THE ONE INESCAPABLE CONCLUSION FROM THE SEPTEMBER GOP DEBATE

9/18/15

One can make plenty of observations regarding Wednesday night’s GOP debates:

• Donald Trump has some chinks in his electoral armor and his opponents are starting to find them.
• Jeb Bush has a pulse.   That his supporters are touting as a huge positive for his campaign the evidence the debate provided of that pulse’s existence shows how much trouble the fair haired boy of the GOP establishment is in.
•  Marco Rubio did a pretty good job but, for some reason, the punditocracy didn’t notice.  He might be the establishment’s alternative if Mr. Bush should continue to fail to live up to what look like cut from whole cloth expectations.
• Mr. Rubio, if he is to inherit Mr. Bush’s well moneyed support, will have to somehow transcend Chris Christie, who performed quite the Lazarus act on his presidential hopes Wednesday night.   Christie was terrific, especially when lambasting the front runners for their obsessions with themselves and positioning himself as an establishment Republican who can still speak for the middle class.
• Rand Paul’s sensible, sober approach to foreign policy clearly disqualifies him for the nomination of a Party that equates to treason the exercise of caution, prudence, and Constitutionality when putting the lives of young Americans on the line.
• You can stick the proverbial fork in Scott Walker. 
• If the American people were yearning for the Fred MacMurray (the good, My Three Sons Fred MacMurray, not the double dealing, caddish, scheming, Double Indemnity and The Apartment Fred MacMurray) approach to life and politics, John Kasich would be a shoo-in.   But that approach became passé when yours truly was a small child.   Too bad.
• Ben Carson is probably too smart, and too much of a gentleman, to be president.  Also too bad.
• The debate was too long.   Even those of us who have yet to overcome our silly addiction to politics were getting bored as the debate moved into the third hour.

While those are all, at the risk of sounding a touch braggadocious, searingly insightful observations, we can only draw one inescapable conclusion from Wednesday night’s debate:  Carly Fiorina is going to be on the GOP ticket.  If she is not at the top of the ticket, still something of a long shot, she will be in the vice-presidential spot.

Mrs. Fiorina is clearly bright, articulate, forceful, and, despite Mr. Trump’s apparent opinion, attractive.  And she is a woman, which certainly has its attractions whether or not Hillary Clinton heads the Democratic ticket.  (See “Something(s)about Hillary,” 9/8/15.)  Mrs. Fiorina is also a cancer survivor, which not only shows courage and grit but is, ironically, a big plus in the increasingly emotional electoral climate we face.  The establishment is more than comfortable with this former corporate chieftain and the social conservatives also like her for her strong pro-life positions.  

Mrs. Fiorina only has two obvious drawbacks.   The first is that her record in corporate America is, to put it charitably, worse than mediocre.   However, the American people seem to be coming to the (correct) conclusion that even someone who did far less than stellar work in a real job is a better choice than someone who has spent his or her life in and around electoral politics, i.e., who has made his or her living having his or her hindquarters smooched and who consequently is terrified at the thought of having to work in the private sector, or even in a public sector job with responsibilities that transcend preening for the cameras, for a living.

The second drawback is that Mrs. Fiorina, unlike Messrs. Kasich, Rubio, Walker, or Bush, has no chance of bringing a swing state, or any state, into the GOP Electoral College fold.   California isn’t going to go GOP regardless of who is on the Republican ticket.   But enhancement of the electoral map by selection of one’s running mate is an overrated strategy, as evidenced by Bill Clinton’s selection of Al Gore, Barack Obama’s selection of Joe Biden, and Ronald Reagan’s selection of George Bush as their running mates.   Each of these veeps either didn’t bring his state into the fold or was from a state that was already solidly in the fold.   Running mates have an appeal that transcends their home states.   This is especially true in the case of Mrs. Fiorina.

ETF: EXCHANGE TRADED FRAUD?

9/14/15

This (i.e., Monday, 9/14/15’s, page C1) morning’s Wall Street Journal featured an article entitled “The Problem With ETFs,” which outlined a host of problems with exchange trade funds.   These problems, almost exclusively manifested on the wild trading morning of Monday, August 24, included wide bid/asked spreads, stop orders getting executed at far lower prices than the stop prices, and, most saliently, ETFs’ trading at prices far below the net asset values of the funds.  

The first of these two problems (wide spreads and blown through stop orders) were not at all unique to ETFS on that wild morning; the same problems plagued trading in stocks of individual companies.   The third was an ETF-centric problem; prices of the ETFs were falling much further than were the prices of the stocks comprising the ETF.   Thus, some traders were, to use a technical financial term, screwed if they sold their ETF positions in the panic stricken trading of the morning of 8/24.   On the other hand, some traders, to use another technical financial term, lucked out if they bought during those ulcer inducing hours, or, really, minutes.  The article tells the story of one such fortunate investor, CIC Wealth CEO Ryan Wibberley, who, to his credit, not only had the courage to buy in that panic stricken downdraft but also has the class to admit that he did indeed experience some very good luck that morning.  As Mr. Wibberley put it

“I was just waiting for them to take it away from us.  (i.e., for the exchange to cancel the trades)   There’s someone on the other end who just is not having a good day.”

Two observations come to mind to yours truly, who both invests in and trades ETFs.

First, trading is not for the faint of heart.   Most people shouldn’t engage in it.   Most days, I think yours truly shouldn’t engage in it.

Second, the problems of ETFs that manifested themselves on the morning of 8/24 were problems not for investors but only for traders and thus do not detract from the inherent beauty of the ETF product for investors. 

Initially, ETFs were promoted as types of index funds that could be traded throughout the day, which is, effectively, what they are.   The target market at that time was thus people, probably primarily traders, who liked traditional closed end mutual funds, and especially index funds, but didn’t like waiting until the end of the day to close or initiate a position.   Such traders wanted to be able to get in and/or out of a position at any point in the day, often to take advantage of short term fluctuations in the market.   Traders wanting a more exciting sport and/or a bigger adrenaline rush could trade options on ETFs, which were, for obvious reasons, almost instantly active with the introduction and expansion of the ETF market.

However, as time went by, ETFs were seen not only as trading vehicles but also as lower cost alternatives to already low cost index funds for long term investors.   Many ETFs feature expense ratios far lower than comparable closed end index funds.   For example, here are the expense ratios of comparable Vanguard ETFs and closed end index funds: 

                                                Expenses, in basis points

                                              Closed End Fund       ETF

S&P 500 Index                                 17                       5

Total Stock Mkt Index                   14                       5

Bear in mind that the expense ratios on the closed end funds are themselves, to use another technical financial term, super cheap compared to actively managed funds.   And if an investor can put more money to work in Vanguard index funds and thus go to the Admiral class of shares, the expense ratios fall to the same as those of the ETFs.   However, several brokerage firms, including Schwab, TD Ameritrade, and Vanguard’s brokerage arm, allow investors to buy certain ETFs with no commissions, usually with no, or very small, minimum purchases, thus making ETFs, at worst, even money propositions, expense wise, with the cheapest closed end funds.

So while ETFs originally were designed to appeal to traders, or to nervous investors, and still retain that appeal, more and more ETFs are being used as cheaper alternatives to closed end mutual funds by long term investors.  ETFs have served that function exceptionally well…unless, for some reason, investors felt compelled to get out of, or even into, positions precisely during those few hours (minutes, really) on the morning of 8/24 when the market was in turmoil.   Such periods of ETF market inefficiency should be rare…unless the ETF product is fundamentally flawed, which is possible but highly unlikely, given the 25 year track record of the ETF.

Long term investors, in ETFs or otherwise, were not, or should not have been, much fazed, or damaged, by the, er, eccentricities of the trading of the morning of 8/24 or by similar trading which is bound to briefly repeat itself, perhaps in the near future.  They don’t use ETFs as trading vehicles and thus weren’t hurt by wide big/asked spreads, blown through stop orders, or ETFs’ temporarily trading at big discounts to their NAVs.  Such investors were just riding the markets…and paying the lowest possible price for their tickets.   For them, ETFs remain what they have been since their inception, i.e., very low priced and efficient ways to execute long term investment strategies.

“LOOKING FOR (IT PEOPLE) IN ALL THE WRONG PLACES”

I wrote a letter to the Wall Street Journal at the end of August in response to a technology entrepreneur who decided that computer science education at the college level is a failure because the people he hired, or tried to hire, in those fields from Harvard and the like didn’t work out.  He decided that he would look for people without degrees for such work.  While I can sympathize with people’s frustration at the quality of graduates some of our colleges are producing, I suggested a less radical path than eschewing college grads altogether.   You can probably guess where I directed him.

The letter was published a few days ago (Wednesday, 9/9/15).  In case you missed it, I have reproduced it below:

 

8/29/15

Dan Gelernter says the he is not looking to hire computer science majors because CS “education is a failure” and “Computer science departments prepare their students for academic or research careers and spurn jobs that actually pay money.”  (Opinion, 8/29-8/30/15)  To fortify his argument, he cites the failings of computer science programs at Harvard, Yale, and Princeton, of all places.

While I agree, to some extent, with Mr. Gelernter’s lament, perhaps he is looking in the wrong places.  If he would expand his search for CS candidates beyond the Ivy League cocoon from which he emerged (Yale, 2010) and look to places like Illinois, Purdue, Iowa, and Iowa State, he would find candidates who have been prepared, and are eager, for jobs “that pay actual money.”

There is a world out there beyond the Ivy League…thank God!

Mark Quinn
Naperville, IL

SOMETHING(S) ABOUT HILLARY

9/8/15

The pundits and the pols have been scratching their heads for weeks, or months, over the popularity of Donald Trump and Bernie Sanders, populists from opposite ends of the political spectrum.   Why, the pundits ask, would a public that is fed up with the establishment pols be so attracted to two non-establishment pols?   The bar over which one must jump to become an officially recognized pundit must be awfully low, but I digress.

This navel-gazing on the part of the punditocracy came to a heretofore head this weekend on the talk shows that the pundits follow in order to know which mewings to echo or reflexively denigrate, depending on their nominal world view.   One such notable, utterly dumbfounded that the benighted electorate is not flocking to the preferred candidate of the media establishment, Hillary Clinton, offered the sage insight that Mrs. Clinton’s problems with such things as her private e-mail account and the Clinton Foundation “obscure her message.”

Hmm…the allegations directed against her, and, more saliently, her horrific mishandling of those allegations, don’t merely “obscure” Hillary Clinton’s message; they expose her message for the precariously wispy reed that it is.

What is, after all, Hillary Clinton’s message?   It is certainly not an ideological message, or at least not an ideological message that can be easily or publicly distinguished from those of her Democratic challengers.  No, Mrs. Clinton’s message is that she is supremely, indeed uniquely, qualified to be president of the United States.   She is hyper-competent and therefore entitled to the office.   Her country’s needing her would be more obvious if the benighted masses were not so utterly incapable of knowing what’s good for them, which provides further evidence of how badly her country needs her.  

Hillary’s having dropped the ball on the e-mails and joked about serious investigations thereof does not “obscure” this message.   No, these missteps and pratfalls directly contradict this message.   If Hillary Clinton cannot properly manage her own feckless finagling, her image of competence, the very reason for her being, in her mind and those of her fervent followers, the obvious choice for president, falls apart.

On related notes….

Perhaps yours truly is being too glib when he states that Hillary’s only message is that she alone is qualified to be president and that anyone who cannot see that is somehow mentally or morally impaired.   There are two other unspoken aspects of Mrs. Clinton’s message, the “wink and nod” facet of Hillary’s continuing lifelong campaign for the presidency.

The first is that, if Mrs. Clinton has any ideology at all, she is to the right of Bernie Sanders and Martin O’Malley and thus is an electable Democrat because she is capable of winning the middle.   This message, of course, is never to be spoken of in the heat of a Democratic primary season, any more than the message that a Republican is to the left of his opponents and therefore can win “the middle” is to be uttered in the context of a GOP primary season.

The second unspoken component of Hillary Clinton’s message is that putting her in office would return us to the halcyon days of her husband’s presidency.   As much as many people with whom I agree on most things don’t want to admit it, Mr. Clinton, despite his many, er, peccadilloes, was one of our great post-war presidents, certainly if his presidency is considered from the perspective of peace and prosperity, which is, understandably and justifiably, the whole ball game for most people and certainly for that vast “middle” everyone seems to be courting.   That Hillary would be a Bill redux is a powerful message and, if it were true, would be a very good reason for plenty of people to vote for Mrs. Clinton.  But this message, too, cannot be spoken out loud; the “watch me roar” crowd, supposedly a big part of Hillary Rodham’s constituency, would never brook such a sexist message.

And one more thing…

Hillary Rodham Clinton is often compared to Richard Nixon, usually in the context of disregard for the law and propriety when such piffles get in the way of the all consuming goal of getting the anointed one elected.   There is doubtless something to this analogy.  Both Mrs. Clinton and Mr. Nixon have (had) credentials that would seemingly make her (him) an obvious choice for president.   She (he) failed the first time around, but only because the American public was temporarily anesthetized by the siren song of a young, dynamic, “different” kind of candidate who ultimately turned out to be far less compelling, “different,” or competent than the electorate’s naïve hopes had led them to believe.   Once the voters sober up, the thinking of both Hillary Clinton and Dick Nixon goes (went), they will return to the obvious choice.

But there is one more point of similarity between Mrs. Clinton and Mr. Nixon:  both are about as likeable as cornered rattle snakes.   Likeability may not make one a good president, but likeability certainly helps one become president.   Mr. Nixon overcame his omnipresent similarities to the bad guys on The Three Stooges to become president.   Can Hillary do the same?    

Further, the same “qualities”…the paranoia, the shiftiness, the amorality….from which he had to divert the public’s attention in order to become president ultimately became Mr. Nixon’s undoing.   Will those same shared qualities contain the seeds of the demise of a second President Clinton?

“I’M AS (SCARED) AS HELL AND I’M NOT GONNA TAKE IT ANY MORE”?

9/1/15

Since I refuse to make predictions regarding the direction of the market (See today’s other post, ON THE EDGE OF THE FINANCIAL ABYSS?), what can yours truly say about this market with any degree of certainty?  Perhaps only two things, to wit…

If this market makes you nervous, you’re human, but

If this market makes you really nervous, to the point at which you can’t sleep, you have too much money in the stock market.

As I said in today’s other post, I have no idea if we are at or near a bottom…or top, for that matter (Think about it.)  I don’t know if we are heading into the abyss or if we are on the verge of another multi-year rocket ride.   But I do know that markets go up and markets go down.   While this was becoming increasingly hard to believe from the perspective of the more than doubling of the market from the 2009, markets don’t go up in a straight line…and all the efforts of the wunderkinds of Wall Street won’t change that.   So if you expect stock market returns with bank account stability, you are badly misinformed and/or delusional.

Perhaps the hardest aspect of planning one’s investment strategy is making a realistic, let alone accurate, appraisal of one’s risk tolerance.  We consistently overestimate our risk tolerances when markets are going up and consistently underestimate our risk tolerances when markets are going down.   Today’s market tribulation, and resultant nervousness, may be merely an example of the latter, but, given the magnitude of the market’s move, it is probably more than that.  The current market difficulty is, as yours truly just said, a rare opportunity to take a realistic look at how much, if any, money one should have invested in markets that are subject to the laws of economics, finance, and common sense.

ON THE EDGE OF THE FINANCIAL ABYSS?

9/1/15

The Dow and the S&P are down about 3% for the day as I write this.   This drop is just the latest leg of a prolonged dive in the markets that has brought that average and that index down 12% and 10% respectively from the all time highs they reached in May.

Most of the experts are telling us not to worry.   Despite

• the problems in China and throughout the developing world,
• tanking commodities markets,
• a domestic economy that is so weak that the market doesn’t seem to think it can sustain even its halting growth if the Fed begins normalizing interest rates, and
• mountains of richly priced debt throughout the world,

there is nothing to worry about, we are told, unless one is a trader.   Why?   Because, unlike in 2007-2009, there is little to no risk of financial contagion arising from the aforementioned.   The banks are far stronger than they were in 2008 primarily due to strict regulation (Dodd-Frank, Volcker Rule, etc., etc.), wise management, and resultant stronger capitalizations.

Yours truly is not so comforted by these anodyne assurances.   

Can we be so sure that the banks are safe and that financial contagion is therefore a remote possibility?   How much exposure do these now super safe institutions have to oil and other producers?   How much exposure do they have, in one form or another, to the high yield market, which we know is heavily exposed to the energy markets?   What are the trading desks of these institutions up to?   How exposed are the other components of these organizations to the activities of those trading desks?   How much different is the current management of these mega-institutions from the 2008 management of said institutions?  If the experts’ answer is “very different,” or even “different,” why are the names of so many of the captains of said institutions the same as they were in 2008?

Yours truly is not saying that we are on the precipice, or in the early stages, of another “big one” a’la 2007-2009.   Since I am no longer in my 20s or 30s, I no longer know everything and am no longer able to make predictions about the financial markets with absolute certainty.  One supposes that if I had somehow finagled my way into a job in which I was paid astronomical sums to appear in the media and make predictions on the unpredictable, I would have retained this ability, but I was never able to obtain such employment.  Perhaps in the next life.  But, for now, the years have taught me to be very circumspect regarding my prognosticatory abilities and to avoid investing based on such talents.  

I am also reminded, as I watch those in the know opine with such great confidence on the inherently unknowable future, of a quote by the late, great Mayor Richard J. Daley, uttered in an admittedly different, yet still quite relevant, context:

“What the hell do the experts know?”

So, no, I’m not predicting that we are looking at a 50%+ drop in the markets.   But I’m not as sure as are most of the experts that we are not facing such a calamity, either.