The Float

Galactically Lame Headline Watch

Just seen on CNBC's Power Lunch:

Is Every Short Seller a Criminal

We are not making this up.

Caution: Reporters Trying to Help

In Sunday's Washington Post, Nancy Trejos assembled a true classic of the "what-should-investors-do-now" journalistic genre. Fortunately, Trejos quotes a couple sane observers, most notably Vanguard's Gus Sauter. But there's enough unhelpfulness in this piece to merit a few observations.

First, even the subtitle--"How to Play Your Stocks When They Keep Falling"--implies a wrong-headed approach to the financial markets. The number of Post readers who should be "playing their stocks" in any environment is vanishingly small. But let's move on to the more substantive elements here. We'll pull a few passages out and add some commentary after each item.

So if your money's tied up in the stock market, what are you to do?

First of all, if you've properly diversified your investments among various sectors and stocks, bonds and mutual funds, strategists suggest you just hold tight.

This isn't a huge deal, but as we've noted on several previous occasions (here, for example), some journalists tend to conflate investment vehicles (in this case, mutual funds) with asset classes. They're different, of course, and reporters should know--and help their readers understand--the difference.

If you decide selling is the right move, make sure you do it a little at a time. "Selling today will lock in that loss. Our recommendation would be to continue to trim but don't do a wholesale fire sale," said William Keller, senior vice president and director of investments for the Washington region at PNC.

This notion of "locking in" losses bothers us a little. A loss is a loss, whether it's realized or not, and though tax considerations might affect one's timing preferences on the margin (in some cases making selling more attractive in order to offset realized gains), selling (or reducing) a position is either a good idea or it isn't. If it is, then lock that loss right in there!* Doing so "a little at a time" is only a good idea if one is scaling out of a position as part of a serious, systematic plan.

Yared, on the other hand, thinks that if it's a real loser, you should not be afraid to dump it. "From an investors' point of view, you have to be somewhat coldhearted," he said.

Do a lot of research beforehand, a rule that applies to both buying and selling, he said. Look at balance sheets, stock prices, growth rates, the history of the company. Read its quarterly and annual reports. All that information and more is available on the Internet, he said.

Yared's plea for coldheartedness is spot-on. But that second paragraph, the Cramer-esque bit about digging into balance sheets, growth rates, and company reports strikes us as decidedly bad advice for the vast majority of the Post's readers, advice that encourages rank-and-file investors to overestimate both their own abilities and the utility of such information in the first place.

Late in her piece, Trejos names four companies: Johnson & Johnson, Wal-Mart (or is it now *Walmart?), General Electric, and Goldman Sachs. Cue the crickets! All that stock-jockeying advice and what do we get? A semi-plausible four-stock proxy for the S&P 500. Go figure.

But let's conclude on a high note:

Of course, each individual investor has to decide how much risk he or she can tolerate and go from there, the strategists said. If all this is too much for you and you just want to hold on to your cash, that might be the right move for you, but consider this: Inflation might be on the way, and if it gets here, it'll take a big bite out of your reserves.

"Cash has its own risks, and the erosion of purchasing power is one of them," Horan said.

That's not to say you shouldn't keep cash. "You need to have a fallback of immediate liquidity whether it's a line of credit or cash at hand," Keller said. "You have to have that because these are rocky times now."

Yes, yes, and yes, with one important amendment: inflation isn't "on the way." It's already here.

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* Of course, one can "lock in" losses if one sells a position (at a relatively low price) and doesn't replace that position until asset prices have risen. But selling X and buying Y more or less at the same time doesn't "lock in a loss" so much as it changes one's exposure from X to Y.

Source

Nancy Trejos, "When You're Tied Up in a Down Market," Washington Post, June 29, 2008

Growth and Value

Sifting through a stack of old newspapers over the weekend, we ran across a Wall Street Journal story that gave us fits. This is the sort of work that diminishes public understanding of financial markets, products, and services. It's three weeks old, but we still feel obligated to shed some light on it.

In a "Fund Track" item on the allegedly mediocre year-to-date performance of several Fidelity mutual funds, Jennifer Levitz opens with this:

Last year, after being needled by analysts for lukewarm performance, Fidelity Investments seemed to regain its footing. But so far this year, only 39% of Fidelity's equity funds are among the top half of their peers, compared with 64% for the same time period last year, according to the Chicago research group Morningstar Inc.

So far, so good...if not especially interesting or important. But the last section of the story gets very strange indeed (emphasis added in bold):

Morningstar analyst Christopher Davis said the numbers may show that what worked for Fidelity last year isn't working this year. After a long dry spell, growth stocks, a Fidelity specialty, surged in 2007, only to stumble this year amid recent market turmoil. Growth funds seek companies that are expected to have outstanding earnings gains.

"The reason they looked so good last year is the same reason that this year they don't -- Fidelity leans toward growth," Mr. Davis said. While Fidelity has "every niche covered" in the fund world, "they need to strengthen" the other categories, he said, adding that Fidelity has many more large-company growth funds than large-company value funds -- which scout for undervalued, cheap stocks.

There are two problems here. First, Fidelity's underperformance most certainly isn't a product of its lean toward growth. Why not? Growth has outperformed value by a comfortable margin this year! Here are the year-to-date performance numbers for two ETFs representing large-cap growth stocks (through June 9th, the day before the Levitz piece was published, not including dividends):

• IVE (S&P 500 Value), -9.70%
• IVW (S&P 500 Growth), -3.77%*

So no, the problem isn't growth per se. But then even if growth had underperformed value, that still wouldn't make the point Levitz seems to want to make. After all, Morningstar's comparisons are within categories (i.e., style boxes), so if Fidelity's three flagship growth funds (Magellan, Contra, and Growth)are lagging, they're doing so relative to other large-cap growth funds, which makes the value/growth comparison moot.

So the story is misleading on two levels: the relative recent performance of growth and value and the nature of the comparisons introduced in the opening paragraph.

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* Through Friday's trading, the year-to-date numbers were -16.93% for IVE (value) and -8.48% for IVW (growth).

Source

Jennifer Levitz, "Fidelity Stumbles in Bid to Regain Footing," Wall Street Journal, June 10, 2008

Major Bloomberg Story

Notwithstanding our best-laid plans, this week has turned into a blogging vacuum. Monday we're back at it--with feeling.

Next week we'll give significant attention to the major Bloomberg story on hidden expenses in defined-contribution retirement plans. This is big stuff, important stuff, and we'll give it the full treatment when we're back in the saddle.

For now, we encourage you to take a look at this short preview at 401khelpcenter.com, then watch the televised feature, which, at the moment, is mid-page at Bloomberg.com.

One Great Ad

You may have seen the spot, but if you haven't, or if you like it as much as we do, and therefore want to see it again, we recommend the "Love Sweet Love" ad from Barclays Global Investors' iShares unit, a clever spin on the Hal David/Burt Bacharach tune. You can see it here. Because they're so perfectly apt, we've transcribed the lyrics here:

What the world needs now, is clarity, a little tax-efficiency, and much more transparency. What the world needs now, is fresh ideas, more complete advice, and shelter from all the nonsense. They're the only things that there's just too little of.

There's plenty not to like about the financial services industry's advertising efforts. This one, however, is worth celebrating.

Sue Herrera Tells It Like It Is

CNBC's Sue Herrera, speaking of class clown Dennis Kneale* a few minutes ago:

And by the way, thanks for that oil-can't-move-to-$150 call yesterday, Dennis. And we had it set a new record high. So, he's a contrary indicator, folks, that's all we can tell ya.

Indeed.

And while we're on the subject, we'll add a new item to our list of Things We Don't Like About CNBC.

New Item

• Bob Pisani's crutch-like reliance on the word "here." If you haven't noticed this before, and get annoyed by verbal tics like this, we apologize for bringing it to your attention. If you have noticed it, we feel your pain.

Old Items

• The little clock in the upper-right corner of the network's charts rushing past in hundredths of seconds. As if the general tone of the whole production weren't short-term jumpy enough.
• Those Pat Boone gold ads. The leathery face is bad enough, but the overweening hucksterism has earned these spots a place in this particular hall of shame.
• Cramer's Fed-Begging. Part schtick, part sincere, entirely over the top.
• Rick Santelli not getting enough love. Chicago's own is a rare (if not "lone") voice of reason in the wilderness.
• Erin Burnett insisting that her guests say something positive. We like positive stuff ourselves--where it's justified. But scraping around for a "silver lining" for its own sake strikes us as something other than disinterested.
• Dennis Kneale. We don't understand Kneale's relentless, damn-the-evidence optimism on the economy and the markets. But the real problem with Kneale is that no one on CNBC's air gets more immediate corrections, curious looks, and dismissive headshakes. It's the willful cluelessness, not the opinions themselves, that make Kneale CNBC's most mutable voice. We simply do not understand why the network has made him such a fixture. Perhaps it's because no one with a fuller sense of reality could muster Kneale's spin--a kind of spin CNBC's decision-makers think they need to sustain their audience.
• "It's four o'clock on Wall Street. Do you know where your money is?" What in the world is that supposed to mean? Why do Maria Bartiromo and her understudies insist on saying it every day? This is a daily must-mute moment.
• The sound effects used to transition between images during Bartiromo's 4:00 summary schtick. Too loud. Too grating. Utterly unnecessary. Sort of like most of the fake noise made in NBA arenas these days: sound and fury signifying nothing.
• Inane questions about why the market is doing what it's doing at a given moment. Bill Griffeth on February 27th, when the S&P 500 was 0.73 points above the previous day's close: "Why are we higher today?" Good grief.

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* Who, in disucssing the "recession myth," just called Wal-Mart's sales the "single best indicator of the economy in the U.S." No. We are not making this up.

Thought Experiment

Just before the opening bell this morning CNBC's Erin Burnett discussed the status of Google shares with the WSJ's Jon Hilsenrath. When Hilsenrath made the perfectly sensible point that Google hasn't lived through a true market cycle (i.e., recessionary conditions), Burnett responded with this:

Well, we know the market has priced in some pretty nasty surprises there.

Now, that's not necessarily wrong. But we invite you to conduct a little thought experiment here--thinking about the broader market, not just Google. If earnings season delivers more "nasty surprises," do you think traders and investors will shrug it off? ("Hey, that was priced in!") Or do you think they'll trim positions more aggressively rather than less?

We think the answer is entirely clear, even obvious. But there's plenty of contingency in the question, and that's what makes a market.

Update: Things We Don't Like About CNBC

With Dennis Kneale back from vacation, we thought this would be a good time to add to our CNBC list. Alas, this one isn't Kneale's fault.

New Item

• The little clock in the upper-right corner of the network's charts rushing past in hundredths of seconds. As if the general tone of the whole production weren't short-term jumpy enough.

Old Items

• Those Pat Boone gold ads. The leathery face is bad enough, but the overweening hucksterism has earned these spots a place in this particular hall of shame.
• Cramer's Fed-Begging. Part schtick, part sincere, entirely over the top.
• Rick Santelli not getting enough love. Chicago's own is a rare (if not "lone") voice of reason in the wilderness.
• Erin Burnett insisting that her guests say something positive. We like positive stuff ourselves--where it's justified. But scraping around for a "silver lining" for its own sake strikes us as something other than disinterested.
• Dennis Kneale. We don't understand Kneale's relentless, damn-the-evidence optimism on the economy and the markets. But the real problem with Kneale is that no one on CNBC's air gets more immediate corrections, curious looks, and dismissive headshakes. It's the willful cluelessness, not the opinions themselves, that make Kneale CNBC's most mutable voice. We simply do not understand why the network has made him such a fixture. Perhaps it's because no one with a fuller sense of reality could muster Kneale's spin--a kind of spin CNBC's decision-makers think they need to sustain their audience.
• "It's four o'clock on Wall Street. Do you know where your money is?" What in the world is that supposed to mean? Why do Maria Bartiromo and her understudies insist on saying it every day? This is a daily must-mute moment.
• The sound effects used to transition between images during Bartiromo's 4:00 summary schtick. Too loud. Too grating. Utterly unnecessary. Sort of like most of the fake noise made in NBA arenas these days: sound and fury signifying nothing.
• Inane questions about why the market is doing what it's doing at a given moment. Bill Griffeth on February 27th, when the S&P 500 was 0.73 points above the previous day's close: "Why are we higher today?" Good grief.

As always, we'll add more as necessary, so feel free to send us your nominations.

Why?

The first question is: Why do CNBC's powers that be insist on this? The second is: Why are we so slow to reach for the mute button?

Here's CNBC's resident comedian, Dennis Kneale, on this morning's events, after Sue Herrera called it "an unprecedented day."

It sure is. You know, I just want to keep context in mind. The entire market cap of the New York Stock Exchange is somewhere over 10 trillion dollars. Bear Stearns now has a market cap of four-and-a-half billion. So that's less than one one-thousandth of the entire market, and yet I feel like the Bear news is just gyrating and overwhelming this entire market.

This madness was followed by the boy's schoolteachers, Herrera and Michelle Caruso-Cabrera, just barely concealing their laughter. Good grief...

Update: Things We Don't Like About CNBC

After receiving some e-mail on the topic, and developing a couple new items ourselves, we reckon it's time to update the list we started last Thursday: Things We Don't Like About CNBC.

New Items

• Those Pat Boone gold ads. The leathery face is bad enough, but the overweening hucksterism has earned these spots a place in this particular hall of shame.
• Cramer's Fed-Begging. Part schtick, part sincere, entirely over the top.
• Rick Santelli not getting enough love. Chicago's own is a rare (if not "lone") voice of reason in the wilderness.
• Erin Burnett insisting that her guests say something positive. We like positive stuff ourselves--where it's justified. But scraping around for a "silver lining" for its own sake strikes us as something other than disinterested.

Old Items

• Dennis Kneale. We don't understand Kneale's relentless, damn-the-evidence optimism on the economy and the markets. But the real problem with Kneale is that no one on CNBC's air gets more immediate corrections, curious looks, and dismissive headshakes. It's the willful cluelessness, not the opinions themselves, that make Kneale CNBC's most mutable voice. We simply do not understand why the network has made him such a fixture. Perhaps it's because no one with a fuller sense of reality could muster Kneale's spin--a kind of spin CNBC's decision-makers think they need to sustain their audience.
• "It's four o'clock on Wall Street. Do you know where your money is?" What in the world is that supposed to mean? Why do Maria Bartiromo and her understudies insist on saying it every day? This is a daily must-mute moment.
• The sound effects used to transition between images during Bartiromo's 4:00 summary schtick. Too loud. Too grating. Utterly unnecessary. Sort of like most of the fake noise made in NBA arenas these days: sound and fury signifying nothing.
• Inane questions about why the market is doing what it's doing at a given moment. Bill Griffeth yesterday, when the S&P 500 was 0.73 points above Tuesday's close: "Why are we higher today?" Good grief.

We'll add more when the spirit moves us, so feel free to send us your nominations.