Trovena Weblog

Stock Returns and Socialism

Below are the returns data for various first world stock markets for the last 10 and 39 years. Given our fears about socialism and its impact on our wealth, I think the results are surprising. For the last ten years, Canada, Austria, Norway and Denmark lead the charge while the US ranks 20th, just ahead of Greece. That leading group isn't exactly on the Barry Goldwater favorites list.

The longer 39 year period's top five is also dominated by socialist government structures. I'm not suggesting that socialism is good for economies. Starting a business or finding a job in these countries is likely to be difficult. From the standpoint of investors though, the US' move the left may or may not be bad for returns going forward.

I took this data from an article written by Weston Wellington with the same theme.

Annualized Return (%) 10 Years as of December 31, 2008 In US Dollars			Annualized Return (%) 39 Years as of December 31, 2008 In US Dollars
Canada	8.97		Hong Kong	14.68
Australia	8.36		Sweden	12.84
Norway	8.25		Denmark	12.57
Denmark	6.82		Netherlands	12.16
Singapore	6.48		Switzerland	11.47
Spain	5.04		Belgium	10.72
Hong Kong	4.34		Singapore	10.65
New Zealand	3.62		Norway	10.51
Sweden	3.29		France	10.35
Austria	3.21		Germany	9.90
Finland	2.55		UK	9.87
France	2.36		Spain	9.77
Switzerland	2.10		Japan	9.75
Germany	1.42		Canada	9.43
Japan	0.58		USA	9.12
Italy	-0.36		Austria	8.69
Netherlands	-0.93		Australia	8.45
Portugal	-1.05		Italy	5.99
UK	-1.05
USA	-1.67
Greece	-2.13
Belgium	-5.69
Ireland	-9.47

1. Jon Meacham and Evan Thomas, "We Are All Socialists Now," Newsweek, February 16, 2009.
2. Jim Davis, Economic Growth and Emerging Market Returns, Purely Academic, August 2006.

The Newest GM Deal?

So, without going into why the feds would turn GM into the latest Amtrak, I'd like to comment on this raw deal. According to the article, the United Auto Workers health care obligation is $20 billion by GM. Bondholders are owed $27 billion. However, when the politicians are all done with this fictional bankruptcy, the union owns 39% of GM and the bond holders own 10%. That sounds a lot like political favoritism to me.

Folks, this means that the UAW and the taxpayer own and control 90% of this once proud symbol of American know how. For what? If capitalists couldn't run GM, how is a union gonna do? It's not their game.

Christopher

GM Offers U.S. a Majority Stake 

Bondholders Balk at Plan; UAW Poised to Get Big Stakes in General Motors, Chrysler

By JOHN D. STOLL and SHARON TERLEP

General Motors Corp. outlined a new turnaround plan that would leave the U.S. government controlling the auto maker, as it set up a showdown with bondholders that could determine whether the company lands in bankruptcy court.

Under the plan, GM is asking the Treasury Department for an additional $11.6 billion in loans, on top of the $15.4 billion it has already received. It envisions giving the government at least half ownership of the company as payment for half of the loans.

At the same time, GM said it would use stock instead of cash to pay off half the $20.4 billion it owes a United Auto Workers fund to cover retiree health care. That stock would leave the union owning about 39% of GM.

The upshot would be the transformation of a troubled American icon, leaving it in the hands of the government and its main union. The situation, fraught with complications and potential conflicts, comes on top of the U.S. government taking stakes in banks and insurer American International Group Inc.

Also Monday, the UAW and Chrysler LLC disclosed that the union would own 55% of that restructured car maker, while Fiat SpA would get 35% and the U.S. and lenders would own the rest.

GM told bondholders it wants to swap up to $27 billion in unsecured debt for a 10% company stake. If bondholders tender less than 90% of the debt, GM is prepared to file for bankruptcy protection, Chief Executive Frederick "Fritz" Henderson said.

Continue reading "GM Offers US A Majoity Stake" »

CEO Disclosure is a Must Unless the Government Wants Differently

So here's Ken Lewis, CEO of Bank of the USA, saying that he really wanted to tell his shareholders (That's you and me folks) that his bank was bust. The only problem was that non-elected government bureaucrats Ben Bernanke and Henry Paulson didn't want him to. This is really astounding.

The SEC is always preaching about how these guys must tell the truth and fully disclose material facts about their public companies. Yet, in this case, the government forbade it. They threw the BofA shareholders under the bus to accomplish their political objectives and forced Mr. Lewis to violate his fundamental duty to his shareholders.

What really bothers me is how little regard the government has for shareholder rights. These corporations provide our jobs, pay our taxes,  and drive innovation in our modern society.

Christopher

Lewis Testifies U.S. Urged Silence on Deal

Bank of America Chief Says Bernanke, Paulson Barred Disclosure of Merrill Woes Because of Fears for Financial System

By LIZ RAPPAPORT

Federal Reserve Chairman Ben Bernanke and then-Treasury Department chief Henry Paulson pressured Bank of America Corp. to not discuss its increasingly troubled plan to buy Merrill Lynch & Co. -- a deal that later triggered a government bailout of BofA -- according to testimony by Kenneth Lewis, the bank's chief executive.

Mr. Lewis, testifying under oath before New York's attorney general in February, told prosecutors that he believed Messrs. Paulson and Bernanke were instructing him to keep silent about deepening financial difficulties at Merrill, the struggling brokerage giant. As part of his testimony, a transcript of which was reviewed by The Wall Street Journal, Mr. Lewis said the government wanted him to keep quiet while the two sides negotiated government funding to help BofA absorb Merrill and its huge losses.

Continue reading "Lewis Testifies US Urged Silence on Deal" »

Check out our Solar System!

In acknowledgement of Earth Day, I wanted to recognize the contribution that the solar panels on the roof of our office has made to our company and the environment. 

As you may or may not know, I recently went solar—not only does it feel great to go green, but it's an amazing experience to actually see my solar system producing clean energy!

My SolarGuard account shows me exactly how much solar energy my system is producing, and continually calculates all of my financial and environment savings. As you can see, the numbers are really starting to rack up!

View my Solar Production

Here we go again with active managers...

I found this story today on page C13 of the WSJ. It seems to me that this should be the biggest story EVER since investors spend over $100 billion per year trying to beat the market. How does it end up buried at the back of the Journal? My theory is that the press is in cahoots with the active managers so they'll have some drama to write about.

Imagine a newspaper with no Madoffs, Blackrock, or hedge funds. How boring. Never mind that they are ripping people off.

Christopher

Managed Funds Take Beating From Indexes

By SAM MAMUDI

NEW YORK -- Investors in actively managed mutual funds for the past five years have reason to wonder what they have been paying for: A new study from Standard & Poor's finds that 70% of large-cap fund managers who use the S&P 500-stock index as a benchmark for comparison have failed to match the performance of the index over that time.

That is double-bad news, given that the index was down 19% in the five years that ended Dec. 31. The failure of active management is replicated across almost all categories, not only U.S. stock funds but also bond funds and even emerging-markets funds.

What's more, those numbers are similar to the previous five-year cycle. From the close of Dec. 31, 2003 to Dec. 31, 2008, the S&P 500 fell 18.8%, but still beat 71.9% of U.S. actively managed large-capitalization funds, according to S&P Index Services.

"We consistently see that once you extend time horizons to five years, the majority of active managers are behind their benchmarks," said Srikant Dash, global head of research and design at S&P.

Continue reading "Managed Funds Take Beating From Indexes" »

Bear markets favor active management, right?

Following every major bear market, it seems that the active managers and market timers come out in full force.

"We got out of the market before the crash."
"Our sector rotation strategies allow us to remain nimble enough to avoid big losses."
"Buy and Hold is dead.  Active trading is the only way to make money in this market."

It sure sounds attractive.  After all, the markets have likely just delivered a major blow to your portfolio.  Surely, someone out there must have been able to help me avoid the losses.  And, of course, they will also be the same firm that will get me the upside of the market.

Well, I have good news.  There are, indeed, funds that outperform the market averages.  But here comes the bad news.  Odds are likely that you won't pick the right ones.  Or at least not at the right time.

Why do I say this?  Two reasons:

1. The study by Dalbar, Inc. that found that mutual fund investors typically experienced returns worse than the funds in which they invested due to poor timing of their investment dollars.  The right time, by the way, is before they go on a run that beats the market, not after.
2. The study by Standard & Poors (of S&P 500 fame) which compares the performance of actively managed mutual funds to the passive S&P indices.

It is the results of the second reason that I explore below.

If Hedge Funds And Active Managers Don't Deliver, Why Do Pensions Buy Into Them?

According to me, hedge funds and active portfolio management rarely pay off for investors in the long run. This is primarily related to the outrageous fees they charge. (3-10% of the total amount invested vs an passive strategy that charges less than 1.5%) You also generally need 30-60 years of performance data to tell what is skill vs luck. (They call this data "noisy").

I see why people sell them (massive commissions) but why do people such as pension trustees buy into them? Theoretically, as trustees and fiduciaries, they don't benefit from the high fees. My contention is that those high fees end up flowing back to the trustees and politicians via campaign donations, free trips, political favors and other "soft dollar" goodies.

Based on this article, it looks like the WSJ has found one of these schemes. It's rare that you get to see this corruption in action so I thought I'd bring it to light.

Christopher

Pension-Deals Scrutiny Spreads

Indicted N.Y. Political Adviser's Firm Secured Business in Another State

By CRAIG KARMIN and PETER LATTMAN

A firm affiliated with Hank Morris, the political adviser indicted last month on allegations of extracting improper fees in exchange for investments from New York state's pension fund, helped investment firms secure business in at least one other state, according to people familiar with the matter.

Private-equity firms Quadrangle Group and Carlyle Group, whose names have already surfaced in connection with the alleged pay-to-play case involving New York's public pension fund, used the placement firm Searle & Co., with which Mr. Morris was affiliated, to get investments from a government-run fund in New Mexico, according to a spokesman for the New Mexico fund.

Continue reading "Pension-Deals Scrutiny Spreads" »

The E-Book Revolution

I've been using the iPhone Kindle app as well as an app a called Stanza to read books on my iPhone. I've tried dedicated readers like Sony's Reader but I have this thing about hauling multiple devices around. Below is a brilliant article about how these devices will change the nature of how man uses information.

In particular, I was struck, and uplifted by the analogy to the printing press (Think Gutenberg Bible). After we acquired the ability to duplicate books and therefore disseminate knowledge widely, we rocketed (literally ultimately) forward economically. Despite some of the more recent developments politically and economically, I believe this innovation, the ability to access everything every written on your phone, will forever enhance and leverage our unique intellectual talents as humans.

Ultimately innovation ends up in stock prices...

Christopher

How the E-Book Will Change the Way We Read and Write

Author Steven Johnson outlines a future with more books, more distractions -- and the end of reading alone

 

by STEVEN JOHNSON

Every genuinely revolutionary technology implants some kind of "aha" moment in your memory -- the moment where you flip a switch and something magical happens, something that tells you in an instant that the rules have changed forever.

First Quarter Market Commentary

March Madness

It is the time of year when half court buzzer beaters turn unknown players from small schools into instant, if momentary, heroes.  The NCAA Men's Basketball Tournament, also known as March Madness, is legendary for great upsets, heart stopping finishes, and underdog "bracket busters."  This year, pre-season favorite, North Carolina, advanced through the field, winning every game by 12 points or more en route to the championship.
 
This March, the madness was not on the road to the "final four," it was on a road called Wall Street.

Kicking Cramer While He's Down

I'm taking a page out of Jon Stewart's playbook here.  I was Googling financial news and blogs from around March 9, 2009, aka The Bear Market Bottom (at least for now).  The point was to find some sucker who put themselves and their opinion out there for the public to scrutinize and, well, rip apart.  Basically, cherry pick some quote that turned out to be wrong or just sounds crazy with the perspective of time.

Well, as luck would have it, the highest profile of suckers with no shortage of opinions has a gem of a quote.  This is from his Mad Money Blog:

The potential for a second Great Depression is real, Cramer said, so long as Obama pushes forward with his plans. Nonbelievers should just look to the stock averages, which have plummeted since Jan. 20 and are now forecasting the worst economic decline since the first Great Depression.

This quote appeared on March 9, 2009.  Now, I will agree that the stock market is forward looking relative to the economy.  But let's be realistic about short term movements.  He was using a 6 1/2 week market drop as a forcast a second Great Depression.  Let's at least hope the second Great Depression won't be referred to in caps.