self Interest

In any situation, there are often multiple goals or outcomes that are desirable. Unfortunately, oftentimes these goals are conflicting. When that happens, it requires some action, a prioritization or a compromise outcome in order to proceed. For example, recently we saw a conflict between the desire to provide universal health care and a desire, held by many, to keep the Government from growing larger.
In an ideal world, some compromise would be worked out that provided the most benefit to both sides. However, it is more common for these competing objectives to be resolved in favor of the stronger party. When this happens, it often creates resentment that builds up over time. It should also be noted that the “stronger” party is often not really the stronger party if social conventions are ignored.
When the rich and powerful impose their will on the poor and weak it usually requires the acquiescence of those very same poor and weak people. When the imposition turns to oppression, we see violent reactions that disrupt society and lead to an overturn of the established order. History teaches us, that given enough time, those conditions will most likely revert to what they were before, but during the unrest some members of the old order are deposed and some of the poor and weak rise to better positions.
Of course, many modern societies, particularly developed Western societies, have worked out a compromise where the middle class serves as a sort of buffer. They generally are well enough off to want to protect the established order and numerous enough to keep the oppressed from taking power.
Of course, we see the deterioration of the middle class, as some of those with the ability to do so, try to manipulate them out of existence.

Target

At least so far, it appears that earnings being reported are living up to and/or exceeding expectations. In fact, the beats seem to be coming both on the earnings themselves plus the revenues. Now by itself, meeting or beating expectations wouldn’t be important but if you are considering earnings in setting a stock’s price target then when they do beat expectations you see target adjusted.
Of course what you tend to see immediately is a drop in the stock’s price as right before earnings, enthusiasm or the whisper on the street gets certain investors into the stock. Of course, professional traders, spotting this and seeing that the price is going up because of the “rumor” will get in. They are only interested in holding the stock until the enthusiasm has run its course and tend to sell “on the news”. This often leads to a short term drop even on a good news story.
Of course over a longer term, the increased earnings will then lead to an increase in the stock price. Now with the better earnings, it is time to take another look at the S&P 500 and whither it goes. The improved earnings and low interest rates indicate that the S&P has some room to grow. My new estimate is around 1350.
There are those who still expect the market to pull back and certainly it might go down and consolidate. However, if the earnings returns validate the Market at 1350, it will reach that point. Of course if interest rates go up significantly, the P/E ration will adjust. However, I don’t see that happening this year to any great extent.

Never enough

What a surprise that a large bank would construct an investment that it probably knew was bad and then promote it in order to make money. This is the sort of thing that hucksters do. Now, if you believe in Caveat Emptor, you have to feel there was nothing actually wrong with what they did, unless of course they did actively engage in deception. Passive deception, which is what I think they are accused of, is another matter. The fact that someone who was hoping for the investment to fail, was so involved in constructing it may raise questions about whether you would ever want to do business with the hucksters who put the deal together, but it doesn’t quite sound like a criminal act, at least not more so than most of the other shenanigans on Wall Street.
Once you get away from investing and simply engage in speculation, you have in fact opened a casino. The fact is so many of the things traded on the street have little to do with investing and simply reflect bets on what is going to happen. Now, we allow this because it increases profitability to traders and the stock market itself, since the bookies get a cut either way. Give them more things to trade and they make more money. Just handling stock transaction would hardly be worth it.

Invisible Hand

It is interesting that the day taxes are due often falls on a beautiful spring day. Now, it always amazes me how many procrastinators wait until the last minute to file their taxes. What is probably even more surprising is how many of them are due refunds. From a financial viewpoint, paying the IRS money should be done at the latest possible moment since you have the use of those funds. But letting the IRS hold onto your money is clearly not in your best interest and it just goes to show how many people fail to act in their own best interest.
This observation makes you wonder about the invisible hand of economics (heart of the free market theory). If you accept the premise that it is best if everyone acts in their own best interests, that is obviously only true if one knows what that is. I guess it also requires a certain degree of equality. If, for example, one group’s best interests is the total destruction of another group, and they are large enough to accomplish it, it certainly doesn’t seem like the best possible outcome.
In a world of individuals of about equal power, the premise has some merit. However, if two powerful financial giants make a deal that profits a few with tremendous bonuses, but ultimately risks the wealth of millions, how can a system of free markets stop them? We know from history that market manipulation is certainly possible. The only way to actually prevent it is to keep any one group from becoming large enough to dominate a particular market.
Of course even in a simpler world the concept has issues. Consider all the areas of the world that have been over farmed, over fished, and now are non-productive wastelands. Have we achieved the greater good by polluting the air? What about the widespread use of dangerous pesticides? It is easy to argue that each of the individuals came to a proper decision about what was best for them individually, but it certainly wasn’t what was best for society.

Change

Earnings season is here again and if you think about what a difference there is from a year ago it makes you wonder. Generally, last April expectations were extremely low and a lot of people were convinced that the uptick in prices that started in March would be derailed and prices would fall even lower. However, companies showed that they were able to adjust and slashed costs (employees and inventory) and managed in many cases to have better earnings or at least smaller losses than expected.
A year later, the stock market has recovered quite a bit of the ground it lost in 2008 and early 2009 and most believe that we are in the beginning stages of a recovery. Some aspects of the economy are still problematic and some of those problems are the result of long term transitions that are not going away. The way people thing about housing has changed, perhaps permanently. The speculative frenzy that saw negative mortgages and rapid “flipping” has gone away, at least for now. Many companies used the downturn to get rid of employees that occupied marginal slots and these positions are not likely to be filled any time soon, if at all. The positions will be automated or outsourced as the cost of having a full time employee with a benefit package simply makes those positions unprofitable as they once existed.
Of course, the continual improvement in technology is going to allow work to be more portable (of course work that requires hands on like construction, mining, factory work are excluded from this) and that will result in more and more people being available worldwide to fill knowledge and service positions. We are going to use less oil and carbon per capita, partly because we are more aware and partly because technology is going to continue to improve in the use of renewable energy. It doesn’t require everyone to change all at once, but gradual reduction will escalate as time goes on, probably much more rapidly than any predictions. This will help with our balance of payment deficit and ultimately drive down the price of energy.
Companies are still benefiting from all the cost reductions and are now starting to enjoy some increased sales as well. While some people will have trouble finding employment, workers with the right skills and training will start to be heavily recruited. There is a clear future for our society as people, who don’t obtain knowledge that is valuable in this economy, become more and more dependent on the Government while those who do acquire those skills command high salaries and accumulate wealth.

Focus

All of us experience change on a regular basis. Change is neither, in and of itself, a good or bad thing, it simply is. There is an old saying (maybe Hindi) that you can’t step into the same river twice. The river has changed because it flows. Life also flows. Of course, while one’s life is constantly changing, much like a river if flows within certain boundaries. Those boundaries solidify and become more structured over time, both for rivers and for life.
The flow of our life, especially as we gain experience, tends to influence how we see things or react to things. If you think about it, what else could we base our judgments on? If we have experienced a lot of rejection in our life, we come to expect rejection. On the other hand, those who have experience success come to expect success.
There are some current “pop” philosophies that say our expectations can dictate our future. Simply get rid of the negative energy, focus on what you want and some mysterious force will deliver it to you. Now, I am not a believer it this mysterious force concept, but, having focus on what you want and maintaining that focus, probably does give you the best opportunity to get it. There are no guarantees and it should always be remembered that if 100 people try something like this, and 10 succeed, there is usually no hearing about the 90 that failed. These are not scientifically controlled population groups. The proponents of these philosophies deny there are any failures, arguing that they either didn’t focus their energies long enough, or that they will still get what they want.
It does seem clear that if you have a goal in mind and keep a focus on it, you will make decisions that help achieve that goal. Now, achieving most things requires effort and no amount of wanting to be a great musician will get you there unless you actually learn how to play and practice. However, if you have that focus and spend every free moment practicing as opposed to watching TV or going to the Movies, you will at least have a chance.

Our new economy

It is probably safe to say that most people would agree that the country has experienced some sort of a recovery from the deepest part of the recession. After that there doesn’t seem to be much agreement about anything else. I think this is the old classic about blind men examining an elephant and coming to different conclusions about what it looked like based on what part they experienced. If you look at some part of our economy, there are clearly problems. Of course in other parts there are clearly opportunities. So is there an overall bottom line?
If you look at trends over time we can see a very clear trend in the direction of improvement. However, there are many who believe the trends won’t last because they depended on the massive Government stimulus and when that stops they will reverse and bring us back to the low points. Of course the question here is does the country fundamentally work?
If you consider the next 10 or 15 years, the country, as always is transitioning. The current transition continues the recent trend where we are becoming more and more reliant on technology and cheap foreign labor to sustain wealth. Neither of these two trends is going to create a great number of jobs in this country, in fact they will have the opposite impact. This is probably going to exacerbate the shift in wealth to fewer and fewer people.
If you don’t have the right education and skills, you are going to be competing for low skill, low pay jobs that are disappearing. The only real answer to this is to reduce the cost of labor in this country to the point where the jobs are cheaper here than elsewhere. That is really not too likely. So, if you are in that group you will face high unemployment, lower pay and become more and more reliant on the Government. Unless we develop a new growth industry that will create a tremendous number of jobs, I have to say we will develop a somewhat permanent situation of high unemployment among lower skilled people amidst a fairly prosperous society that will try to ignore them.

Mobility

We are currently in the midst of a revolution in how we interact with the world around us and each other. As you consider the speed and accessibility of mobile computing, we are finding that location is becoming less and less important, connectivity is the key.
Now of course, this revolution has been ongoing and many may think we are near its end, but I don’t think so. When you consider the social and intellectual frontiers of humanity, we are moving to an age where each of us will in effect carry out world with us wherever we go. We will have all our contacts, all our information and all our entertainment. Strangely, this tremendous increase in mobile productivity will coincide with a decrease in the need to actually be travelling. The mobile interactivity will allow all of us to work together even when we are far apart.
For the last few decades, there has been some progress in this area, but it had flaws. However soon, if not already, we will all have nearly instant access to each other and all our documents. The devices we use will range from smart phones to tablets and mobile computers.
If you accept that the improvement in networks and speed will continue to improve at the rate they have been, there is an unbelievable market opportunity for those that get it right. This opportunity is really just beginning. Whether it is the traditional mobile phone manufacturers or the new entrants who will eventually succeed remains to be seen but there is going to be so much demand that there will be room for many winners.