Monday, July 30, 2012

A few stock, ETF and ETN predictions

Just a few ruminations about the investment picture, amidst the Euro crisis and fears of sequestration and a possible descent from the fiscal cliff.

The past two months, certain commodities have nicely followed my predicted path. I entered the $CORN fan club a wee bit late, in early July at $43, but even so, the recent closes above $50 are gratifying.  More importantly, there were several predictable buy/sell triggers along the way, as $CORN oscillated with the drought news.  Now it appears that everyone is on board with rising prices related to droughted corn and other crops. Call it a broad corn-sensus... got it? $CORN is popping. Somebody stop me.

$GLD has also proven a worthy investment over the past few months; it had slipped below $150 with hardly a notice, even as it became crystal clear that the ECB *must* step in to contain the runaway bond yields of Spain and Italy. Now, a few signals of inflation could trigger a lot more interest in gold, but it's not going to be some unrestrained gold rush, because relative dollar strength will keep the gold price in check. I like this.

I briefly considered $COW but lost interest after I couldn't find reliable information on how feedstock prices ultimately affect the price of beef. The price could go up for some time and then perhaps collapse quickly as herds are sent to slaughter. Not interested in anything that complicated, it reminds me of critical behavior: you build a hill out of sand and keep adding sand and making it higher and higher until, wham, the whole thing avalanches down, and you can't predict when or how quickly.

$AAPL has been, as usual, predictably charmed for the past few months. For 4 whole months, we've been treated not only to a relatively high average value around $600 but also many beautiful little dips and rapid recoveries.  The most recent such event followed the slightly disappointing earnings report on July 24 sent the price to an appetizing level of almost $570, which I (and many other faithful, I am sure) welcomed with open arms. Today, $AAPL again flirted with $600 and... my guess... the lid is off in advance of the debut of the iPhone 5.

Regarding $FB, as I said before, some of us know the difference between a product delivered well, and a concept delivered poorly. It continues to amaze me that $FB finds any support. Any.

I liked $FCX for a short while but quickly opted for $GLD as the purer play, as copper (tied to housing) remains iffy. I still like $CSX, $WM and $WMB for the long haul.

Ahead of sequestration, we should see US yields steadily rise... as long as the Euro crisis doesn't again run off the rails and generate a flight to safety. I'm cloesly watching for action from Draghi, which could signal an end of artificially low yields in the US. If all goes quasi-smoothly in Europe, then it appears that leveraged treasury bear ETFs may become attractive in the coming weeks, ahead of the inevitable sequestration / fiscal cliff speculation. Watch $TBX and $PST.

I'm currently looking at the possibility of speculative losses in major defense stocks, as the market begins to price in the possibility of sequestration.  Offhand, it appears that fear of this threat will hit $LMT particularly hard, before rebounding robustly in the spring. The picture is anything but clear, but I really don't see how defense stocks can possibly hold up under the growing chorus of concern about sequestration.  Hence a ~6 month strategy is forming.

Sunday, July 29, 2012

Key #Merkel Ally Doesn't Support #ECB Bailout


"CSU-Chef Horst Seehofer hat sich gegen den Kauf griechischer oder spanischer Staatsanleihen durch die EZB ausgesprochen. "Das ist nicht die Aufgabe der Zentralbank", sagte Seehofer im ZDF-Sommerinterview."

In other words, Seehofer, who heads a big part of the current coalition supporting Merkel, doesn't recognize the ECB's mandate to purchase greek or spanish debt...

He has no problem with the ECB taking care of the Euro currency ("Stabilität der Währung"), but doesn't recognize sovereign debt purchases ("Aufkauf von Staatsanleihen") as a necessary part of that.

We'll just have to see how Draghi responds this week; the bond yields for Greece and Spain may tell the story.

This reminds me of how we joked about the new currency and called it the "Teuro" during the Euro transition. "Teuer" means expensive in German, so it was an amusing play on words that became popular when consumers noticed that the prices on just about everything seemed to go up under the new currency.  If the Germans thought the Euro was expensive then, what do they think the people of Greece and Spain are feeling now?

A Technological Cloud Hangs Over Higher Education

Here, I quote my commentary on the Chronicle of Higher Education from a few months ago. Physics geeks will note one small change, I can now include the "ħ" symbol as I intended.  The Chronicle didn't have it in their font set ;)

A Technological Cloud Hangs Over Higher Education
By Keith A. Williams 
I was there when it happened. And for the record: I did object. I was but a teaching assistant; the decision was not mine. The decision was to replace the pendulums and other demonstration gizmos in the undergraduate physics teaching laboratory with computers and software. 
To be sure, the change would be convenient: no more time-consuming preparation of experiments, no more lectures on how to make demonstrations work, no more disinclined planes or springs sprung too far. This was cutting-edge. The students would love it. Students like computers. And aren't computers the future? Don't we need to get with the times and prepare students for the information age? 
With great reluctance, I packed up the pendulums one last time, helped install the computers, and then stood witness as another three-dimensional classroom was replaced with a computer lab. The students would now be greeted by glowing screens and a printer for their data. 
I didn't return to the demonstration lab the following semester; probably a good thing, as I was busy with my own experiments. To be fair, the students probably did enjoy the computers. They could press a button and make a pendulum swing across their screen. With a few keystrokes, they could change the hanging mass and the length of the string supporting it. They could even change the strength of the gravitational field. The software did everything, and there would be no more experimental complications, such as higher-order friction and drag. If students wanted to observe what Foucault observed, I suppose they could rotate their screens. Best of all, the students now recorded all quantities with perfect accuracy, so they wouldn't need to learn how to account for errors. There were no more experimental errors. 
Countless other exciting innovations have ensued since that day in 1993 when one teaching laboratory shed one of its dimensions. Long gone are the overhead projectors—the noisy appliances with which we showcased our patiently handwritten transparencies. I confess that I miss those; we physicists tend to have innovative symbols. It seems unlikely we would have "ħ" if PowerPoint had been around in the 18th century. 
To its credit, PowerPoint did relieve us of hot projectors, smelly pens, and staticky transparencies spread out to dry, and students have certainly benefited from more-legible typefaces. Many students don't even need to labor on their own handwritten notes; they can simply download a scanned lecture or PowerPoint file and view it at their leisure on a laptop, iPad, or iPhone. It is all so irresistibly convenient and ... cool. 
The tasks of asking and answering questions in the classroom, and the taking of the attendance, were solved by placing a clever new technology in the hands of each student: This "clicker" sends signals to a computer, somewhat like a television remote control. Colleagues informed me that clickers would solve the problems of low attendance and lack of student engagement. The added benefit is that instructors can take attendance without learning any names, and they can administer a quiz without subjecting students to the embarrassment of direct inquiry. (Predictably, the improvement in attendance was short-lived: It seems that some mischievous students are capable of wielding more than one clicker at a time and might even find financial incentive for doing so, particularly in the case of early-morning lectures.) I do wonder whether the clicker is designed to confirm the attendance of the student or the absence of a teacher. 
Textbooks are rapidly becoming a thing of the past. We'll spare many trees that way. Old knowledge can be scanned. Instructors and students can annotate their PDF's. Unfortunately, the few textbooks that are still written tend to be horribly expensive by the time they reach the bookstore. With fewer instructors requiring books, and fewer students buying them, publishers say they need to set a higher price. 
It has been a long while since I have beheld an innovative new textbook. With the incentive to write them virtually gone, what does appear is usually rehashed and cluttered with "Web resources." On an accompanying disc, one typically finds lectures and exercises that can be done on a computer. The instructor needn't invent questions—there is a bank full of them. 
Busy professors certainly appreciate the time that these innovations have saved them. One can now summon a lecture from the bank, project it on a screen, and simply narrate it, if he or she wishes. There is far less risk of actually interacting with the students, who can ask troublesome questions if given the opportunity. And for homework crises, Cramster is only a few clicks away. 
The Internet certainly channels a great deal of wonderful, fresh information into the classroom. During one recent lecture, I couldn't recall the year that Tycho Brahe observed the supernova, but I was saved by a student with a smartphone, who then narrated the whole tale from Wikipedia. I am actually rather fond of the Internet's capabilities; I use Twitter to disseminate hints and links. Some instructors don't permit laptops—too much distraction from the compelling PowerPoint lectures—but members of a generation that had keyboards beside their cradles are far more comfortable with the technology than we ever will be, we who remember fingers blistered from typing out a manuscript on a manual typewriter, long before floppy disks or even the Selectric
Students of today are adept at taking notes on laptops and tablets and phones, should they choose to do so. Unfortunately for those students whose instructors haven't found a way to format test questions compatible with bubble sheets, test-taking remains arduous. Students must write with an analog pencil or pen, relying on the trained dexterity of the whole hand, not merely the opposable thumbs so adept at texting. 
It is virtually miraculous how much information the laptops, tablets, and phones can bring into the classroom, almost free of cost. A steady torrent of fresh information has transformed the classroom. Gone or concealed in dust are most periodic tables, encyclopedias, and globes. All of that can now be called up on a screen.
The whole apparatus of instruction has moved into the cloud. (And at my institution, the cloud is present most of the time; only foul weather or an occasional IT glitch decouples us from it.) Whether we need the YouTube video of the astronaut dropping a hammer and feather on the moon or Newton's Principia translated, narrated, or lectured, we delight in using Google to retrieve it quickly from the cloud. 
And so the instructor is the multimedia rainmaker who summons from the cloud everything that the modern American scholar must learn. The student is spared the necessity of a library; the library is in the cloud. Lecture demonstrations are also in the cloud, in the form of flashlets and applets sanitized of any complicating realities, non-idealities, and inefficiencies. And if a student should miss a lecture, the cloud will oblige: The student need no longer request notes from an instructor or colleague. Everything is in the cloud—even some of the most popular instructors. And that cloud hangs over all of America's institutions of higher education.

The Chronicle link is here:

A Technological Cloud Hangs Over Higher Education

Saturday, July 28, 2012

Review of Neil Barofsky's "Bailout"

This is my review of Neil Barofsky's recent book "Bailout: An Inside Account of How Washington Abandoned Main Street While Rescuing Wall Street."

Neil Barofsky's book describes his work as the Special Inspector General for TARP, the controversial $700B program begun in the G.W. Bush administration and considered one of the most complex bailouts in US history. Several years since TARP slipped out of the headlines, we still have little clarity about the complicated tangle of investments that it thrust upon the market. This book provides a clear account of the government's hastily cobbled oversight of the program.

The book is well structured and balanced. Beginning with an introduction full of engaging anecdotes, Barofsky's narrative provides adequate assurance that his motives are transparent and nonpartisan. Then, we learn about the TARP program in a thorough but not excessively technical manner. Unfolding as a credible, personal account, the book begs for a closer look at the government's financial oversight functions, and sheds some light on the Treasury's relationships with the "too big to fail" institutions in today's headlines. Perhaps most important, Barofsky's book implicitly argues for appointment of many more professionals such as himself, who don't aspire to become Washington insiders.

On a personal level, Barofsky's book describes a trial-by-fire in Washington, a place where so many young idealists lose their ethical footing as they gradually integrate into the well-established mechanics of the city. Thanks perhaps to the brevity of his stint, Barofsky can provide this frank account, which is at times unsettling, at other times humorous... and on the whole very informative.

Here is the Amazon link to the book:

Bailout: An Inside Account of How Washington Abandoned Main Street While Rescuing Wall Street

Friday, July 27, 2012

Distance Learning has Cons... and Pros

A recent article on the Chronicle of Higher Ed website describes concern about the effects of distance learning:

In response, I offer these thoughts:

In cases where no better alternative exists, distance learning is a wonderful thing, even a life-saver for some: 

  • Radio-based "School of the Air" instruction has been very useful in places like Australia, and created many educational opportunities long before the internet as we know it (e.g. see ); 
  • While growing up in a remote part of Africa, I was spared exile to a faraway boarding school by two years of middle school correspondence courses from the Calvert school in Baltimore; 
  • As a manager, I work with employees who can't simply walk away from their jobs and go to a campus- they need flexible distance curricula for their own advancement, in parallel with their employment; 
  • A large number of our service-people benefit by online coursework in places where no alternative exists; surely we can all agree that education should not stop when a soldier ships off to war, yet some choose to lament the quality of the schools offering that service rather than try to make it better by actually sitting down with a soldier and helping them with their homework once they come back home and try to catch up.

That said... now is the time to defend the real and non-virtual, experiential education, and indeed to grow it.  We can do this! And without behaving like Luddites and sequestering our students from the internet.

Save Euro or Euro Zone? ECB Strategy Still Unclear

A couple of days ago, Mario Draghi served a sugary (and perhaps slightly alcoholic) beverage to global markets by pledging ECB action to do "whatever it takes" to preserve the Euro.

Unfortunately, it's what Super Mario didn't say that left a cloud of uncertainty, which I think will come back to bite us in the rear sooner than later.  Draghi did not say that the ECB would act to preserve to Euro Zone.  In other words, it appears that the ECB will purchase Spanish and Italian bonds and thus reduce lending costs in those member states, but Greece's membership is not assured.

An exodus by Greece could still deliver a tremendous blow to Euro confidence and send the PIIGS' yields back up to the danger zone.  We have to remember that there is no well-defined path for any Euro Zone state to exit the currency. Hence it seems that a split currency could easily happen- certain debt obligations paid in Euros, even as the drachma is brought back.  I'm no currency expert, but I suspect that a cleaner, hybrid-currency solution is possible, but it's not clear whether present leadership is that creative. 

Rating the Risks in American Public Higher Ed

Recently, several credit ratings agencies (S&P, Moody's) have reported on the risks to American institutions of higher ed.  In my view, the agencies have done a good job exposing the increasing risks that we face.

The main reasons why the ratings agencies are showing such interest in the problem are (1) the effects on the broader credit market e.g. housing; and (2) the recent surge in investor interest in various online firms that target the instructional sector.

There are several very large risks faced by public colleges in several states that are basically unmanageable at the level of school governance:

*The Euro crisis will continue to hold back a recovery of exports in several states, thus crimping state revenue and, in turn, threatening state funds for education; e.g. less auto exports in Michigan can lead to less state investment in faculty salaries, school infrastructure and student aid;

*The threat of DoD sequestration weighs very heavily on some states, particularly Virginia and Maryland, which could lose ~2M jobs in the near term. This would of course lengthen our unemployment lines and thwack state revenue.  Even if the sequestration is temporary, it is apparent to me that states like Virginia and Maryland could see credit rating downgrades as a result, which would have a longer-term ill effect.

There are other risks a bit further down the road as well, but anyone with a stake in public institutions should watch these two very closely for the next half year.  Worst case, we could see furloughs, recission of funds, and many other unfortunate jolts to the system.

Not to sermonize annoyingly, but I do wish that academics had realized their role in the bigger picture of global business and politics before we reached this point. Quite suddenly, many of the academic stakeholders are realizing just how interconnected our economies are. Our schools are physical parts of the broader economy- there is no immunity, no place to retreat and recuse ourselves from the politics and think brilliant thoughts. Surprise: academics are in the thick of it, just like their non-academic, private sector counterparts, who have already been feeling these pressures for several years. 

Further comment and links to the agencies' reports may be found here:

Wednesday, July 25, 2012

Germany Offers "verbal" Support

I am curious what this "verbal" support is, that Germany is offering Spain.

Beruhig dich, ich hab' hier die Leitung... ???

Spain has ~15-20% persistent unemployment, a 7%+ 10 year bond yield, whole provinces falling into depression... and an overvalued currency.  

Nein danke...

Drought May Drive US Recovery

There are many reasons why the US economic recovery has been slow and jobless; chief among these is the persistent risk of contagion from the Euro zone and the rapid slowdown in China, which is hardly the "soft landing" that China's policymakers assumed they could deliver.

The bond markets have had their day (okay, their year) but now we see record low yields among almost all bonds worth holding, with the remainder being so risky that most investors won't even consider them.  The result is record yield spread between the larger Euro-zone countries that are most essential to recovery. For example, as of this writing, there is a ~5% spread between Germany and Italy in the 10 year bond market, and a 6% spread between Germany and Spain. This presents bond investors with two equally unattractive investment options: you can invest in Germany's debt and get no return, or invest in italian or spanish debt and pray that they aren't soon declared junk.  There's almost nothing in between to lure investors, no mid-risk lure.  Hence Europe's debt cycle is broken and there is a flight to safety in the US bond market... thanks, but no thanks!  In the US, 10 years are now almost as low in yield as Germany's.

[One positive is that US 30 year bonds are creating great mortgage opportunities, but many Americans are reluctant to make a commitment while so many job risks loom. Also, mortgage underwriters -once bitten, twice shy- are now looking for ~20% down, which many Americans just cannot muster.]

With the bond markets unattractive and equities relatively flat (unless you have the time and interest to trade on short term swings), it appears that commodities -excluding oil- are primed for great performance through the rest of the year.  I exclude oil because of the glut, which arose from oversupply and poor global demand. The oil glut has of course taken its toll on alternative energy concerns, particularly solar.  If you like solar, then buy panels, not stock!

The commodities I am targeting are those that have a well established supply and demand relationship, and which have decreasing supply, i.e. there is no risk of the glut that we see in oil.  Among these, my most attractive performers have been basic agricultural products- corn, wheat, soy. I have been accessing these via various ETFs and ETNs.  $CORN has been my best performer over the past 6 weeks or so; the first whiff of drought had me intrigued and it now appears that the worst (or best!) is yet to come.  My main concern is the very low volume in $CORN trading, which suggests very high short term volatility.  Thus far I have profited on the downswings and the upswings, but there is risk that I will snooze and lose at some point.  A safer investment may be $MON, as pointed out by Tim Collins and repeated by Jim Cramer.  $MON is exhibiting a really beautiful ~3 year inverse head-and-shoulders pattern that suggests a 50% upswing by the end of the year.  Worst case seems to suggest a solid 5-10% upswing. And there are the dividends...

In addition to $CORN and $MON, I am working with $FUE, $HAP, $DBA, and several others, while exploring the secondary and tertiary effects of the drought- food prices etc.

Now, on the topic of recovery and what may get it started in earnest. What will drive further investment into the market this summer?  Investors need solid mid-risk opportunities, and ironically, the drought may be just the thing to deliver that. With the risk of oversupply virtually nil, agriculture may bring some investment back onto the table.  At the least, we might finally be seeing some re-flation by the end of summer. Consumers will lament the higher price of their Wheaties, but this is precisely what the US market needs... some initial sign of inflation, however tentative it may be. That will suggest, to many investors, that real inflation is just around the corner, which will of course drive a lot of investment back into equities and gold. QE3 would of course only heighten that effect.  So... in a roundabout way, the investment picture is looking a little bit better because of the drought.

Tuesday, July 24, 2012

Link Between Student Loan Burden and Slow Housing Recovery

Rising student loan debt may be related to the slow recovery of the US housing market, according to a new article on

Chief economist for Credit Suisse, Neal Soss, says:

“We are trying to migrate towards a much safer underwriting standard, with let’s say 20 percent down payments required. It takes a certain amount of time for people to save that up, and the more they’re burdened with student loans the less possible it is for them to accumulate that chunk of liquid capital that allows them to make that.”

The key point is that students laden with college loan debt and flat salaries will have more difficulty meeting this 20% standard. The Bloomberg article furnishes fresh numbers on total student loan debt ($904B) and the average debt per student ($25,250); these numbers show that the student loan debt crisis is far from abating.

Soss notes that it's not clear how strong the link is.  But what is clear is that a greater debt burden placed on our young people, early in their careers, can have dire consequences for their financial position much later in life.  We now see very attractive mortgage rates tied to extremely low bond yields depressed by short-term Eurozone instability; for many Americans, right now is a great opportunity to secure an attractive home loan. It's a shame that so many young people will miss out on the opportunity to invest in what promises to be a robust housing recovery, due to other debt obligations.

Here is a link to the Bloomberg article:

America's Two-Lane Higher Education

For the many financial and structural ailments of American higher education, many diagnoses and prescriptions have been offered. My own conviction is that there is a dire need for more thought and policy concentrated on the role of pre-college, preparatory work, which sets the stage for the financial and resource problems in our headlines.

First, a brief disclaimer: I am very strong proponent of true liberal arts.  As a former student in diverse school systems in several countries on three continents, I am strongly convinced that America's emphasis on interdisciplinary cross-fertilization is a special feature that should be kept intact and even expanded. However, this successful American ideal has, for many students, become reduced to remedial high / middle school material. To add financial insult to intellectual injury, this is taking place in the expensive college classroom, taught by the far more expensive college instructor, and quite often in a stadium-like environment. Many schools are discovering that it is far too expensive to conduct remedial coursework in the traditional classroom environment; hence, vast structural changes are forced upon us.
Central to many of the financial challenges that we now see in American higher education is the “prep problem” which delivers students to our campuses for remedial high school coursework. It astounds me that some consider introductory Algebra, History, or English etc, taken in college, to constitute a liberal arts education. Hardly. A course in the historical and cultural development of algebra… that is a better example of the inspiring, synthetic material that an in-person college education should deliver.
Because of the prep problem, a “two-lane” structure is clearly emerging in American higher education. In the fast lane are students who arrive with the benefits of more diligent preparation.  These students typically arrive with substantial advanced placement credit and can bypass the large introductory courses.  These fast-lane students quickly complete core material and have enough time to pursue double or even triple majors.  (When I double-majored in physics and German literature and philosophy, it was rather exotic, but this is no longer the case) The fast-lane students reach smaller classes quite early in their college careers and thus benefit the most from direct faculty interaction. Because of this, the fast-lane students will have the ability to pursue true liberal arts material and benefit from all of what college can offer.  They will also receive the most substantial boost upon graduation, because they will have distinguishing advanced coursework and are more likely to have recommendation letters filled with prose about their unique contributions.  It is no surprise that these students typically find better placement after college.
Meanwhile, underprepared students languish in the slow lane... expending considerable time and investment on remedial material, thereby increasing costs to college as well as the student.  Unfortunately, the introductory curriculum designed to serve these students is often a tedious insult to the world-class faculty called upon to teach it. Naturally, there is much dispute among the faculty regarding who will be “stuck” with these courses.  In other words, there is not a tremendous amount of enthusiasm associated with them- not on the student side, nor the faculty side. Hence the underprepared students are those most likely to experience "stadium courses"- and now perhaps online curriculum.  Underprepared students will typically spend the full four years completing a basic degree with no additional distinguishing features such as research or study abroad.

On the whole, underprepared students receive a college education that is ultimately worth far less than that of their fast-lane peers. I hope that more immediate attention will be given to the prep problem and the wide divergence in outcomes that it has brought to the American campus.  Many of America's students lack the preparation that would enable them to get the most out of a college education.