| Wednesday, August 21st, 2013 | | | | |  | | | The Timeless Wisdom of Izzy Stone | | | - Your own personal glimpse into the Fed's crystal ball...
- How many financial hoodwinks are one too many? A maxim to help you decide...
- Plus, Chris Mayer on why earnings look better than they should, what's "too technical" for Fox Business and some sage advice from a guy named Izzy...
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| | | | | | | === > URGENT: OUR CANCELLATION REQUEST < ===
We're asking readers of Lifetime Income Report, Outstanding Investments, Penny Stock Fortunes, Addison Wiggin's Apogee Advisory and Capital & Crisis... to cancel their subscriptions. Click here to find out why he's making this odd request. >> CANCELLATION REQUEST << | | | | | | | | Peter Coyne, parsing through the media hype ahead of the Fed's press release today...
 | | Peter Coyne | "Often, the FOMC minutes aren't a big market mover," said Paul Ashworth, Capital Economics chief U.S. economist. "By the time they are released three weeks after the Fed's meeting, the debate has moved on; either because of more recent incoming data or post-meeting speeches made by key officials,"
"In this case, however," qualifies Ashworth, "these minutes, and what they have to say about the possibility of the Fed beginning its QE3 taper in September, could have a big impact."
"Could" is Ashworth's operative word. As we go to press this morning, Wall Street (and the world) awaits the Fed's latest taper-tease.
Ahead of today's FOMC release, the major stock indexes are still deflated. As we go to press, the S&P 500 is down 0.4%. Oil also dropped just under $105 on the anticipation of tapering and a stronger greenback. Likewise, Treasury yields rose and prices fell. A 10-year Treasury note yields 2.85% this morning. Gold took a $13 hit this morning but has reclaimed $8 at this writing... an ounce will run you $1,368 spot.
If the Federal Open Market Committee meeting minutes for July contain more Fed wish-wash, then it will be the next release will be the big market mover. And so on ad nauseam. By the time you read this, we'll already know and pundits from every digital nook of the Interweb will have their $.02 posted.
Entertaining, no?
"It's amazing people are still trying to read the tea leaves," our research associate Jason Farrell marveled this morning, "but not surprising. Even if the Fed says something today, its officials have given at least six different messages since May 22 about when it will taper, to what extent and the economic outlook." Brings the Fed's mission as "unpredictable" lender of last resort to a whole new level.
Well... fool me once, shame on you; fool me six times, there's probably no help for me.
By the Federal Reserve's account, tapering (stepping off the gas, mind you, not on the brakes) will happen when unemployment drops to 6.5% or inflation hits 2.5%. We bet those targets are tentative and negotiable. But let's give our monetary overlords the benefit of the doubt for a moment.
Here are the Fed's forecasts for GDP and core PCE, their preferred representations of prices in the economy. The green and red bands represent their estimated range looking toward 2014.
The right chart tells us the Fed won't taper because of inflation in 2014 (unless their forecasts change). The forecasted upper bound is 1.8% inflation. As to the left chart...who knows what unemployment rate corresponds to 3.5% GDP growth. Maybe 6.5% unemployment... may be higher. We won't pretend to know which.
A tidy Google search for "FOMC release" yields 1,050,000 results -- no doubt most of it repetitive conjecture. But all of the guesswork ignores that elephant over there in the corner of the room: Who prefers to take their hard-earned money and invest it based on this higgledy-piggledy litany of monthly data, anyway?
Throw extra confusion into the mix after the second quarter's earnings reports and it's an even bigger crapshoot. "If people start to think earnings will fall," writes Chris Mayer in today's episode of The Daily Reckoning, "the stock market also tends to fall. This is simple stuff.
"Trying to predict what will happen," Chris qualifies, "is, of course, anything but simple. I'd say it's foolish to even try. But people love this kind of thing -- especially TV people."
No kidding.
The market moves on investors' consensus about where the market's headed -- that's Chris' philosophy. In his essay below, Chris spells out the truth about second-quarter earnings. Turns out Q2 earnings eerily foreshadow what's to come in the third quarter. To help you separate the wheat from the chaff, Chris invokes the timeless wisdom of a 20th-century investigative journalist.
Then in today's DR PRO, our own Ryan O'Connor closes the book on one mining play he recommended back in July 1. After the company's Q2 earnings, Ryan thinks it's time for PRO subscribers to cash in. At this writing, they stand to make 6%. Congrats in advance. (As always, if you want to join PRO subscribers in plays like this, you can upgrade your account by clicking here.)
Continue reading below for Chris' essay...
[Ed. Note: Chris was on Fox Business on Aug. 7. He went on the record: Hit the sell button now. Soon after, the market turned downward. Fox Business must've been impressed... they invited him back on air last Friday.
Chris was too humble to admit it, but he owes his success to his very conservative way of valuing stocks. He calls it his "Coffee Can Portfolio." We can't tell you how many people have written to us about how much they love this strategy. So by popular demand, you can check it out on our website by clicking here (for readers looking for volatile "hit or miss" plays that pop up quick... we recommend you ignore Chris' strategy. It's too long-term and risk-averse for fast-paced trading.)
| | | | | | | "The Anguish on Bill Bonner's Face When I Told Him Was Horrifying…"
Find out the full story behind this quote in a special presentation you don't want to miss from Addison Wiggin, co-founder of The Daily Reckoning, when you CLICK HERE. | | | | | | | | The Daily Reckoning Presents
| | | | The Timeless Wisdom of Izzy Stone | | | | by Chris Mayer | | | "I sought in political reporting what Galsworthy in another context had called 'the significant trifle' -- the bit of dialogue, the overlooked fact, the buried observation which illuminated the realities of the situation." -- I.F. Stone, The Haunted Fifties (1963)
I start with a hidden problem in the stock market's latest earnings report card. Overall, earnings rose about 2% for the quarter. But if you take out the financials (banks, insurers), earnings actually fell by 3%.
That's a problem.
I appeared on Fox TV Friday morning. Before the show, I said I wanted to talk about this earnings stuff. The producer asked, "Do you think that's too technical to explain?"
"I should hope not" I thought to myself. I hope people understand that earnings (or profits) drive the stock market over the long term.
Specifically, the market rises and falls based on what the consensus guess is about where earnings are going. The market looks ahead. So you can match up the S&P 500 -- a broad proxy for the market -- with the consensus guess for earnings in the coming 12 months (the so-called "forward estimate").
Take a look at this chart from FactSet, which shows just that.
So if earnings fall -- or if people start to think earnings will fall -- the stock market also tends to fall. This is simple stuff. Trying to predict what will happen is, of course, anything but simple. I'd say it's foolish to even try. But people love this kind of thing -- especially TV people.
I was on Fox last week, on Aug. 7. I expressed the usual caution about the market, which I've been doing in these pages all year. Asked if it was time to sell, I said "Absolutely." I told viewers that my C&C portfolio was down to just nine names. We have historically carried 20-25.
Anecdotally, I said, that tells you what I think of the market. It was a lucky call, because the market has done nothing but drift lower since. (It got me a return invite. They want to know what I think now.)
People are starting to worry about earnings. They are also worried about when the Fed will stop pouring free drinks and end the party -- which, in a roundabout way, still comes down to a worry over earnings.
The earnings for the second quarter seem to foreshadow a decline ahead.
I've already pointed out the fact that if you exclude the banks, earnings actually fell. In some sectors, the decline was ferocious. The mining sector's profits were off 59%. (Fortunately, we put ourselves in a great position here. We long ago dumped all of our miners and commodity plays. Instead, we bought the financials. Today, we enjoy the profits -- and savings -- of that decision.) The overall growth in earnings was the third-slowest growth rate in the past four years (or 16 quarters).
Also, the number of positive surprises was the lowest since 2008. And of the number of companies that gave guidance for the third quarter, about 80% have issued negative guidance. Meaning they've taken their forecasts down a notch or two. As a result, the expected earnings growth rate for the third quarter is 4.3%, down from 6.7% at the start of the quarter. That figure is still probably optimistic.
In summary, for anyone who takes a deeper look into the market's working engine (those earnings), there are plenty of worn-out parts that look like trouble down the road.
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Taking a deeper look is what Izzy Stone was all about.
I.F. Stone (1907-89), or "Izzy" as he was known, wrote and self-published a newsletter called I.F. Stone's Weekly for nearly two decades. It was influential in its time. At its height in the 1960s, Stone had about 70,000 subscribers.
His focus was political reporting. He was famous for digging through the public record and finding things that people missed. As he described it so eloquently, "I sought in political reporting what Galsworthy in another context had called 'the significant trifle'-- the bit of dialogue, the overlooked fact, the buried observation which illuminated the realities of the situation."
His work has earned him a place among the best investigative reporters that ever lived. I find him inspirational in my own efforts in trying to put together a newsletter attuned to those same "significant trifles." Stone would've made a heck of a financial newsletter writer.
Among my favorite nuggets of wise advice from Stone:
"If you're going to be a newspaperman, you are either going to be honest or consistent. If you are really doing your job as an observer... it's more important to say what you see than worry about inconsistency. If you are worried about that, you stop looking. And if you stop looking, you are not really a reporter anymore. I have no inhibitions about changing my mind."
I don't think I have to point out how this applies to markets. Certainly, if you come at the market with a strong view, you are apt to overlook the possibly important trifle that doesn't fit your worldview. And that trifle might be the clue that gets you ahead of the crowd.
More from Stone:
"The search for meaning is very satisfying, it's very pleasant, but it can be very far from the truth. You have to have the courage to call attention to what doesn't fit. Even though readers are going to say, 'Well, two weeks ago you said this.' So you did. And maybe you were wrong then, or partly wrong, but anyway, you've just seen something that doesn't fit, and it's your job to report it. Otherwise, you're just the prisoner of your own preconceptions." [Bold added.]
This is not just for newsletter writers. This is for thinking people everywhere.
We should realize that we are all, to some extent, prisoners of our preconceptions. And we should all work to not let those preconceptions blind us to opportunities (or pitfalls) staring us in the face. Aim to take opportunity (and see trouble) where it lies, and don't try to force the market to live up to your preconceptions.
Izzy's world had its center in Washington. Our focus is Wall Street. Both places have many affinities. Power and money are their chief currencies. Deception and sleight of hand are common skills. It's easy to get discouraged when you get close. Izzy never did.
"I felt that if one were able enough and had sufficient vision," he once wrote, "one could distill meaning, truth and even beauty from the swiftly flowing debris of the week's news." Stone's essays did that with wit and good writing.
If you are interested, I recommend The Best of I.F. Stone as a starter. If you want more, you can move on to Stone's six-volume A Nonconformist History of Our Times, which starts in 1939 and runs until 1970. I've also read two excellent biographies: All Governments Lie! by Myra MacPherson, and American Radical, by D.D. Guttenplan.
I live in a suburb of Washington, D.C. (If you step outside and listen closely, you can hear the beating heart of the Empire.) Last night, I headed down to the Penn Quarter to meet a couple of friends for dinner. Izzy used to write his Weekly from Washington and lived only a couple of miles from where I was.
It's unseasonably cool in Washington. We ate out on the patio at chef Jose Andres' Jaleo restaurant. (Best tapas restaurant in town.) My friends were globe-trotting investors, and I was hoping to get a useful lead or two. And I did. Never stop looking, Izzy used to say. More another time...
Regards,
Chris Mayer
for The Daily Reckoning
P.S. I just suggested a "fire sale" play to readers of my Capital & Crisis newsletter. This stock is just one of five you can salt away for the next decade and potentially grow your money 20-fold. To learn more about this lazy man's road to riches, follow this link.
| | | | | | |  Chris Mayer is managing editor of the Capital and Crisis and Mayer's Special Situations newsletters. | | | | | | | | | BE SURE TO ADD dr@dailyreckoning.com to your address book.
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