Bob Carlson

April 23, 2014

Reviewing the Latest Home Sales Data

Filed under: Housing — Bob @ 5:20 pm

The latest report on existing home sales was below expectations and below the trend of a year ago. Initial media reports took this to be negative. They shouldn’t. Here’s a good behind-the-headlines review of the data that shows the bright points. Key points are that many of the sales of recent years were distressed and foreclosure sales. There also were all-cash purchases by investors looking to buy cheaply. A lot of the decline in home sales is due to the reduction in these opportunities, and that’s a good thing. Housing is less distressed. No one should have expected the pace of 2013 to continue, or wanted it to. There’s other good news in the report.

Probably the most important number in the NAR existing home sales report is inventory.   This morning the NAR reported that inventory was up 3.1% year-over-year in March.   This is a smaller increase than other sources suggest, and it is important to note that the NAR inventory data is “noisy” (and difficult to forecast based on other data).  A few other points:

• The headline NAR inventory number is NOT seasonally adjusted (and there is a clear seasonal pattern).
• Inventory is still very low, and with the low level of inventory, there is still upward pressure on prices.
• I expect inventory to increase in 2014, and I expect the year-over-year increase to be in the 10% to 15% range by the end of 2014.
• However, if inventory doesn’t increase, prices will probably increase a little faster than expected (a key reason to watch inventory right now).

Achieving Better Investment Results

Filed under: Asset Allocation,Investing — Bob @ 12:20 pm

Howard Marks of Oaktree Capital has one of the best investment records. In his shareholder letters, he’s frequently willing to reveal some of the steps an investor needs to take to achieve such results. He’s willing to give the advice, because he knows few people will take it. In this shareholder letter, he explains that to achieve better investment results than the average, you have to be different from most other investors. For many people, that’s too uncomfortable and it also means taking the risk of being both different and wrong. That’s why so many investors follow the headlines and invest with the pack. They find it comfortable to achieve average results. That can be okay in a bull market,but it doesn’t work out well when markets aren’t doing well.

Most great investments begin in discomfort. The things most people feel good about – investments where the underlying premise is widely accepted, the recent performance has been positive and the outlook is rosy – are unlikely to be available at bargain prices. Rather, bargains are usually found among things that are controversial, that people are pessimistic about, and that have been performing badly of late.

But it isn’t easy to do things that entail discomfort. It’s no coincidence that distressed debt has been the source of many successful investments for Oaktree; there’s no such thing as a distressed company that everyone reveres. In 1988, when Bruce Karsh and I organized our first fund to invest in the debt of companies seemingly at death’s door, the very idea made it hard to raise money, and investing required conviction – on the clients’ part and our own – that our analysis and approach would mitigate the risk. The same discomfort, however, is what caused distressed debt to be priced cheaper than it should have been, and thus the returns to be consistently high.

Updating Europe

Filed under: Economy,Financial crisis — Bob @ 8:19 am

There haven’t been many headlines from Europe recently. The financial crisis seems to be in the past, and European stock markets generated nice gains the last few years. But that’s only the surface analysis. In fact, European leaders haven’t done anything except stabilize the continent at depression levels. Growth is very modest. Unemployment still is very high and generating a range of social problems. The structure of the continent’s governing structures make it difficult to enact any policies that will do more than provide stopgaps to the serious problems. updates the situation.

There’s a growing consensus that the European Central Bank needs to implement something similar to the quantitative easing policies of the U.S. and U.K. The ECB isn’t allowed to buy bonds the way those two central banks have. More importantly, a German court is reviewing a case in which it could sharply restrict the powers of the ECB, making it extremely unlikely that the ECB would be able to pursue aggressive policies. If the court does rule that way, it could change public perception enough to cause another panic and crisis.

Much like the U.S. Supreme Court, upon which Germany’s highest court was partially modeled after World War II, the German Federal Constitutional Court is the final interpreter of constitutional law. Accordingly, it has the last word on the legality of any treaties, agreements or actions undertaken by Germany at the European level.

The court already has challenged German involvement in some of the more creative legal acrobatics undertaken by the European Union. These include the establishment of the EU emergency bond-buying plan known as the Outright Monetary Transactions program. In that case, the German Federal Constitutional Court proceeded with caution and referred the case to the European Court of Justice. But there are strong indications that it could be more aggressive in future cases. A rejection of government moves in a landmark case, such as one involving potential German participation in a strengthened quantitative easing program, could derail the Continent’s recovery.

April 22, 2014

Kind Words About Variable Annuities

Filed under: Annuities — Bob @ 5:20 pm

I’ve been among those critical of variable annuities over the years. Many of them have high fees and expenses, plus they convert tax-favored capital gains and dividends into ordinary income. But there’s something different about many variable annuities sold in recent years. After the stock market crash following 1999, insurers have to sell something more than tax deferral to sell VAs. So, they came up with guarantees. Many of the VAs sold since the early 2000s guarantee lifetime withdrawal rates or have similar guarantees. The result is guaranteed income and principal protection, something most people need as part of their nest eggs. You can read kind words about former VA critics here and here. The second link argues that insurers are pricing the guarantees too cheaply, creating a great deal for insureds. Or at least they were pricing cheaply at the time of the paper. A hat tip for these articles to this link, which is a good general discussion of the issue.

The question is whether those guarantees are worth the cost. In particular, if you’re considering a VA with a lifetime income guarantee, you also should consider buying an immediate annuity instead at retirement or buying either an index annuity or fixed deferred annuity now and converting it to an immediate annuity at retirement. A VA with guarantees carries a lot of costs. You need to work with an independent insurance expert to determine which policy’s guarantees are the best value for you.

Fisher’s claims are at odds with a growing body of empirical research published in peer-reviewed academic and professional journals.

At the heart of the issue is that, in his anti-annuity magniloquence, Fisher neglects to disclose that nearly 90% of all variable-annuity contracts issued over the past decade or so have a rider feature that offers the contract owner some form of a lifetime income guarantee – something no traditional money-management firm or mutual fund can provide. Since these guarantee features first came into vogue in the early 2000s, researchers have sought to determine whether they truly add value to consumers or whether they are merely marketing gimmicks for generating revenue for commission-hungry sales reps and greedy insurance companies.

Economics in Fewer Than 500 Words

Filed under: Economy — Bob @ 12:20 pm

Nobel Laureate Tom Sargent gave a graduation speech and, deciding that most such speeches are too long, decided to summarize economics as succinctly as he could. Here it is.

11. Most people want other people to pay for public goods and government transfers (especially transfers to themselves).

12. Because market prices aggregate traders’ information, it is difficult to forecast stock prices and interest rates and exchange rates.

New Data on Income Inequality

Filed under: Economy — Bob @ 8:20 am

Often lost in the debate over income and wealth inequality is that there aren’t too many people who consistently stay or in or out of the top of the income scale. Consider this post with interesting details from the data.

It turns out that 12 percent of the population will find themselves in the top 1 percent of the income distribution for at least one year. What’s more, 39 percent of Americans will spend a year in the top 5 percent of the income distribution, 56 percent will find themselves in the top 10 percent, and a whopping 73 percent will spend a year in the top 20 percent of the income distribution.

Yet while many Americans will experience some level of affluence during their lives, a much smaller percentage of them will do so for an extended period of time. Although 12 percent of the population will experience a year in which they find themselves in the top 1 percent of the income distribution, a mere 0.6 percent will do so in 10 consecutive years.

April 21, 2014

Diving Into the Medicare Data

Filed under: Health,Medicare — Bob @ 5:23 pm

Recently the Center for Medicare and Medicaid released a bunch of data that various people have been pouring through. Here’s an interesting post pointing out how much Medicare paid for chiropractic treatments and asserting all this is wasted money. I’ve never had a chiropractic treatment, but I know people who have. They say it works, but they also have to keep going back regularly, so it doesn’t work for long. The post says it doesn’t work and cites a few other sources for support. Should Medicare be paying for such alternative medicines and rely on the patients to determine which treatment are best for them?

But wait, you might ask, don’t chiropractors provide pain relief? And don’t they have medical degrees? Well, on the second question, the answer is that they have special Doctor of Chiropractic (D.C.) degrees, which are given out by just 15 special chiropractic colleges in the U.S. The entire field was invented out of thin air by D.D. Palmer in 1895, and later popularized by his son. In his book-length expose Chiropractic Abuse: An Insider’s Lament, chiropractor Preston Long lists “20 things most chiropractors won’t tell you,” including

  1. “Chiropractic theory and practice are not based on … knowledge related to health, disease, and health care.
  2. Many chiropractors promise too much.
  3. Our education is vastly inferior to that of medical doctors.”

The Importance of Trend Following

Filed under: Asset Allocation,Investing — Bob @ 12:20 pm

Trend following is an important component of my investment strategies. I know it works. But if you need some more evidence, take a look at this post. It cites two papers demonstrating that trend following produces higher returns at less risk.

The strategy explains the strong performance of Managed Futures funds from the late 1980s, when fund returns and index data first becomes available. This paper seeks to establish whether the strong performance of trend-following is a statistical fluke of the last few decades or a more robust phenomenon that exists over a wide range of economic conditions. Using historical data from a number of sources, we construct a time series momentum strategy all the way back to 1903 and find that the strategy has been consistently profitable throughout the past 110 years.

U.K. Government Helps with Retirement Planning

Filed under: Retirement - General — Bob @ 8:20 am

The U.K. government recently liberalized national pension rules to allow retirees to take their benefits in a lump sum instead of being required to take them as a life annuity. The latest move they’re considering is to tell people how long they are likely to live and will need their nest eggs to last. The state doesn’t want people to run out of money and turn to public support. So, it’s addressing the well-known fact that most people underestimate longevity by a substantial amount. Details are here.

The objective, he said, was simply to “help people to make the right choices.”

The new retirement rules include free face-to-face consultations with a pension adviser provided by the private pension providers themselves. The government is considering whether guidance on life expectancy should be included in these consultations, amid concerns that the new rules on the timing of claiming retirement funds could result in some retirees’ running out of money. “People tend to underestimate how long they’re likely to live,” Mr. Webb said.

April 18, 2014

Measuring Obamacare

Filed under: Health — Bob @ 5:20 pm

There’s a lot of debate over whether or not Obamacare is a success. The problem with all these debates is that not many people establish metrics and stay with them. The major problem is that no one involved with enactment of the law set out clear metrics from the start about the goals of the law and what would make it a success. So, people with a bias one way or the other set their own metrics and change them as the data seems to move their way. Here’s a better approach. It takes three metrics that are or should have been the goals of health reform legislation and sets goals for these over 10 years.

But when he uses language like “the individual mandate … is working” and “the law is back on its expected track,” and concludes that ”[Kathleen Sebelius] can leave with the law she helped build looking, shockingly, like a success,” it implies a stronger definition of victory, in which Obamacare isn’t just continuing, isn’t just unlikely to be swiftly repealed, but is clearly succeeding as a policy in basically the way its advocates predicted that it would.

So I think it would be useful for the law’s supporters to specify the metrics/numbers/outcomes that would vindicate the latter claim. Here are three fronts where specificity would be helpful:

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