In Search of the Perfect Investment

Are interest rates finally rising?

Are the new higher rates the end of the run for the mortgage REITs?

The last few days have been awful:

Somebody clearly thinks so. Selling was intense, but has now eased. The stocks have firmed. These charts make things look worse because of the Y-axis scale which Fidelity charts.

There are slightly different stop loss rules on mortgage REITs:

+ We bought them for their dividends, not their appreciation. Frankly, I’ve been surprised at their recent gains.

+ AGNC is yielding 16.1%. NLY is 13.64%. I don’t believe their already-reduced dividends are in doubt. Here’s an analysis of the earnings of AGNC and NLY. The author  is long AGNC,  ARR, MTGE, IVR and (for now) TWO and CYS For his piece on AGNC and NLY, click here.

I am long AGNC, ARR, MITT, and TWO.

I am watching this carefully. Your thoughts? Add them to Comments below, please.

It’s not easy to make money on today’s stockmarket. From today’s Stratfor by George Friedman:

Financial Markets, Politics and the New Reality

Louis M. Bacon is the head of Moore Capital Management, one of the largest and most influential hedge funds in the world. Last week, he announced that he was returning one quarter of his largest fund, about $2 billion, to his investors. The reason he gave to The New York Times was that he had found it difficult to invest given the impossibility of predicting the European situation. He was quoted as saying, “The political involvement is so extreme — we have not seen this since the postwar era. What they are doing is trying to thwart natural market outcomes. It is amazing how important the decision-making of one person, Angela Merkel, has become to world markets.”

The purpose of hedge funds is to make money, and what Bacon essentially said was that it is impossible to make money when there is heavy political involvement, because political involvement introduces unpredictability in the market. Therefore, prudent investment becomes impossible. …

You can read the rest of his article here.

Classic consumer behavior. Years ago, I did similar studies in our business and found the same conclusion. To me, this stuff is fascinating. From the latest New Yorker magazine:

The Financial Page
Downsizing Supersize
by James Surowiecki August 13, 2012

In an era of political polarization, Michael Bloomberg has the rare ability to come up with policies that enrage everyone. His latest pet project-banning large sodas, as a way of fighting obesity in New York-has been ridiculed by both Jon Stewart and John Boehner. And a recent Board of Health hearing on the plan saw Democratic and Republican politicians alike lining up to attack the idea, which would prohibit restaurants, delis, sports arenas, movie theatres, and food carts from selling any soft drinks larger than sixteen ounces. Critics dismiss the ban as yet another expression of Bloomberg’s nanny-state mentality and as a “feel-good placebo” that’s doomed to fail. They’re right that the ban is blatantly paternalist. But that doesn’t mean it won’t work.

It’s true that the ban will be easy to circumvent: if you want to drink thirty-two ounces, you can just buy two sixteen-ounce servings. But Bloomberg’s proposal makes clever use of what economists call “default bias.” If you offer a choice in which one option is seen as a default, most people go for that default option. People who are automatically enrolled in a retirement plan, for instance, are more likely to stay with their original plan than those who choose plans for themselves. In countries where people have to choose to be an organ donor, most people aren’t donors; in countries where people have to actively say they don’t want to be an organ donor, most are donors. The soda ban makes sixteen ounces or less the default option for soda drinkers; if they want more, they’ll have to make an extra effort.

An executive at the American Beverage Association has dismissed the plan, saying that “150 years of research finds that people consume what they want.” Actually, the research shows that what people “want” has a lot to do with how choices are framed. In one well-known study, researchers put a bowl of M&M’s on the concierge desk of an apartment building, with a scoop attached and a sign below that said “Eat Your Fill.” On alternating days, the experimenters changed the size of the scoop-from a tablespoon to a quarter-cup scoop, which was four times as big. If people really ate just “what they want,” the amount they ate should have remained roughly the same. But scoop size turned out to matter a lot: people consumed much more when the scoop was big. This suggests that most of us don’t have a fixed idea of how much we want; instead, we look to outside cues-like the size of a package or cup-to instruct us. And since the nineteen-seventies the portion sizes offered by food companies and restaurants have grown significantly larger. In 1974, the biggest drink McDonald’s offered was twenty-one ounces. Today, that’s roughly the size of a “small” drink at Burger King. In effect, the scoops have got bigger, and consumption has risen accordingly.

Of course, if you don’t want the large soda, you needn’t order it. Yet the mere existence of the supersize can change your idea of how much you want to drink. In a classic experiment by Itamar Simonson and Amos Tversky, people asked to choose between a cheap camera and a pricier one with more features were divided more or less equally between the two options. But when a third option-a fancy, very expensive camera-was added to the mix most people went for the mid-range camera. The very expensive camera made the middle one seem less extravagant. In the same way, the fact that a large soda is now forty ounces makes a twenty-ounce soda feel sensible. Bloomberg’s ban is designed to flip this effect on its head: if the largest soda you can order is sixteen ounces, a can of Coke may start to seem like more than enough. Some food researchers doubt that this will work, since so many of us are used to the idea of large servings. But even our experience of feeling satiated is highly malleable. In one experiment, people ate meals of dramatically different sizes in the dark, and those who were given much less food did not feel hungrier than the others or rate their meals as much smaller. So once people have a few sixteen-ounce drinks they may find that sixteen ounces is plenty.

Many economists would say that, if we want to discourage soda consumption, taxing it-the way we do alcohol and tobacco-would be more efficient than a ban. Some European countries do have such taxes, but the idea has been a political non-starter in New York. In any case, perhaps the most cunning aspect of Bloomberg’s proposed ban is that it would function as a kind of stealth tax on consumption, while leaving average-sized sodas untouched. Currently, on a per-ounce basis, large drinks are much cheaper than smaller ones-which encourages people to supersize. The soda ban should shift this. Two sixteen-ounce servings are bound to be more expensive than one thirty-two-ounce serving, which creates another disincentive to drink more.

If all this sounds as if New York’s soda consumers were about to become the subjects of an elaborate social-sciece experiment designed to reshape their behavior and desires, well, that’s kind of true. But then we’ve been the subject of just such an experiment, run by beverage and fast-food companies, for the past forty years. If Bloomberg has his way, we may start feeling like we’re white rats in a maze, but at least there’s a good chance we’ll be thinner rats. 

Exercise or dieting? It’s not easy, nor obvious. Studies continue. Click here.

Air conditioning issues: They break when it’s warm. They work when it’s cold. Fact of AC life. All of our units, including those in a rental unit, have recently crapped out. Lesson learned:

+ Window units make 1000% more sense than central ones — if you can stand the view, though you can put them away in the fall and reclaim your view. Instead of fixing window units, you simply replace them. I just bought this Sharp AFQ120RX as a replacement window unit. It’s 12,000 BTUs, uses a normal 120 volt outlet,  and does a fine job of cooling a large room. About $400.

+ Don’t leave the design of a central AC system up to your contractor. You’ll generally need more cooling than he calculates. I suspect bigger units will last longer, too, since they’ll run less. You don’t need AC for average hot days. You need AC for hot hot days. You need the power.

+ Whoever designs the system, get the full schematics, design, installation and instruction manuals and a full overview before you pay him n full.

+ Make sure you understand how the thing works. and which elements need servicing and which are likely to break Buy spare parts and keep them on hand, like spare light bulbs. Your AC contractor will disappear. Ours became a bicycle designer and won’t return my phone calls, despite the fact that his great installation is now busted. And virtually all the AC guys (bar one) in our neighborhood shake their heads at our installation.

+ Buy the best system from the longest living AC maker. You don’t want a quirky system that no one knows how to repair. Only the third of our recent AC guys has had a clue about our quirky, badly installed system. Our original guy “forgot” to put filters in the two of our units. They’ve been without filter for five years. Dumb! Who knew? I should have checked.

The Towel.
An elderly Jewish gentleman marries a much younger woman. No matter what the husband does sexually, the woman never achieves orgasm. Since a Jewish wife is entitled to sexual pleasure, they decide to ask their rabbi.

The rabbi listens and makes the following suggestion: “Hire a strapping young man. While the two of you are making love, have the young man wave a towel over you. That will help the wife fantasize and should bring on the desired event.”

They go home and follow the rabbi’s advice by hiring a handsome young man who waves a towel over them as they make love. However, it doesn’t help and she is still unsatisfied. Perplexed, they go back to the rabbi.

“Okay,” he says to the husband. “Let’s try it reversed. Have the young man make love to your wife and you wave the towel over them.”

Once again, they follow the rabbi’s advice. The young man gets into bed with the wife and the husband waves the towel. The young man gets working with great enthusiasm and the wife soon has an enormous, room-shaking, orgasm.

The husband smiles, looks at the young man and says to him triumphantly;

“You see that, you schmuck? THAT’S how you wave a towel!”

Modern Technology
I was visiting my son and daughter-in-law last night when I asked if I could borrow a newspaper.

‘This is the 21st century, old man,’ he said. ‘We don’t waste money on newspapers.  Here, you can borrow my iPad.’

That fly never knew what hit it…

Harry Newton who has seven theories on why his right arm hurts, and one untenable solution — stay off tennis for three months. There’s got to be a better solution. Latest theory — shiatsu.