Stock Market Correction or Bear Market?

 I certainly haven't covered myself with glory this year. My recession call in May, just ahead of a 5% GDP quarter is damning. (Shulmaven: Has the Recession Arrived?) Nevertheless with the S&P 500 now down a touch over 10% from its July 31st high, a correction has been signaled. Perhaps more troubling, notwithstanding the fact that the index is still up 7% on the year, the equal weighted index is down 6%, meaning more stocks are down than up. Just as in the early 1970's nifty fifty market, the leadership has been extraordinarily narrow. Indeed with the onset of a middle-east war we have yet again another parallel to the 1970's. (Shulmaven: Roaring 20's or That 70's Show)

To me my biggest concern is that the S&P 500 is still down 14% from its 4797 all-time high set on January 3, 2022. It can be argued, that just like in the 1970's, we are now in a structural bear market that began almost two years ago. If that is the case, the rally this year could be characterized as one of the biggest head fakes of all time. It remains to early to make that call, and a big tell will be whether or not the broader stock market rallies next month with the abatement of mutual fund tax selling.

My Amazon Review of Michael Lewis' "Going Infinite: The Rise and Fall of a New Tycoon"

Crypto Kid

 

Sam Bankman-Fried (SBF) viewed himself as the J.P. Morgan of crypto currency, instead he was far more like P.T. Barnum; a huckster of the first order. He is now on trial for multiple counts of fraud. I didn’t like crypto currency before I read this book; I now like it even less. Author Michael Lewis really let me down in his trying to make a hero out of SBF. Nothing could be further from the truth as SBF comes off as the pampered child of the Stanford bubble he grew up in with his too indulgent law professor parents. Even at age 31 he held on to his childhood stuffed animal.

 

Lewis chronicles his career from MIT to Jane Street Capital where he earns his trader chops and then on to trading crypto currency in Hong Kong. He then formed his Alameda Research and his market maker FTX. Because there were no financial controls it was very easy to intermix customer deposits at FTX with his hedge fund which was nominally run by his on and off paramour Caroline Ellison, another piece of work.

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Some of that money was invested in Bahamas real estate for his firm and for a fancy house for his parents. The money also found its way to Washington D.C. where SBF became a leading contributor to the Democratic Party and anti-Trump Republicans and boy did that buy him access.

 

SBF had an unusually high degree of tolerance for risk. All he cared about was a positive expected value, no matter how high the probability of losing was. Thus, he totally ignored the Kelly Criterion for the proper sizing of investments. His goal was to get as rich as possible so that he could give away his fortune to save the world. He operated under the principal of “effective altruism” in order to maximize the greatest good for the maximum number of people. He professes to love humanity, by he really doesn’t like people as individuals. Further he virtue signals by his vegan diet, unruly hair, and dressing in shorts.

 

To me his effective altruism is nothing but a marketing hype to justify the huge fortune he was creating which peaked at around $40 billion before the collapse. Somehow, he managed to lose $8 billion of client funds and therein lies the core of his fraud.

 

Too conclude Michael Lewis was snowed by Sam Bankman Fried. A more critical look would really have improved this book.

For the full Amazon Review see:  Crypto Kid (amazon.com)

Hamas' Useful Idiots

"Useful idiots" is a term attributed to Lenin to describe western intellectuals who naively supported the Soviet dictatorship. Unfortunately, today we have two nominally Jewish groups, IFNotNow and Jewish Voices for Peace, who are explicitly supporting the Hamas dictatorship in Gaza. These two groups look the other way when 1400 Jews were murdered by Hamas terrorists in the Simchat Torah massacre on October 7th. As a result, just like the Communist fellow travelers in the 1930's they are giving cover to Hamas' brutality.

For whatever reason these guilt-ridden Jews have turned their backs on their Jewish brethren in Israel who account for half the Jewish population in the world. Instead, they are supporting a dictatorship whose sole goal is the destruction of the Jewish population in Israel. In other words IfNotNow and Jewish Voices for Peace are implicitly calling for a second holocaust. My advice to the Jewish community is to shun them and for the press to call them out for what they are.

My Amazon Review of Walter Isaacson's "Elon Musk"

 

                                             Rocket Man

 

Every aerospace executive and board member should read Walter Isaacson’s biography of Elon Musk. Starting from scratch Musk has built America’s leading rocket and space communications company by ignoring the hidebound bureaucratic rules of the major aerospace companies delivering rockets at one tenth the cost of his bloated competitors. Musk’s rules are:

1.      Doubt every requirement.

2.     Question every cost?

3.     Act with a sense of urgency.

4.     Learn by failing.

5.     Improvise.

 

The other secret that Musk applied to Tesla as well as SpaceX is that he integrated design, engineering, and manufacturing so that each of those entities can learn from the others. Thus, engineers and designers are able to make improvements in manufacturing as issues arise. Steve Jobs at Apple integrated design and engineering, but outsourced manufacturing to China.

 

Rising from an unhappy childhood in South Africa, Musk became a Silicon Valley entrepreneur to become part of the famed “PayPal Mafia.” He used his PayPal success to fund Tesla and SpaceX and the rest is history.

 

Musk’s genius has the ability to inspire loyalty, at least for a time, of a host brilliant people who built his empire. However, empathy is not his middle name, and, in many ways, he seems to be a very cruel person. He is one of those people who professes to love humanity, but really doesn’t like people as individuals.

 

Isaacson discusses Musk’s chaotic personal life. Three marriages, 11 children two of whom by sperm donation. Isaacson doesn’t explain why so many of Musk’s children were conceived by in vitro fertilization.

 

Then, of course there is Twitter, now called X after his favorite letter. His adventure at Twitter seems to be one giant ego trip where he promised to free that social media site from it “wokeness.” To say the staff of Twitter was woke, would be an understatement. He wanted to encourage free expression, yet under his rule Twitter has become a cesspool of hate.

I had my own run in with twitter. Despite all of Musk’s talk of a new openness I was banned for using the term “circular firing squad” to characterize Hunter Biden bringing his father into his legal thicket. Something is really wrong with X and from press accounts is seems to be getting worse by the day.

 

Despite being hagiographic at times, Isaacson brings to life one of our leading entrepreneurs who is bringing us into new electric and space ages.

For the full Amazon URL see: Rocket Man (amazon.com)

Bank of America Corp: A Beached Whale

Bank of America (BAC) reported earnings today that modestly exceeded analyst consensus estimates. However, as we noted in April (Shulmaven: Winter Comes to the Bank Stocks), BAC was suffering from huge embedded mark-to-market losses on its held to maturity securities holdings which amounted to $108 billion at yearend 2022. Today BAC reported those losses, as of the end of the third quarter, increased to $132 billion on a cost basis of $603 billion, not chump change.

The bank also reported that its tangible book value per share was $23.79. The $132 billion in embedded losses amounts to $16.35/share. Thus the true tangible book value would be a meagre $7.44/share. With BAC stock trading this morning at $27.15, it is being valued at a very pricey 3.6X "true" tangible book value. To me this means, that unless interest rates fall dramatically, BAC's share price will be weighed down for years.

Hamas Aggression Must be Punished

Hamas' aggression against Israel has to be punished; quickly and severely. To use the words of the 1950's Cold War, Israel has to massively retaliate to avenge the deaths and kidnapping of its civilians. Put bluntly, Israel has to destroy Hamas root and branch. By acting this way the country will gain the respect of the region and instead of putting the proposed U.S./Saudi/Israel deal on hold, it would accelerate it. 

Remember, an Israel that looks weak will garner no respect in the broader Middle-East. Indeed to reinforce the idea that Israel means business Netanyahu ought to form a new unity government by bringing in the center-left and kicking out the rabid right ministers, who by the way have no military experience. Just to note, prior to the 6-Day War in 1967, Israel formed a unity government.

Now is not the time for recriminations, but once the objectives in Gaza are achieved a full blown inquiry will be needed to examine the gross military and intelligence failures of the government that enabled the aggression in the first instance.

My Amazon Review of Victor Haghani's and James White's "The Missing Billionaires: A Guide to Better Financial Decisions"

Utility vs. Wealth Maximization

 

Victor Haghani and James White of ElmWealth have written an important, but too academic book, about investing for retirement. Trust me, this not Burton Malkiel’s “A Random Walk Down Wall Street.” In the interest of full disclosure, I worked with Haghani at Salomon Brothers in the late 1980’s and early 1990’s, before he went on to Long Term Capital Management (LTCM). After initial success in 1995, the firm failed spectacularly in 1998. From that Haghani personally learned the importance of sizing of investments. Simply put, he was over-invested in his firm.

 

This is a book more about how much to invest rather than what to invest in. Sizing is critical and the author’s missing billionaires were way over invested in a single asset, and they maintained unsustainable lifestyles. They utilize the concept of the “Merton Share” where the size of an investment is positively related to expected return and negatively related to risk aversion and the square of expected volatility.

 

The goal is to maximize utility, not wealth. Here I will give an example of my own. An investor has an opportunity to invest $9,000 in an investment that has a 1% chance of a return of $1,000,000 and a 99% chance of a total loss. The expected return is a positive $1,000. A pure wealth maximizer might just take the bet, while a utility maximizer would abstain.

 

In order to make their math work Haghani and White assume that individuals operate under “constant relative risk aversion.” For the lay reader this is a nonstarter, and the book is loaded with references to the finance literature. Further, at least in my case, I don’t think it is valid. When I retired, I was determined to have a fortress balance sheet, which saved me more than a little bit of anxiety during the 2008 financial crisis. Once passed, as my wealth increased, I began increasing my risk levels, but retaining a core fortress balance sheet.

 

The authors take the Jane Austin view that a critical measure of wealth is the income derived from it. Hence, they conceptually like annuities, if only they could be structured in a transparent and low fee way. In today’s financial marketplace that is a tall order. My problem with annuities is that they cause confusion between the return on capital with the return of capital.

 

If you follow Haghani’s and White’s advice you would today be cautious about the prospect for long-term returns from today’s stock market. At this writing the earnings yield of the Case-Shiller price-earnings ratio is 3.39% while the five-year TIPS yield is 2.35%. A real equity risk premium of a meagre 1.04% has historically led to very poor future returns.

 

There is much more in this book, but my guess is that the lay reader would find it a difficult go. On the other hand, a reader with financial training will gain much insight.

For the full amazon URL see: Utility vs. Wealth Maximization (amazon.com)