In Search of the Perfect Investment

Stay on the side and watch history unfold. This is Richard Russell’s latest stockmarket advice.

Today will trade with guesses and prayers about tomorrow’s critically important Jobs Report, which I suspect won’t be exciting.

This is not an easy time. Picking winners is not easy. The market is volatile and many high-flying stocks are unpredictable, viz:

Yelp up. Twitter down. Facebook up. Amazon down. Soda up. General Motors down. Green Mountain up. Costco down. Google Up. Pandora down. Apple down, but coming back. Maybe.

I’m being very cautious.

Have to watch:

+ Our inviolate 8% stop loss rule.

+ When the stock falls below its 200-day moving average.

All about ten percent corrections: From Business Insider today:

The History Of 10% Stock Market Sell-Offs
2013 saw a robust rally in the stock market with few memorable declines. In fact, the last time we saw a correction of 10% or more was in the summer of 2011.

However, 2014 has been all about volatility. After touching a high of 1,850 on January 15, the S&P 500 has been tumbling.

Today, it touched 1,737. That’s a 6.1% decline.

So, is this the beginning of something bigger and much worse? Are we doomed for a correction (i.e. a 10% sell-off)?

Back in December, Deutsche Bank’s David Bianco argued that “a correction is not past due.” Citing history, he argued that it’s possible to go four years without a correction.

From his note:

S&P 500 corrections of 10% or more, including those that turned into bear markets, occur nearly every 1.5 years (357 trading days) on average since 1957. The last correction began over two years ago (550 trading days) in the summer of 2011, but that correction was severe and nearly a bear market with a 19% decline. But more importantly, there is enormous variation around the mean of trading days between corrections. The STD is higher than the mean, thus a correction is not more than 80% likely, based on precedent since 1957, until 750 days from the last correction. Moreover, corrections are less frequent the past 25 years vs. the past 50+ years. From 1990 to 1997 the S&P avoided a 10%+ decline (1994 was close), also from April 2003 to September 2007. Thus 4 years without a correction is possible, especially if earnings climb and inflation and interest rates stay low vs. history, but a higher PE raises the risk.

To be clear, Bianco is not screaming buy. In fact, his 1,850 price target on the S&P 500 is the most cautious on Wall Street. He’s been advising clients to “wait for dips to buy.”

“Don’t fear being left behind,” he said.

Ultimately, 10% is a pretty arbitrary number. But for what it’s worth here’s a chart of history’s 10%+ corrections.

Alibaba dwarfs Amazon. In 2012 Alibaba had $160 billion in sales versus Amazon’s $88 billion Big shareholders in Alibaba, which is going IPO some time this year, include Softbank and Yahoo.

The best laptop is the Lenovo T440s, says Laptop Magazine. It sports a 13 inch screen. If you want something more portable, get the Lenovo X240, which has 12.5 inch screen — the size screen I use. (I use the older X230.) If you opt for either, make sure you get the fastest processor and the biggest solid state drive. Hence you’ll get high speed and long battery life. Both machines have a pointing stick in their keyboard.

I find the pointing stick a very fast and very accurate way of moving your cursor around the screen. Find out more about its laptops on Lenovo’s web site. Click here. Don’t pay retail with Lenovo. There’s always a way to get 15% off. Lenovo’s machines are ultra-reliable and their service is superb.

The Sochi Olympics starts tonight. The web is full of stories and photos of unfinished hotels, dirty drinking water, horribly installed toilets, tiny beds, etc.  This piece is by my favorite James Surowiecki in the New Yorker:

The Sochi Effect, February 10, 2014

Whatever happens on the ice and snow of Sochi in the next couple of weeks, one thing is certain: this Winter Olympics is the greatest financial boondoggle in the history of the Games. Back in 2007, Vladimir Putin said that Russia would spend twelve billion dollars on the Games. The actual amount is more than fifty billion. (By comparison, Vancouver’s Games, in 2010, cost seven billion dollars.) Exhaustive investigations by the opposition figures Boris Nemtsov, Leonid Martynyuk, and Alexei Navalny reveal dubious cost overruns and outright embezzlement. And all this lavish spending (largely paid for by Russian taxpayers) has been, as Nemtsov and Martynyuk write, “controlled largely by businesspeople and companies close to Putin.”

Sochi is emblematic of Russia’s economy: conflicts of interest and cronyism are endemic. But the link between corruption and construction is a problem across the globe. Transparency International has long cited the construction industry as the world’s most corrupt, pointing to the prevalence of bribery, bid rigging, and bill padding. And, while the sheer scale of graft in Sochi is unusual, the practice of politicians using construction contracts to line their pockets and dole out favors isn’t. In the past year alone, Quebec learned about systematic kickbacks and Mob influ-ence in the awarding of city construction contracts. In Turkey, Prime Minister Recep Tayyip Erdogan has become embroiled in a vast scandal involving friendly construction tycoons who were given cheap loans and no-bid contracts. And a recent report from the accounting firm Grant Thornton estimated that, by 2025, the cost of fraud in the industry worldwide will have reached $1.5 trillion.

What makes construction so prone to shady dealings? One reason is simply that governments are such huge players in the industry. Not only are they the biggest spenders on infrastructure; even private projects require government approvals, permits, worksite inspections, and the like. The more rules you have, and the more people enforcing them, the more opportunities there are for corruption. And, in many countries, the process of awarding contracts and permits is opaque. As Erik Lioy, a forensic accountant and fraud expert at Grant Thornton, told me, “When it’s not clear how projects get approved, people assume the worst, and that provides incentives to do a bribe or kickback.”

On big government projects, additional factors kick in. Such projects are rare, and construction work is erratic, so politicians with contracts to award have immense leverage. For contractors, bribery will always be attractive, because the cost of a bribe is dwarfed by the value of a contract-an effect known to economists as the Tullock paradox. And, as a study by Neill Stansbury, the co-founder of the Global Infrastructure Anti-Corruption Centre, put it, when a project is really big “it is easier to hide large bribes.” Then, too, Lioy explains, “most big projects involve building something unique, or at least something that’s never been built in that place before, and that makes it harder to estimate if costs are reasonable.” Corruption is obvious only when costs are completely absurd-which Nemtsov and Martynyuk have shown is the case with Sochi’s ice arenas and ski jumps.

Sochi is a monument to Putin’s Russia-a nationalist showcase, intended to demonstrate just how far the country has come in the past two decades. It has also given Russia its first world-class winter resort, and has significantly developed the infrastructure of the Caucasus. In that context, overspending can become, perversely, a point of pride. The contractors on the Pyramids almost certainly padded the bills, too.

It’s no surprise that graft-ridden grandiose projects are most common in countries where government isn’t accountable. But even politicians who (unlike Putin) have to worry about being reëlected often see benefits in unnecessary or wasteful construction spending, because it gives the economy a short-term boost. Turkey’s construction spree, for instance, has played a major role in its economic boom. Construction creates jobs, and often reasonably well-paying ones. That’s why, going back to the days of Boss Tweed, pouring money into construction projects has been a key part of what’s sometimes known as “populist clientelism”-a system that allows politicians both to reward cronies and to appeal to voters.

But an economic boost based on corrupt spending is an illusion, the equivalent of a sugar high. Paolo Mauro, an economist at the I.M.F., says simply, “Corruption is bad for economic growth.” It’s well documented that corruption discourages investment, because it makes businesses uncertain about what it takes to get ahead; as one study put it, “Arbitrariness kills.” Corruption also skews government spending. The economists Vito Tanzi and Hamid Davoodi found that corruption leads politicians to overinvest in low-quality infrastructure projects while skimping on maintaining existing projects. (It’s easier to collect bribes on new construction than on maintenance.) And, in a pathbreaking study nearly twenty years ago, Mauro found that countries with high levels of corruption spent little on education. In economist-speak, corrupt politicians put too much money into physical capital and not enough into human capital. Crony construction capitalism leaves us with too few teachers and too many ski jumps to nowhere. 

Favorite this week’s New Yorker cartoons. FYI: Valentine’s Day is next Friday.

Harry Newton who remembers one lesson from the time he ran a 120-person business: You are your own worst enemy. Lately it’s been my lot in life to fix things around the house that are busted. Which means dealing with companies from Viking (the kitchen appliance people) to Lighting Services (a maker of track lighting). My experiences have been just plain horrible. I can’t imagine any CEO designing policies designed to so offend his/her customers. But there we are. Two absolutely awful companies to deal with. Never buy their stuff. Meantime, if you run a company, go ask your people how they deal with customers. What improvements you should make? Maybe the top priority should be pleasing customers and solving their problems — like getting them replacement spare parts, installation manuals, etc.? And putting your email address on your web site so customers can find you.

Ladder Capital (LADR) is going IPO today. Fidelity is involved. They offered me shares on the IPO. I put in for 10,000. I got 100. I don’t make this up. I got exactly one hundred, despite the fact that I have over $6 million in my Fidelity account. I also got a a warning,

Shares allocated as part of an IPO through Fidelity Investments are subject to a 15 calendar day holding period.  You are free to sell shares allocated to you at anytime, however the first day you can sell shares without violating our ?flipping? policy is Friday February 21, 2014.

The question marks are Fidelity’s. Nice people.