I hope you all had a good St. Patrick Day. Several years ago, my wife and I spent St. Patricks' day in Dublin. We really love Dublin and all of Southern Ireland. We always stay at the Merrion when we visit Ireland, and we recommend the breakfast buffet and the Patrick Guilbaud French Gourmet Restaurant. The powers that be in Dublin close off many of the streets downtown for St. Patricks day, and then hand out free stuff, have rides and people just stroll and talk like we use to when I was a boy in Small Town USA. Then they pack in downtown for the fireworks over the river that night.
Cyprus
The big news over the weekend was the Cyprus government reaching into the deposits at the banks and taking people's money. Micos Anastasiades announced a levy of 6% on all deposits less than 100,000 euros, and 9% on all deposits above 100,000 Euros. As you can imagine, this caused a run on the banks as the depositors lined up at the ATMs. The government stopped all transactions, and a bank holiday has been declared until Tuesday.
Generally speaking (except for the pain of the people in Cyprus), a bank run will not have much affect on the Euro. What is troublesome for investors (and politicos) is that the TV pictures could cause other troubled countries (Spain, Portugal, Italy, and Eastern states) to have problems with capital flight.
Moody's has also suggested that bank ratings in all the Euro region could be hurt.
At the moment, the Cyprus government is reconsidering this "fine" on deposits. The backlash is pretty intense according to Bloomberg. The government has decided to delay the decision until later in the week -- rumor is Wednesday.
Euro
The Euro lost 1% before climbing back a bit. Gentle readers, now observe the capital flow reverse itself form risk-on to safe-haven investment.
This will mean that high yielding currencies will drop, and investors will shift money back into the US treasuries.
The risk-off have sent the yield on the US 10 year treasury bond back toward 1.9%.
Several Wall Street banks are forecasting a further slide for the Euro, and the Euro has already breached 1.2910. It is up a bit above that at 8:20 PDT, but it is weak. Morgan Stanley analysts say the Euro could test 1.27 before rebounding. Bilal Hafeez at Deutsche Bank is forecasting $1.20, and if that turns out to be true, the Swiss Bankers will be very very nervous as they linked the Swiss Franc to the Euro.
UK Pound
The pound jumped up and it is at its strongest level vs. the Euro in more than a month. It even moved higher against the US dollar.
This has nothing to do with the UK economy or the strength of the pound. The only reason for this to happen is the investors moving away from the Euro.
Gentle reader, this move is highly unlikely to last as the UK is still doing what it can to avoid a triple-dip recession. If I was a currency trader (and I'm not), I would look for an opportunity to sell the pound.
Swiss
As you can guess the Swiss Franc moved higher, and the Swiss had to sell large amounts of Francs into the market in order to maintain the cap it imposed on CHF/EUR (1.20) The Swiss better hope that the Cyprus situation does not lead to a larger Euro crises.
US Dollar
We are in a part of market where anything that causes fear leads to a rise in the US dollar. All the emerging market currencies (temporarily) are down as investors move to risk-off trades.
The housing numbers were not good this morning. New home sales have moved lower 2 months in a row, and the report missed expectations. Market Reaction? -- Don't care, as the stock market has risen since the opening (as of 8:25 AM). The focus of economic data this week is on USA housing data.
Aussie $$$
China is likely to grow this year, and the growth rate should put plenty of demand on resources from Australia. Look for any downturn in the Aussie $$$ to be temporary.
Let us not forget the goal of Investing
I've heard from several of you now. I think the most interesting (maybe because I'm trying to read into the comment something) was the comment that investing is common sense. If one just uses common sense, I think it goes, investments will be all right.
I am always intrigued by discussions of common sense. For the most part (not any specific reader on my list), people's common sense is usually wrong when it comes to investing. If you would read a very "heavy" academic book, Advances in Behavioral Finances, by Dr. Richard Thaler, you would have to conclude that common sense is missing most of the time when it comes to dealing with money.
In published academic papers, Dr. Thaler has attempted to categorize what he calls mental illusions. The most common one that seems to exist in everyone is mental arithmetic - which goes something like this: I have $100.00 in my checking account which I am determined I will not spend more than, and I have a credit card. I go to the store, and I find things I want. I spend $50.00 on my credit card. A few hours later, I shop on-line using my credit card, and I spend $25.00. Then I go to the grocery store, and I use my debit card. I'm thinking I've still got nearly a $100.00 in my checking account, and I spend $75.00. And then I go to the pharmacy where I again use my credit card. I know I'm slightly past my checking account balance if I purchased on my debit card, but I think I have some in there yet to pay my credit card. I spend $30.00. I think I'm OK until my credit card bill comes. Then I find I can't pay it off. (If you are like some of my relatives, you will refuse to look at your credit card bill, 'cause you are afraid how much you charged.) Thaler says that is mental arithmetic and money spent with credit cards is not real money to them.. People do it all the time, and credit card companies know this and take advantage of it. (People also seem to discount as not real the 19% interest they have to pay on credit card balances (and late fees if they don't look) if they don't pay it off.)
Are people rational when they invest? Apparently they are not according to one academic study after another, and yet most of the risk-management techniques studied and published are based on investors making rational decisions.
Thaler had another example he created from bond investors. It goes like this.
20 Years ago, Sallie bought a 30-year Treasury bond yielding 7%. The bond now has 10 years of life, and the bond's market price has risen to the point where its yield to-maturity on the market price equals the current 10-year treasury yield. Sallie in effect owns an asset that yields the same as the 10 year treasury. Par value of the 30 year and coupons are merely artifacts of when the bond was issued.
In effect, Sallie has an asset of the same value as a 10 Year Treasury yielding 2%.
Sallie has over 80% of her portfolio in those 30 Year Bonds. Sallie knows she should diversify. If instead of those bonds she had all her money in cash, would she buy 10 Year Treasuries at 2%? She is very unlikely to do this. Assuming she has no taxes to pay on the 30 Year (for example only), then rationally, should she not liquidate her bonds, and reallocate her portfolio?
Now think about your answer to that. How would you handle that question? And if you said you would give up that 7% interest in order to reallocate, would you really? How many of us can earn 7% per year on a large amount of money? However, I just showed you, that those 30 year bonds are going to only earn 2% because the yield-to-maturity equals the 10 year treasury yield. Again if there were no taxes involved, then liquidating the 30 year bonds to cash, and then buying 10 year treasuries yielding 2%; is that rational?
Now what would you do?
- (OK, I don't think I have many readers on this blog -- just my Canadian and German friends, but I think Thaler's question is a very difficult emotional decision for most of us, and it is contrary to common sense I suspect. Copy this section out and send it to your friends, because the answer to this question has a lot to do with determining whether you should invest your own money or turn it over to a money manager.)
If one makes this error it is because we confuse cost (coupon on par) with economic value (coupon on market price). We error by thinking in terms of yield on costs. Yield on cost has very little (if any) bearing on whether we should buy, sell or hold an asset in our portfolio. Also we have to take into account tax consequences which does affect our portfolio allocation.
When we fall into challenges with our assets portfolio, we must remember the GOAL. The goal is to increase economic value.
- (By the way, non-liquid assets are much more difficult to value in your portfolio. Each of you may recognize the most prevalent non-liquid asset in the USA -- your house. Even if you feel like arguing about whether you know the value, you don't know until you go to sell it - and this includes the value the tax assessor puts on your house - which in Washington State at least has no relationship to the actual value. In fact, the assessor's value numbers mix rational and irrational numbers (rational and irrational emotions) in a sort of dance that defies all common sense otherwise and heretofore before and after assessed tax statements.)
Do CEOs of business remember their goal? What do you think? Is not the goal of the CEO to increase per-share intrinsic value? Market share growth, sales growth and even earnings growth do not necessarily trickle down to the investors (share holders or owners). CEO's goal is to maximize the value of the company, but how many of them state that clearly?
The goal of investors is to maximize the value of their assets. We then study how to minimize the risk. If my only goal was to maximize income now (that I can spend), then ultimately I will not be increasing my asset value a great deal. And here is the important point. I'm very likely increasing my risk substantially (something Dr. Bernanke wants you to do - as I've been stating to my readers for some time).
Now, I want to stress that as a retiree I want income, and that I'm not arguing against income. Therefore, I prefer dividend paying investments that I invest in over a long time. I only care about yield to the extent that it signals value. In many cases, value from income is a decent indicator, and I can choose to re-invest all or some of it using DRIP. But at the extremes, yield often becomes a tool for less scrupulous managers and financial alchemists to take advantage of reflexive income hunters. In his out-of-print classic Margin of Safety, legendary value investor Seth Klarman wrote:
- "Too often struggling companies sport high dividend yields, not because the dividends have been increased, but because the share prices have fallen. Fearing that the stock price will drop further if the dividend is cut, managements maintain the payout, weakening the company even more. Investors buying such stocks for their ostensibly high yields may not be receiving good value. On the contrary, they may be the victims of a pathetic manipulation. The high dividend paid by such companies is not a return on invested capital but rather a return of capital that represents the liquidation of the underlying business."
May the tax assessor be far away from you; irrationally and rationally???
Good day...
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