime Martial Law!” spread concerns of gasoline ration cards; while an Examiner article declared the order would “nationalize everything” and “allow for a civilian draft.” Facebook, email and Twitter were suddenly abuzz, and even the extremely popular Drudge Report posted a link to the White House release under the title “Martial Law? Obama Issues Executive Order.”

But are the cries of martial law and expanding executive power justified?

No, says William A. Jacobson, associate clinical professor at Cornell Law School.

“If someone wants to make the argument that this is an expansion of presidential powers, then do so based on actual language,” warns Jacobson. “There is enough that Obama actually does wrong without creating claims which do not hold up to scrutiny.”

As it turns out, Obama’s executive order is nearly identical to EO 12919, issued by President Clinton on June 7, 1994, which itself was an amendment to EO 10789, issued in 1958 by President Eisenhower, and which in fact, was later amended by EO 13286, issued in 2003 by George W. Bush.

Obama’s executive order specifically assigns “executive departments and agencies responsible for plans and programs related to national defense” to do five things:

• “identify” requirements for emergencies;
• “assess” the capability of the country’s industrial and technological base;
• “be prepared” to ensure the availability of critical resources in time of national threat;
• “improve the efficiency” of the industrial base to support national defense;
• “foster cooperation” between commercial and defense sectors.

Later provisions in the order establish the protocol for government agencies to purchase equipment needed in times of national emergency and even make loans to ensure the availability of that equipment.

Despite the vague nature of the functions, none mention anything about martial law or seizing private property. The five functions are also identical to those identified in Clinton’s EO 12919.

So why did Obama issue the order at all?

A side-by-side analysis of Obama’s order compared to Clinton’s, conducted by Ed Morrissey of HotAir.com, reveals Obama’s order is essentially just an update to reflect changes in government agency structure.

“If one takes a look at EO 12919, the big change is in the cabinet itself,” Morrissey writes. “In 1994, we didn’t have a Department of Homeland Security, for instance, and some of these functions would naturally fall to DHS. In EO 12919, the FEMA director had those responsibilities, and the biggest change between the two is the removal of several references to FEMA (10 in all). Otherwise, there aren’t a lot of changes between the two EOs, which looks mainly like boilerplate.

“I’m not ruling out the possibility that this is more than it seems,” adds Jacobson, “but unless and until someone [demonstrates any expansion of powers in the order], I’ll consider this to be routine.”

“The timing of this release might have looked a little strange,” Morrissey concludes, “but this is really nothing to worry about at all.”

Source

Mark Milian

Mike Daisey, the monologist behind “The Agony and the Ecstasy of Steve Jobs,” created a “reality-distortion field” of his own.

But it didn’t fool Rob Schmitz.

The China bureau chief for American Public Media’s Marketplace publication uncovered that Daisey had fabricated several details in his accounts of Chinese factory labor at Foxconn Technology Group, which manufactures products for Apple and other electronics makers.

In January, an excerpt from Daisey’s monologue, which he said was based on many interviews during a stay in Shenzhen, China, was broadcasted on the public radio show, “This American Life.” Shenzhen is where Foxconn’s largest factory is located.

When Schmitz listened to the podcast, he was immediately skeptical, he said by phone from Shanghai early Saturday morning.

“There were quite a few things in the piece that struck me as a little unusual, and one of them was the beginning of the piece,” Schmitz said. He’s referring to Daisey’s claim that every electronics product is made in Shenzhen. “If you know anything about the manufacturing sector in China, you know that that’s just not true.”

As Daisey’s tale went on, other details stuck out to Schmitz. For example, Daisey had said that he saw security guards around the Foxconn perimeter holding guns. Schmitz knew that that couldn’t be true, he said, because only military and police officials are legally allowed to carry firearms.

“He evokes this image of a very sort of totalitarian state, and there is some broader truth to the things that he puts in his monologue,” Schmitz said, “but from what we found, there are many things that don’t just check out.”

After listening to that episode of “This American Life,” Schmitz’s most promising clue was found in a Google search.

In Daisey’s monologue, he refers to the translator who accompanied him only by her first name, Cathy. So Schmitz said he punched into Google: Cathy translator Shenzhen.

“I called the first number that popped up,” he said.

The woman on the other end of the line was Cathy Lee, who happened to be Daisey’s translator on his trip to China. Schmitz said he and Lee later met in front of Foxconn’s gates, where parts of Daisey’s story are set.

Schmitz asked Lee whether she and Daisey had actually witnessed the things that Daisey recounted. The guards with guns? The man whose hand had become deformed from the repetition of assembling iPads? The young workers aged 14, 13, 12? The factory-line crew that said they had been poisoned by a toxic cleaning substance?

Lee’s answer to each question: No.

Read the rest here.

Some interesting charts and good commentary on the very steep VIX futures curve.

Watch it here.