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Be Careful of Economic Forecasts and Negative Extrapolation

That was truly a horrible jobs report that was delivered today before the market opened. It will no doubt engender a series of large downward estimates. However, be careful of negative extrapolation. It is my opinion that most economic data points’ estimates are nothing more than guess work.

When I was at The Wharton School of Business in the early 1980s (which had a similar but not exactly same economic environment to that of today) I had the pleasure of taking an advanced macroeconomic class taught by Professor Robert Shiller . Prof. Shiller is now at Yale University and is widely known as co-creator of the Case-Shiller Index. For the term project we were asked to develop an econometric forecast of many data points such as unemployment, US Treasury interest rates and GDP.

It was a fun project for which I devoted plenty of time. I even visited the Federal Reserve to try to get more data and insight. Recall that this was before the days of personal computers and the internet. We had to perform time consuming research with crude tools by today’s standards. I submitted my forecasts along with a written paper (which was typed on an old fashioned electric typewriter) explaining my research, assumptions and conclusions. Prof. Shiller aggregated the entire class’ forecasts and compared them to the actual results. My predictions were at the bottom of the class. However, I received an “A” on the paper / project. The reason according to Prof. Shiller was that my methods and reasons were the best in the class.

So be careful as you start to see economists and market strategists begin to forecast data points in the future. I don’t put much weight into such forecasts. Be even wearier of the less rigorous analysts who just use a ruler and extrapolate in a negative fashion.



Posted By Scott Rothbort at December 5, 2008

Madoff Fraud Will Change The Investment Advisory Business

The Bernard Madoff fraud arrest is going to take even more investor confidence out of the market. I was speaking to a colleague yesterday about the hedge fund industry after I returned from the IMN Super Bowl of Indexing Conference. In my opinion I thought that the hedge fund industry’s best days were in the past and that the beneficiaries would be mutual funds, ETFs and separately managed accounts. The secrecy and leverage which is a characteristic of the hedge fund industry is simply going to have to be regulated or legislated away. The fund of fund concept is no longer economically feasible as well as it has all of those problems but to a second order.

As to Madoff, one has to wonder – where were the firm’s independent accountants and brokers? Did they just sit idly by? One thing we know about fraud is that it usually takes more than one person to keep the scheme perpetuated. I would expect more arrests to be forthcoming.

We are going to move toward a transparent and regulated environment. My business is set up in just that way. I can’t touch client funds. Period. All that LakeView Asset Management, LLC can do is buy and sell securities. Our brokers independently report client account information to our clients. Clients can also get real time account information online. While it will take some time (perhaps years) for the cash and money parked in money market funds and Treasuries to be re-circulated back into the market, there is no doubt that it will flow toward transparent and registered investment advisor structures. Unfortunately for now, the honest hard working investment advisor is going to suffer because of the acts of a Bernard Madoff.



Posted By Scott Rothbort at December 12, 2008

Using the US Treasury 30 Year Bond to Ignite the Mortgage Market

As I look at my Bloomberg screen, with just under 1 hour to the FOMC interest rate announcement, the 30 year Treasury bond is selling at a yield to maturity of 2.93%. Why don’t we use the 30 year Treasury to finance the mortgage market?

 

It would be very simple to construct. The US Treasury offers loans to banks at 50 basis points above the 30 year at issuance who willing to make mortgage loans. That would now be 3.43%. Then the banks would lend to qualified – that is qualified in the traditional sense and not by the 2005, 2006 or 2007 definition – borrowers at 100 basis points over the fixed rate loan from the Treasury. The banks would then pledge the mortgages back to the Treasury as collateral for the loans. To top it off, let the mortgages be portable and allow homeowners to roll it from one property to another as long as they sell the first property and the second property is worth at least what the initial property was worth. No need for mortgage brokers or mortgage backed securities.

 

By doing this we would be getting mortgage money to those who need and qualify for it at record low rates. This would help to clear out existing unsold homes and spur new home construction.



Posted By Scott Rothbort at December 16, 2008

Apple To Cease Macworld Participation - No Big Deal

Apple (AAPL) is off $6 after hours. I picked some up to add to existing positions. However, I will sell this purchase and keep my core position if we get a bounce. I think that there is too much reading into AAPL decision to phase out of the Macworld media circus and have someone other than Steve Jobs make the presentation. Macworld needs AAPL more than AAPL needs Macworld. By having someone other than Jobs speak, it allows the company to show off the talent below Jobs. Yet, traders are interpreting this move as an indication of Jobs’ potential deteriorating health. If AAPL has something new to unveil then it can do so at its own choosing. Having to force the company to meet the schedule of Macworld is plain silly. Just as General Electric (GE) announced today that it would no longer provide guidance to analysts, APPL is saying that when it has something to say it will do so but won’t succumb to market pressures to make presentations or spoon feed analysts on a set schedule.

At the time of this Blog entry Scott Rothbort, his family and or clients of LakeView Asset Management, LLC was long shares of AAPL --- although positions can change at any time.



Posted By Scott Rothbort at December 16, 2008

10 Things That I Will Not Miss About 2008

Another year has passed. I hope that you managed to survive this most difficult and challenging year.  Now for the seventh year, and back by popular demand, I would like to share with you the 10 Things That I Will Not Miss About 2008 (and do not want to see ever or hear again).  

 

 

1. Investing With a Guy Named Bernie

Investing With a Guy Named Bernie – that sounds more like a sitcom than the tragedy it turned out to be. Between Bernie Madoff and Bernie Ebbers more capital was lost than our domestic automakers – General Motors (GM), Ford (F) and Chrysler - need to survive. Then again there is one Bernie I would invest with – Bernard Baruch. Unfortunately he is long gone.

 

2. Kid Rock’s “All Summer Long”

You are driving down the highway and all of a sudden you hear the intro to Warren Zevon’s “Werewolves of London.” Then when the first words hit the air waves you realized that you have been punk’d.  It is not “Werewolves of London” rather it is “All Summer Long” by Kid Rock. It only gets worse. Later in the track the song goes on to defile another classic, Lynyrd Skynyrd’s “Sweet Home Alabama.” Warren Zevon and Ronnie Van Zant must be turning in their graves. I have banned listening to “All Summer Long” in all vehicles (land or water) which I am a driver or passenger. What song do you wanna hear? “Free Bird!”

 

3. Activia and Boniva Commercials

I am getting older. I accept that. My hair is thinning and what little I have is grey. I am told I look distinguished and professorial. There are some memories of my younger days which I would like to keep in their original form. Amongst them is Jamie Leigh Curtis when she portrayed: Ophelia in Trading Places (1983); Wanda in a Fish Called Wanda (1988); or Helen in True Lies (1994). I don’t want to see or hear Jamie Leigh discussing her digestive issues on television in a Dannon Activia commercial.  It does not end there. I also have a bone to pick with Roche and Glaxo Smith Kline (GSK). I also prefer to remember Sally Field as the Flying Nun than a hawker for Boniva. Please let me keep some visions of youthfulness while I still have a memory to recall. So to the executives at Danone (parent of Dannon), Roche and GSK, I beg you to hire some other (and older) actresses to help sell yogurt and osteoporosis drugs to aging adults and baby boomers. May I suggest Lainie Kazan or Martha Stewart?

 

4. Digital Television Transition

You hear about it all the time: “On February 17, 2009, federal law requires that all full-power television broadcast stations stop broadcasting in analog format and broadcast only in digital format.” Not since Dr. Ed Yardeni spooked me with his Y2K warnings have I been so concerned about the future of humanity. On February 17, 2009 either life as we know it will cease or just like Y2K we will have figured it out way in advance. Here is one thing that I am certain about. There is some young hedge fund manager out there somewhere who manages a small fund that thinks they have found a way to make money on DTV2009 and has bet the ranch on that day. It is likely they are even leveraged up in the process.

 

5. Steve Jobs’ Health

My mother-in-law passed away from pancreatic cancer. I feel for Steve Jobs or anyone else who is afflicted with this cruel disease. What I can’t stand is the constant speculation about the health of the Apple (AAPL) CEO. Leave the man alone. As for my co-investors in AAPL, there is no need to worry. The company has been well stocked with a team of excellent business managers, engineers, programmers and marketers who are the true force behind the continuing success at APPL. This is one of the most innovative companies in the world over last ten or more years. That innovation will continue well into the future. Of course I do not want to diminish Jobs’ role. He has been instrumental in reviving AAPL since returning to the company he co-founded.  So to all of those short sellers or rumor mongers, please stop spreading gossip about Steve Jobs’ health and worry about yourselves.

 

6. Money Market Redemptions

Every year I name the most overexposed metric of the year. This year, the award goes to money market redemptions. What do people think that investors do when they withdraw money from money market accounts during a recession? Burn it for heat? It is doubtful as energy prices have come down during the heating season. This is not the Weimar Republic (despite some speculation to that effect). People will use it to: A) spend; B) pay down debt; C) invest in government bonds; or D) invest in stocks. Well there is not much spending going on or stock investing taking place. So my guess is either B or C. Maybe it is a bit of both. This is not something new, but the media treats it like a new revelation.

 

7. Those Wonderful Investment Faxes

Thankfully my fax machine works and I am able to receive all of those insightful faxes about those wonderful investment opportunities that are about to take off. Perhaps I spend too much time doing my own research. Instead I can just wait by the fax machine to help me on my way to becoming the next Warren Buffett. If the SEC can eliminate the up-tick rule, allow mega-ultra ETFs and let Bernie Madoff rip off investors for over a decade then I guess that these faxes must be on the up and up. The truth; I don’t use those faxes for investment ideas. But my pet Sun Conure, Sunshine sure does appreciate the paper in his bird cage.

 

8. Taking Foreign Exchange Trading Advice From a Model

Last November Bloomberg news reported that supermodel Gisele Bunchen refused payment in US Dollars (USD) and demanded payment in Euros (EUR). First the EUR rallied and then it fell like a rock. Since that news report came out the EUR has declined by about 3.5%. Then again, down 3.5% in 2008 was pretty darn good. Maybe she should start a hedge fund after all.

 

9. Pistol Packing Athletes

Let me be clear. I respect an individual’s second amendment right to keep and bear arms. I have many friends who legally own fire arms. They do so for protection and sport. I do not own and I never even so much as held a firearm in my hand. My buddies in South Carolina have promised to take me to a firing range and practice at targets of Osama Bin Laden. I will take them up on the offer one day. If you are looking to buy firearms maybe you ought to think about shares of Smith & Wesson (SWHC) or Sturm, Ruger (RGR). But I digress. For what possible reason did Plaxico Burress of the New York Giants bring an unregistered firearm into a crowded New York City nightclub? Are we supposed to feel sorry for the guy because he pulled the trigger and shot himself in the leg? Perhaps he was just trying to emulate Tank Johnson, another NFL player who was arrested for illegal handgun possession. Of course NBA players also have a fine history of illegal gun possession. At least in Major League baseball they have bats and in the NHL they have sticks to satisfy the need to carry firearms. Have you ever tried to conceal a hockey stick in your sweatpants? Ouch! I don’t think so.

 

10. Bailouts

I am sorry we got to this point. You can blame Presidents Bill Clinton or George Bush or mortgage brokers or Wall Street or unions or dare I say the American public for the current financial crisis we are in. At the end of the day we have a mess to clean up. So the Congress and Treasury and foreign governments are using monetary and fiscal stimuli to cure the problems. Call it a bailout if you wish but get over it and stop whining. It is a reality. I don’t expect to benefit from the government plans but expect to have to pay for it. Heck I have been paying for government programs my entire adult life and have not seen anything in return. Welcome to my world.

 

 

At the time of this Blog entry Scott Rothbort, his family and or clients of LakeView Asset Management, LLC was long shares of AAPL --- although positions can change at any time.

For more information on investing with LakeView Asset Management, LLC please visit the company's website

You can subscribe to The LakeView Restaurant and Food Chain Report newsletter at Restaurantstox.com



Posted By Scott Rothbort at December 24, 2008

Scott Rothbort

About Me :

SCOTT ROTHBORT

THE FINANCE PROFESSOR

 

Scott Rothbort has over 20 years of experience in the financial services industry. In 2002, Rothbort founded LakeView Asset Management, LLC, a registered investment advisor based in Millburn, N.J., which offers customized individually managed separate accounts, including proprietary long/short strategies to its high net worth clientele. He also is the founder and manager of the social networking educational website TheFinanceProfessor.com and a frequent contributor the TheStreet.com where he also writes a weekly article as The Finance Professor

Immediately prior to that, Rothbort worked at Merrill Lynch for 10 years, where he was instrumental in building the global equity derivative business and managed the global equity swap business from its inception. Rothbort previously held international assignments in Tokyo, Hong Kong and London while working for Morgan Stanley and County NatWest Securities.

Rothbort holds an MBA in finance and international business from the Stern School of Business of New York University and a BS in economics and accounting from the Wharton School of Business of the University of Pennsylvania. He is a Term Professor of Finance and the Chief Market Strategist for the Stillman School of Business of Seton Hall University.

For more information about Scott Rothbort and LakeView Asset Management, LLC, visit the company's Web site at www.lakeviewasset.com.

 


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