Monthly Archives: September 2010

The Employment Situation: the August US unemployment report

September 7, 2010 By in Current Market Thoughts, economics, Portfolio management, Recent Market Action, Strategy, Technical Analysis Tags: , , , , , , , Leave a comment

Last Friday the Bureau of Labor Statistics (BLS) published its latest monthly update of The Employment Situation. The results were better than Wall Street expected, sparking a rally in world stock markets that carried over into Monday trading.  We’ll see if there’s any further follow through from the US as well, when US trading reopens after Labor Day.

the details

current data According to the establishment survey, the US economy lost 54,000 jobs during the month of August.  This breaks out into a gain of 67,000 jobs in the private sector (all of that in the service sector, with healthcare, temporary help and leisure/hospitality  the largest gainers); and a loss of 121,000 jobs in the government sector–114,00 of them temporary census workers.  So, ex the temporary census jobs, the economy added 60,000 jobs.

revisions The establishment survey data are revised twice, once in each of the two months following the initial report.  The overall unemployment figures for June, which had been revised down from -125,000 to -221,000, were revised up to -175,000.

The figures for July, which were initially reported at -131,000, were revised up to -54,000.

225,000 temporary census workers finished their work in June and 143,000 were terminated in July.  Ex these workers, the latest revisions show that the US economy added 139,000 jobs during the two months.

together The August revisions added 123,000 jobs to the rolls as reported a month ago.  Factor in the 60,000 new jobs reported for August and the economy looks 183,000 jobs better off than it did a month ago.

the reaction

The S&P 500 gapped upward by about a percent on the open and closed within a half point of the high of the day.

my thoughts

While having an up day (actually three up days in a row) is better than having a loss and though the BLS figures were better than expected, there are several reasons to temper one’s optimism:

1.  The rough rule of thumb is that on average 100,000 new job seekers enter the workplace each month.   A rate of private sector job growth of 60,000-70,000 a month isn’t enough to absorb all these new workers, to say nothing of addressing the issue of the millions of workers currently unemployed.

2.  The rise brought the S&P 500 toward the top of the trading range it has been in since June, but didn’t beak through it.

3.  The most senior Wall Street investors were presumably still on vacation last week and will only begin to return to work today.

As a result, I think it will be important to observe trading over the next few days to see whether the August unemployment report has any lasting positive effect.

Macau gambling results for August 2010

September 6, 2010 By in Asian economic development, Casinos, China, economics, Entertainment, Hong Kong, Industry Analysis, Recent Market Action, Stock ideas Tags: , , , , , , , , , , , 1 Comment

After suffering a temporary slowdown in June, as gamblers stayed home to watch the World Cup, the Macau gambling market has bounced back vigorously over the past two months.  Here are the figures:

* 1 HKD = 1.03MOP (Unit:MOP million )
Monthly Gross Revenue from Games of Fortune in 2009 and 2010
Monthly Gross Revenue Accumulated Gross Revenue
2010 2009 Variance 2010 2009 Variance
Jan 13,937 8,575 62.5% 13,937 8,575 62.5%
Feb 13,445 7,912 69.9% 27,383 16,488 66.1%
Mar 13,569 9,531 42.4% 40,951 26,019 57.4%
Apr 14,186 8,340 70.1% 55,137 34,359 60.5%
May 17,075 8,799 94.1% 72,211 43,158 67.3%
Jun 13,642 8,269 65.0% 85,853 51,427 66.9%
Jul 16,310 9,570 70.4% 102,163 60,997 67.5%
Aug 15,773 11,268 40.0% 117,935 72,265 63.2%
Sept – – – – – –
Oct – – – – – –
Nov – – – – – –
Dec – – – – – –

Source:  DICJ, Macau SAR

my thoughts

1.  Of the large world gaming markets where information is publicly available–Macau, Las Vegas, Atlantic City, Australia–Macau is at present much more of a high roller market than the others.  Is that important?  Ultimately what counts is the profit return that the physical capital of the casino generates.  But one salient characteristic of the high roller, table games segment vs. the average gambler, slot machine segment is that the law of large numbers (that is, the odds balancing out) works for periods of time as short as a quarter.  In the high roller arena, on the other hand, one or two unusually lucky or unlucky gambler’s results can affect the bottom line even over a three month period.

What counts as gross revenue in the table above is the amount “held”, or won, by the Macau casinos, not the (much, much larger) amount bet.  If gamblers are unusually lucky in a given month, then the DICJ number will be correspondingly low–and vice versa.

2.  So far this year, the Macau market has growth by 63% vs. the comparable period in 2009.  This number is much more important than shifts in market share among the various market participants.  When the market matures, the relative market shares will become much more crucial.

In addition, share figures can vary substantially as new capacity opens, or as gamblers try out different venues before establishing more regular patterns of patronage, or as a given casino’s win percentage varies randomly.

3.  The Macau government has been critical to the success of the gambling market there.  It issued the licenses that permitted new blood to open up in the former Portuguese colony.   It has prevented the weaker casinos to initiate severe price competition that would have hurt everyone in Macau.  And it has slowed down the pace of new construction to try to match capacity more closely with demand.  All these moves have greatly enhanced the profitability of the gaming industry in Macau.

4. In the simplest terms, it seems to me that the publicly traded Macau casino stocks divide into two groups.

–One consists of 1128 and 1928, which are American controlled firms trying to apply the upscale casino/resort experience model they developed in Las Vegas to Macau.  Their weakness is their relatively limited knowledge of China.  The open question in investors’ minds is whether the American model will work in the Pacific.

–The rest of the market consists of firms with much stronger local Pacific contacts and experience.  Their potential weakness is that they haven’t run the upscale American model.  Also, it’s not clear that some managements would be permitted to operate in the US–although so far this fact does not appear to have been a key factor for Asian investors.

portfolio manager skill: is coin flipping a good analogy?

September 5, 2010 By in Academic Theories, Basic Concepts, Current Market Thoughts, Strategy Tags: , , , Leave a comment

A few days ago I posted about the equity market views of well-known portfolio manager Bill Miller.  I knew that he had been  suffering through hard times after having beaten the S&P 500 every year for over a decade.   Still, when I looked up his recent record will writing the earlier post, I was taken aback by the extent of his underperformance over the  past several years.

Finance professors would have no trouble explaining this development.  In fact, as efficient markets adherents they might relish the prospect of talking about the stumbles of a renowned practitioner.

The standard academic argument runs as follows:

Take a large number of people (say, 1024) and put them all in a (big) room together, each armed with a coin to flip.  Start them all flipping their coins together on command.  At the end of round one, 512 of them will have flipped heads.  At the end of round two, 256 will have flipped two heads in a row.  At the end of round three, 128 will have flipped three heads in a row….At the end of round ten, 1 lucky individual will have flipped ten heads in a row.

Is he a coin-flipping genius?  No.  He’s just been lucky.  He’s the one in a thousand twenty-four that the laws of chance predict there will be.

Conclusion:  that’s all the “skill” of apparently successful investment professionals is–dumb luck, plus their clients’ lack of knowledge of basic facts about probability.

As an explanation, this is, of course, ludicrous.  It might be the basis of a good joke if the academic community didn’t actually believe it is a valid explanation.

Let’s try it out on AAPL.

AAPL was on the verge of bankruptcy when Steve Jobs was rehired.  But Steve is not a superior manager.  It was just dumb luck  that he launched the iPod.  Then he accidentally started opening Apple Stores, which enhanced the image of Apple and provided another distribution network for APPL products.  Then, through more dumb luck he created the iPhone, which doubled the size of the (now larger) company again.  After that, through even more luck the company has begun to sell the iPad.

Maybe Barry Bonds, or Mark McGuire or Sammy Sosa could hire a few finance professors to improve their public images.  The academics could explain that they didn’t grow those big bodies and hit all those prodigious home runs because they were juiced on steroids.  Instead, it was just but  dumb luck that they happened to repeatedly place their bats in just the right position to hit the pitched ball out of the park.  They had as little to do with the home runs as the coin flipper who repeatedly tosses heads had to do with his streak.

Nevertheless, if Mr. Miller is someone of unusually high skill in equity investing, how can we explain his recent extended fall from grace?

This is what I think happens: Continue reading →

I’ve just updated Keeping Score for August

September 3, 2010 By in Constructing a Portfolio, Current Market Thoughts, emerging markets, Keeping Score, Portfolio management, Recent Market Action, Strategy Tags: , , , , , , , , Leave a comment

Here’s the link–or you can just click the tab at the top of the page.

Take a look at my post on patterns in September-October stock market trading.  I’ll have an update for 2010 soon.

Bill Miller: US large caps are “bargains of a lifetime”

September 2, 2010 By in Current Market Thoughts, Portfolio management, Recent Market Action, Strategy Tags: , , , , , , , , , , Leave a comment

my present market quandary

I’ve been really scratching my head about the US stock market over the past few weeks.  Stocks have been going down all month, which is never pleasant.  But what has struck me is how negative the tone of most commentators has been.  Expert after expert (maybe I should put that word in quotes) appears in the financial press, or on radio or TV to deliver an unremittingly negative message.  The factual or theoretical starting points may differ, but the conclusion is the same–stocks have no chance of going up (because the economy will fall back into recession, or because earnings won’t come through as strong as anticipated, or…) and stand a good chance of continuing to decline.

The negative message is not the issue–it’s better to find out you’re wrong before the bottom drops out of your portfolio, no matter what the source or how damaging to your ego.  Invariably, the expert makes some totally insipid comment about stocks that suggests that he/she has no practical knowledge or experience in the equity market, and no particular desire to get any.

If you’ve been reading this blog for a while, you probably know my positive stance on stocks is based on several ground-level assumptsions:

–a large portion, maybe 50%, of the earnings of S&P 500 companies comes from foreign economies, virtually all of which are faring better than the US,

–of the US portion, maybe half is exposed to the overall economy.  That’s trouble.  But the other half is either focussed on servicing corporations, whose profits are booming, or the 90% of the American workforce still employed.   Since the top 5% of wage earners do about a third of all discretionary purchasing, and the top 20% a bit less than two-thirds, the second half should have pretty solid profit underpinnings.

–S&P profits will be up in 2011, maybe by 10%.  This would imply an index level of 1300+ sometime next year.  Before 2010 is over, Wall Street will begin to discount this possibility.

My case, then, depends on investors believing that, say, three-quarters of S&P earnings and perhaps a larger part of its profit growth, are not closely tied to US nominal GDP.  While 10%- unemployment is a terrible social problem, it will not prevent most US publicly traded companies from posting earnings increases.

I can’t find any recent evidence in communications media or in brokerage research that anyone else believes this.  So I keep thinking to myself that in the land of the blind, the one-eyed man isn’t king, he’s must a guy with a bad sense of hearing.  Or, if the game is backgammon but you think it’s checkers, you’re not going to win many games.

who Bill Miller is

Then I read an article in yesterday’s Financial Times by veteran portfolio manager Bill MIller.  Who is Mr. Miller?  –the chief investment officer for Legg Mason, and the manager who became famous a few years ago for beating the S&P 500 every year for over a decade.  Although Mr. Mill has caught my eye for making extra-large, and very successful bets on internet stocks like Amazon, he bills himself as a value investor.

what he said

His point about stocks shows his value roots:

US stocks have underperformed US bonds for over twenty years.  They’re now the cheapest they’ve been vs. bonds since 1951, almost sixty years ago.  Even better, you can’t find a soul who has a good word to say about them.  To Mr. Miller, stocks today are in the same position that bonds were in the early Volcker years–despised, misunderstood, and about to begin a huge run of outperformance.

When might that run begin?  No one knows, but when it starts it will be something to behold.  (Value investors typically believe that can get a good handle on what is likely to happen, but not on the when.)

The article, which is Legg Mason’s July letter to holders of its Value Fund with some stuff edited out, is worth reading, in my opinion.  You can get the edited version by clicking the link above, or you can get the entire thing from the Legg Mason website.

a Pimco joke deleted?

I was amused to see that one of the sections the FT deleted was an apparent jibe at Bill Gross, another modern legend, who built  the Pimco bond business.  Miller’s points out that while Gross is talking down global economic prospects as part of building his positive case for bonds, he is quietly starting an equity business for Pimco.  He seems to be saying that one should watch what people do, not what they say.

I was cheered up by realizing that in true value style, the MIller argument is all forest and no trees.  It’s simple.  Stocks are really cheap, so you should buy them and not worry about what happens in the next six months or so.

Bill’s recent investment performance–whoops

As one final matter, I figured I should report on the Legg Mason Value Fund’s recent record.  So I clicked onto that section of the Legg Mason site.

The picture isn’t pretty, to my eyes.  It appears that Mr. MIller followed his stunning streak (more on this topic in a couple of days) with a deep three-year slump in 2006-08.  My guess, based admittedly on almost nothing, is that his fondness for financials did him in.  After an above-average 2009, the Value Fund is underperforming again in 2010.  The net result is that for almost any period over the last ten years, the fund lags the S&P.

It would have made a better story if Mr. Miller had returned to his old winning ways.  It would also have been easier to figure out how to take the article/shareholder letter he published.

my thoughts

I have three reactions:

–would I give Mr. Miller my money to manage?  No.

–do I think he has a good point?  Yes.

–does he help solve my worry that I may be out of step with everyone else because I’m wrong, not because I’m ahead of the curve?  No.

I’m not exactly back where I started, though.  I have another good reason for thinking that stocks may do well.  Yesterday’s sharp rise in the S&P, while gratifying to any holder of stocks, also makes me scratch my head a bit.  All of the information that seems to have triggered the rally–ISM factory data and employers’ difficulty in finding workers to hire–was already available to the market for some time, both in reports from international transport companies and in bureau of Labor Statistics data (see my recent post on this topic).

Maybe we’ll get more clarity after Labor Day.