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Thursday, October 18, 2007

Fox Business News: Not Much Business News, But a Good Lesson About the Financial Media

I took a few brief looks at the new Fox Business Channel and was still waiting for the business news before I flipped over to CNBC. John Gapper of the Financial Times impressions are pretty much in line with mine.

Fox is for fun, not investment advice
By John Gapper
,,,,,For me, the highlight of the launch of the Fox Business channel on Monday was when the sound went off as Ivanka Trump displayed the jewellery collection she is selling at her new Madison Avenue store.
The Donald’s daughter was a guest on the first outing for Happy Hour, an evening show on the US cable channel filmed in the Bull and Bear bar at the Waldorf Astoria. The hosts were Cody Willard, a long-haired hedge fund manager (and FT contributor) and Rebecca Gomez, a pneumatic brunette in a short, turquoise dress……

As Fox Business took to the air, preaching its gospel of democracy and bullishness, its anchors were confronted by a 140-point fall in the Dow Jones Industrial Average, prompted by a Treasury-endorsed super-fund to bail out structured investment vehicles holding $400bn of collateralised debt obligations. After a stab at explaining what “it means for your mortgage” they moved on.

But Gapper points out maybe this fluffiness is not so bad after all. For if the more “hard news” approach of CNBC with Cramer and the Fast Money crew giving rapid fire buy and sell recommendations gives the impression that the advice is actually useful it is an illusion.
Cramer himself from an LA Times interview with reporter Tom Petruno

Petruno: Given the sheer number of stocks you suggest either buying or selling in any given show, do you worry that you're encouraging people to trade in and out, even though all the research says the vast majority of investors won't make money as active traders?Let's just say I struggle with it. . . .

Cramer In Year 1 I was much more oriented toward "stock of the day." And I didn't like that. In Year 2 I went away from that. In Year 3, this year, I'm trying to say, listen, there are broader themes, there are broader sectors, you can try to pick the best of breed in the sector.I go back to the fundamental idea that stocks can be interesting. And therefore if you're interested, you will be better off than if you just let the broker handle you. You'll be a better client and a better investor.

Petruno: But you agree that very few people can make a lot of money actively trading?

Cramer:It's a sucker's game

So the FT’s Gapper is bang on when he writes:
Even an investor who confines himself to buying company shares based on Mr Cramer’s stock tips is hopelessly outgunned. He may now be able to make a trade online rather than by phoning up a broker but he is up against a battery of hedge fund quantitative traders whose computers execute trades in milliseconds.
So what is the investor with a 401(k) plan to do? He should start by turning off the television set, or at least by treating Fox Business and CNBC as news and entertainment rather than investment advice…..
Buying individual shares on the basis of what an analyst says on the box – presumably long after he has told his institutional clients – is a mug’s game. The wisest things to do – spread your money across funds, particularly low-cost index funds, rather than individual securities; buy and hold; consult a fee-based adviser, etc – do not require you to watch talking heads and tickers.
Come to think of it, Fox Business is on to something. CNBC, despite its on-screen warnings not to take Mr Cramer’s stock tips over-seriously, has a professional mien. You could almost believe, watching it, that you are getting the inside track on what Wall Street is really doing.There is no such illusion during Happy Hour and that has a bracing honesty to it. You will not discover much about structured finance here but you can see Ivanka Trump in a Manhattan bar. At least you know where you are

Back After Extended Summer Hiatus ! Third Quarter Review

October 9, 2007
Quarterly Market Review
The third quarter experienced another of the increasingly frequent and intense short term stock selloffs. The S+P 500 index fell 11.9% between mid July and mid August. The declines in international markets, emerging and developed, were even more severe. Once again, the markets showed that the only thing that goes up in a down market is correlation. Domestic and international (developed and emerging) small cap and large cap stocks all moved in sync.
While the most apparent cause of the decline was the collapse of the subprime credit market and the housing markets in the US, UK and elsewhere it is difficult to cite a specific event that precipitated the market move. What is clear is that several interrelated factors make each market shock more volatile, more widespread and more violent than the previous one. Among these factors are:

The increase in leverage by hedge funds and private equity firms,
The proliferation of complex derivative instruments, poorly understood by both issuers and buyers.
Short term quantitative trading techniques implemented with leverage by hedge funds. These funds often follow very similar strategies and when they reverse positions trigger a cascade of trading exacerbating short term market movements.
The continuing integration of global markets with the consequence that a crisis such as the recent one related to mortgage lending in the United States can trigger selloffs in markets around the world.
The tendency of market participants to underestimate market risks during periods of stability, increasing leverage and holding of illiquid assets only to find themselves forced into panic liquidations when risk inevitably returns.
None of these developments (described in depth in the recent book Demons of Our Own Design by Richard Bookstaber) are likely to reverse. As a consequence, prudent investment management must include avoidance of leverage and illiquid instruments and recognition that the only sure way to limit the volatility of a portfolio is to raise the holdings of short term US government bonds.
By mid September the Federal Reserve reacted to the market turmoil and the prospective impact of the real estate crisis on the overall US economy and cut short term interest rates by .5%. Markets rebounded strongly and at the time of this writing the broad US market and the major developed and international stock indices are at record highs.
At the end of the quarter the pain of the selloff had been erased for the broad indices:
Listed below for each of the indices is the drop from July intraday high to August intraday low followed by the
third quarter return
S+P 500

EAFE Developed Market Index (ishares etf symbol EFA)

Emerging Market Index (ishares etf EEM)

Reviewing the market action, the following trends emerged:
· Growth stocks strongly outperformed value stocks as investors moved away from financial stocks which weigh heavily in the value sector and instead moved to large multinational corporations which dominate the growth side. We adjusted our portfolios during the quarter reducing our small and value weighting and adding to large cap growth domestically and internationally.
· International and especially emerging markets outperformed US markets as expectations remain that the highest growth will be from outside the US.
· The global growth story continues to fuel rallies in commodities and commodity producers. Our portfolios continue to benefit from our long held positions in this area.
· REITS (real estate investment trusts ) suffered in reaction to the housing crisis, probably to a greater degree than warranted. Lower interest rates and higher demand for rentals should help many REITs, though the outlook for commercial real estate is a more uncertain. By the end of the quarter markets seemed to be recognizing this as REITs recovered from their worst levels. The domestic REIT etf (ticker rwr) ended the quarter with an ytd loss of 5.02%, while international REIT etf (rwx)was up 3.37% for the period. By contrast the etf for the homebuilder’s index (xhb) closed the quarter near its year’s low, down 34%
Going forward, the outlook for the US economy is at best uncertain. The open questions through the end of the year are:
· The performance US economy in the wake of the housing downturn. Consumer behavior in the holiday season will be a good indicator of this.
· Federal Reserve policy in response to developments in the financial markets and the overall economy.
· Will earnings from US multinationals be sufficient to offset any decline in domestic US economic activity?
· Will the growth from the developing world continue to fuel global growth?
· The “known unknown” a political or economic crisis that could have large reverberations on the financial markets
With the overall US market (Russell 3000 index)at the time of this writing up a bit over 10% ytd, developed international market (EAFE index) up 15% and emerging (MSCI emerging index) ahead by over 38%, I would be reluctant to forecast that the year will end with those indices much higher. The main driver in the extremely strong global stock market performance seems to be the flood of liquidity from outside the US particularly sovereign funds such as those from Dubai and China. This trend would be the key factor in extending gains further.
We feel comfortable with our current allocation:
· A reduction in weighting towards value stocks (with their high weighting in financials) and an increase in holdings in large cap growth domestically and
· A significant weighting in developed and emerging international markets (with a tilt towards emerging Asia)
· Weightings in energy and basic materials producers.
· Maintaining our allocation to domestic and international REITs.