Though she doesn’t tell me that, I can sense that my wife thinks I have a crush on Susan Boyle. I really don’t, seriously, I don’t. I just see the parallel between her experience on Britain’s Got Talent and value investing – low expectations (high margin of safety) and high performance lead to incredible returns. Of course, I am not sure how a nervous breakdown fits into this analogy, but oh well.
Rising Stock Market Lifts the Economy (Well, Kind of)
We often talk about how developments in the economy will impact the stock market, but we rarely discuss the other side of the relationship: how the market impacts the real economy.
It does, and the current run-up in stocks is very positive for the economy. Here's why:
Financial stocks have doubled from their lows. This is great news for banks -- they were able to capitalize on higher stock prices and issued $85 billion of new common equity in one month. Some of the newly issued equity will go to pay back TARP money from the government; some will allow banks to boost their balance sheets so they can swallow more losses that are coming their way from mortgages, credit cards, commercial real estate, etc.; and whatever is left will go to originate new loans.
Since banks use leverage, equity funds will allow banks to generate new loans in the multiple of 15-20 times of issued equity. Of course, banks have to be willing to lend and consumers/corporations will need to be willing to borrow, but that is a different story. We think of corporate management as rational, numbers-driven individuals, and some of them may be all that. But they are still just well-paid, well-dressed and well-spoken members of that species that we call humans. As such, they are susceptible to the pressures and influences of their external environment.
The stock market has great influence on their decisions. The recent stock market rise made them question how much downsizing they really want to do. In other words, in the absence of the stock market's positive influence, management possibly would have been laying off more people that they’ll be actually laying off.
Of course, some corporate managers simply realized the impact that the stock market has on decisions of other managers and adjusted their behavior accordingly. Finally, consider the employed consumer – the driving force of the economy, the one who still has a job, the 92% of workforce. They see the Dow climbing, hear the media going hysterical over the green shoots and hear fewer people discussing the end of the financial world. Suddenly Dr. Death (my nickname for economist Nouriel Roubini, whose more common Dr. Doom nickname was misappropriated from Marc Faber) is not as popular as he was two months ago.
These employed consumers are feeling better about their future and may actually start spending money. (Those who are unemployed are unlikely to change their behavior, as the job market is very tough.) I don’t think we should expect a repeat of the 2000-2007 spending spree, but maybe they’ll start putting butter on the popcorn when they watch DVDs at home.
George Soros has a name for what I described above; he calls it reflexivity. To me it just sounds like a self-fulfilling prophecy – stocks go up because the economy is expected to do better, the economy does better because stocks went up. Of course, everything I said works the other direction, too.
Microsoft – What a Week
Call it the wishful thinking of the guy who owns Microsoft (MSFT) stock, but the news flow from the company this week was excellent:
MSFT did something very uncharacteristic. It did not push back the release of Windows 7, which will be released on October 22. Bing is excellent. I played with it for a couple of days, and it's an "un-Microsoft-like" search engine. It is good. Type for instance "flight from NYC to Denver", and it will tell you that fares are predicted to rise in the next 30 days. Click on the green arrow and it will tell you what the prices were over the last 30 days.MSFT demonstrated project Natal this week at E3. If the technology demonstrated is real, and it looks like it is because MSFT has released SDK (Software Developer’s Kit), software programmers can now start developing games and applications for Natal. Natal puts Wii’s wireless controller to shame. In fact I think it will change the gaming industry forever and I’d be very worried if I owned Nintendo (NTDOY) stock. Here is what Natal does:
“A motion sensing device that allows you to control video games and Xbox 360 menus with your body instead of a peripheral controller. Natal gives you voice and full-body motion control over your on-screen avatar using an RGB camera, depth sensor, multi-array microphone, and custom processor running proprietary software.” --PC World
Take a look at this incredible video.
Finally, in my article I said “it is believed by many that creativity retired with Bill Gates”. In response to that I received a lot of emails saying that Microsoft never had any creativity as it never had an original product. It just copied products created by someone else and then improved and marketed the hell out of them. It is very true, even the original DOS, the one that MSFT sold to IBM (IBM) was originally created by someone else. But copying requires creativity too, otherwise why would anybody buy your product instead of the competition. Think about WordPerfect for example. It was a dominant product at the time. MSFT created Word which is a replica of WordPerfect, but a much superior replica.
Many find the payday loan biz immoral, I believe there is nothing wrong with it. This cartoon explains it well.
About the author:
Vitaliy N. Katsenelson, CFA, is Chief Investment Officer at Investment Management Associates in Denver, Colo. He is the author of The Little Book of Sideways Markets (Wiley, December 2010). To receive Vitaliy’s future articles by email or read his articles click here.
Investment Management Associates Inc. is a value investing firm based in Denver, Colorado. Its main focus is on growing and preserving wealth for private investors and institutions while adhering to a disciplined value investment process, as detailed in Vitaliy’s book Active Value Investing (Wiley, 2007).