Sunday, November 23, 2014

Extreme Corporate Risk Taking

October 12, 2007
The New York Times: Maybe It’s Time to Restructure Executive Stock Options

The reasons for the poor performance of option-laden bosses seem obvious. An option holder will get rich if the stock soars, but he is no worse off if it falls a lot rather than a little. So a project with a huge possible profit may seem attractive even if a big loss is also possible, or even probable.

Kudos to the New York Times for publishing this article just before the Great Recession hit. Well done I say! Seriously, the timing was impeccable.

So let's try and imagine what an option-laden boss might be thinking now. We've seen the dotcom bust. Times have changed. Investors want dividends (especially during ZIRP). Well, fine. If that's what they want then that's what they'll get. The incentive to boost them would seem irresistible, at almost any cost. Hell, burn the seed corn if necessary! Right?

The following chart shows the 1-year moving average of corporate net dividends divided by corporate net cash flow.

Click to enlarge.

Other than another return to the median, what's the worst that could possibly happen? I'm speaking on behalf of option-laden bosses looking to cash out before it happens, of course.

Let's zoom in for a closer look.

Click to enlarge.

To infinity and beyond! Well, once we get these stupid dividend (chart) and net cash flow (chart) spigots oiled up. Both seem to be getting sticky again. The temporary prosperity must flow!

Lever up! If you engage in extreme risk taking by borrowing money to invest in extreme corporate risk taking then just think of all the money you could make! That's what makes parabolas (y = x²)! And if/when it all comes crashing down again, don't go blaming the option-laden bosses. Unlike you, the bosses stand to lose nothing if the risk doesn't pay off. That's what makes it such a sound business decision for them. Woohoo!

This is definitely not investment advice. There may be the tiniest hint of sarcasm though. But what's new?

Source Data:
St. Louis Fed: Custom Chart

Jobs of the Future: No Puppy Left Behind!

The following chart shows the 12-month moving average of pet care services employment (excluding veterinary).

Click to enlarge.

Career Outlook

1. Parabolic growth!
2. Perfect for recent college graduates!
3. It's the one job that can never be automated! Motivation

If a pretty poster and a cute saying are all it takes to motivate you, you probably have a very easy job. The kind robots will be doing soon.

Source Data:
BLS: CES Databases

Groundbreaking New Research in Computer Science Offers Hope for a More Prosperous Future

November 20, 2014
Journal Accepts Paper Reading “Get Me Off Your Fucking Mailing List”

A paper that largely consists of the words “Get me off your fucking mailing list” repeated 863 times has been accepted by a journal that claims to be peer reviewed. The move might appear to offer hope to scientists struggling to get marginal work published, but really just exposes the extent of scam publications pretending to be contributing to science.

Claims to be peer reviewed? For what it is worth, I reviewed the publication in its entirety. It seems like solid research to me. My only critique would be that the research is not comprehensive enough. I had hoped that it would apply to the Do Not Call list as well.

The move might appear to offer hope? Oh, I think it definitely offers hope. Anything that could get me off mailing lists would be a welcome change.

Exposes the extent of scam publications? I think not. As seen within the link above, the paper includes two very useful charts. I think charts can offer compelling evidence at times. Further, we may not trust either one of the charts individually, but as a group they should really make us think about mailing lists and how nice it would be to get off of them.

International Journal of Advanced Computer Technology (IJACT)

The Journal welcomes the submission of manuscripts that meet the general criteria of significance and scientific excellence.

I would provide you with a link to their site, but in the name of science I feel that it is probably best that I alone take the risk of visiting it. Think of me as your own personal "scientific excellence" firewall. Put another way, I wouldn't want your computer to get IJACT'd.

Prosperity and sarcasm, baby. That's what I'm talking about.

Exponential Trend Failure of the Day: Real Exports of Financial Services

The following chart shows the 3-year moving average of real monthly exports of financial services (September 2014 dollars). I have added two trend lines for your consideration.

Click to enlarge.

What a beautiful transition from one trend (in blue) to the other (in red)! I assure you that the data in black is actually there. You just need to look really closely for it.

I have bad news, good news, and more bad news.

1. The blue exponential growth trend failed.
2. Parabolic trends are even better!
3. Unless they're upside down.

So, on that note...

Hey world! We ain't done financially servicin' you yet!

Get over here!

What's it going to take to get you interested in buying the very finest modern and financially innovative services that our strong and resilient economy can provide again?

Limited time offer! Buy one global financial crisis at the regular price and get a second global crisis absolutely free! Just pay separate processing and handling. Limit 5 free crises per caller.

Source Data:
St. Louis Fed: Custom Chart

Saturday, November 22, 2014

Parabolic Trend Failure(s) of the Day: Real Nonfinancial Noncorporate Business Net Worth per Capita

The following chart shows the 10-year moving average of real proprietors' equity in nonfinancial noncorporate business (net worth) per capita (June 2014 dollars).

Click to enlarge.

$28,000+ for every man, woman, and child in this country? Perhaps I'm too cynical, but there are only two things that I genuinely trust on this chart.

1. Epic parabolic trend failure Tweedledum (r² = 0.9991).
2. Epic parabolic trend failure Tweedledee (r² = 0.9991).

Tweedledum and Tweedledee (comics)

Tweedledum and Tweedledee officially have no superpowers, but their fat bodies enable them to bounce and roll as they please.

Have I mentioned lately that I don't trust nonfinancial corporate business equities much either? Perhaps that stems from working at a company that experienced a massive accounting scandal, all under the watchful eye of the SEC.

September 27, 2007
Report: Cendant’s Silverman Knew about Fraud

Silverman, currently chairman and CEO of Realogy, a privately held real estate holding company spun off from Cendant, first learned of troubles at CUC on March 6, 1998, when Scott Forbes, then Cendant’s accounting chief, told him that he had been asked earlier that day to “help [CUC] creatively justify” $165 million in accounting entries, according to The Post.

Isn't that special?

Cendant’s accounting fraud was the largest before Enron and WorldCom. When the fraud came to light, Cendant’s market cap plunged by $14 billion in one day.

What's $14 billion among friends?

SEC: The Investor's Advocate: How the SEC Protects Investors, Maintains Market Integrity, and Facilitates Capital Formation

The world of investing is fascinating and complex, and it can be very fruitful. But unlike the banking world, where deposits are guaranteed by the federal government, stocks, bonds and other securities can lose value. There are no guarantees. That's why investing is not a spectator sport. By far the best way for investors to protect the money they put into the securities markets is to do research and ask questions.

I'd start with, "Can I trust your accounting?" Follow it up with, "Do you creatively justify any of it?" Since you might not get straight answers, I'd also suggest using hidden thermal imaging tools.

February 2011
Thermal imaging as a lie detection tool at airports.

We tested the accuracy of thermal imaging as a lie detection tool in airport screening. Fifty-one passengers in an international airport departure hall told the truth or lied about their forthcoming trip in an interview. Their skin temperature was recorded via a thermal imaging camera. Liars' skin temperature rose significantly during the interview, whereas truth tellers' skin temperature remained constant.

Hey, just trying to think outside the box! I bring it up because your competition is definitely using cameras. If you don't have cameras too, then you are already losing the battle. Seriously.

November 26, 2010
This Black Friday, Somebody’s Watching While You Shop

The satellites snap pictures of hundreds of shopping malls, and analysts painstakingly count the cars in the parking lots of each one, looking to pin down the fill rates of each parking lot.

And people wonder why the average day trader loses money?

An Introduction To Day Trading

News provides the majority of opportunities day traders capitalize on, so it is imperative to be the first to know when something big happens. The typical trading room contains access to the Dow Jones Newswire, televisions showing CNBC and other news agencies, as well as software that constantly analyzes various other news sources for important stories.

I have never had nor will I ever have any desire to become a day trader.

This post was a journey. One thing kept leading to another. I better stop here or I risk going off on an H.P. Lovecraft tangent.

“It was from the artists and poets that the pertinent answers came, and I know that panic would have broken loose had they been able to compare notes.” - H.P. Lovecraft

Oops. Too late. :)

Source Data:
St. Louis Fed: Custom Chart

Future Employment Growth Index (Musical Tribute)

I believe that today's employment growth is being fueled to a large degree by putting people back to work. Once they are back to work, employment growth will slow considerably.

As such, I'm making an attempt here to come up with an index that can show the theoretical effect and see how this effect would compare to previous business cycles.

Future Employment Growth Index

1. There is a positive effect for a civilian labor force that is growing. As the civilian labor force grows there are more people able to work. It doesn't mean more people will work, it just means there is potential for it. The first part of the index is therefore the annual increase in the civilian labor force divided by the population.

2. There is a negative effect for an unemployment level that is falling. As fewer people become unemployed there are fewer people who could be put back to work. The second part of the index is therefore the annual decrease in the unemployed divided by the population.

3. I then combine the two effects and use a 24-month moving average to smooth out much of the volatility.

The following chart shows the results and hopefully offers some historical perspective on where we are now.

Click to enlarge.

What does it mean to be below 0%? Well, we're shrinking our unemployed faster than we're growing our civilian labor force. Clearly the employment growth we're seeing now is not sustainable. If the trend continues, we will simply exhaust our unemployment reserves and then employment growth must slow dramatically. We've done this in the past, but never to this degree (at least over the past 60 years anyway).

I really don't think "love drunk" investors will enjoy all the drama of exhausting the unemployment reserves, especially since I don't think many even realize what it would mean. It is common knowledge that the lower the unemployment rate is, the better our future economy will do. This ignores the fact that when things are as good as they can get, then things can't actually get any better. Further, things can actually get worse and often do.

I'm a start some drama
You don't want no drama
No, no drama
No, no, no, no drama

We can hope that as the labor market tightens, more people will feel compelled to join the civilian labor force again. There is therefore some hope that some of the drama can be mitigated to some degree. Yes, that's a sentence that uses the word "some" three times. Nobody can accuse me of being an optimist!

The following chart shows the 12-month moving average of the annual percentage change in the civilian labor force.

Click to enlarge.

If you can tell me where that data is headed from here then we'll both know. Let's hope it is up from these very anemic levels. I wouldn't even care to guess. I will say this though. One wonders how much of that recent decline was due to the taper tantrum and what the next tantrum might do.

October 8, 2014
Fed Worried About Triggering Another ‘Taper Tantrum’

“This likely reflects the scars from the ‘taper tantrum’ last summer,” when then-Fed Chair Ben Bernanke signaled that asset purchases might be scaled back sooner than investors expected, according to a note to clients from Bank of America Corp. Bernanke’s comments caused a jump in Treasury yields.

If I was the pilot on a cargo plane filled with expensive irreplaceable artifacts, the plane was very low on fuel, my company was optimistically pleading with me to perform a soft landing, all I could see in all directions was mountains and trees, and I was the sole person on the plane, then I would definitely consider alternatives to the soft landing idea. Performing a parachute tantrum might be one of them. But, hey, maybe that's just me, lol. Sigh.

Source Data:
St. Louis Fed: Custom Chart #1
St. Louis Fed: Custom Chart #2

Friday, November 21, 2014

Quote of the Day: "Fed Has Boxed Itself In" (Musical Tribute)

November 20, 2014
Fed’s Bullard: Fed Has Boxed Itself In When It Comes to June Rate Hike

“The probabilities about when the Fed would move off the zero bound are all piling up on this June meeting” because the U.S. central bank has led observers to believe major policy actions can only happen at meetings with a press conference to explain what just happened, Mr. Bullard said. The Fed’s talk about “being data dependent isn’t as credible as it should be” given this situation, he said.

The following chart shows MZM own rate (the interest rate the $12.8 trillion liquid money supply is earning).

Click to enlarge.

The market is suggesting that the interest rate is reaching a bottom. For the first time since the Great Recession, I am therefore inclined to believe that the rate hike may actually be coming as predicted.

If so, this red parabola will fail, as all economic parabolas eventually do. The failure would be to the upside next year. I don't expect there to be a lot of fireworks the instant it happens though.

That said, I don't have much faith that the Fed will engineer a soft landing. Oddly enough, knowing that Janet Yellen's first major interest rate hike decision will be made from inside a box does not bring me any additional comfort. I intend to have the clown horn standing by just in case hilarity ensues, lol. Sigh.

As a holder of long-term treasuries (with intent to hold to maturity), how concerned am I about the rate hike? I'm not concerned at all. I welcome it wholeheartedly. I have a bond maturing in January of 2016 (purchased in 2006) and I would like to reinvest it. I therefore hope that the economy can avoid a recession between now and then. I'm just not holding my breath.

Source Data:
St. Louis Fed: MZM Own Rate

Exponential Trend Failure(s) of the Day: Real Dividends per Capita

The following chart shows the 4-quarter moving average of real dividends per capita (September 2014 dollars).

Click to enlarge.

The red trend was growing at a 17.9% annual rate before it failed. This compares very favorably to the mere 12.0% growth rate of the blue trend before it failed.

As seen in the r-squared values, the red trend was also much, much more of a "sure thing" than the blue trend. Well, before both trends failed anyway.

I remain a permabear. Some bulls seem to think it is a derogatory comment intended to shame me into submission. I own it. It is what it is. I have no desire to buy stocks again in my lifetime. Based on my long-term beliefs about the direction of this economy, I just can't imagine the conditions that would make me want to do it. I'm retired. I value safety.

Based on the contents of the chart, is it really a big shocker that the long-term treasury market has had a good year?

This is not investment advice.

Source Data:
St. Louis Fed: Custom Chart