Trust "The Experts?" Don't.

The Wall Street Journal . . .
or The Onion?

Sometimes -- OK, a lot of the time -- I think The Wall Street Journal needs a meta-editor.

Their job?

To spot risible inconsistencies and contradictions between articles literally on the same page.

Or, if you're reading online, between articles barely centimeters apart.

Are They at Least Different Experts?

So, The Journal's Web home page today features a video with this title: 'News Hub Extra: Homes Sales Drop Surprises Analysts.'

Meanwhile, scarcely an inch away, is this quote:

Many economists expect housing declines to continue into at least next Spring, erasing most of the gains made since prices bottomed out in early 2009.

--"Housing Recovery Stalls"; The Wall Street Journal (12/29/2010)

See what I mean?

Next Spring, look for yet another installment of "surprised analysts" coupled with "housing experts' latest predictions."

P.S.: Today's Journal contains no fewer than three articles on the housing market, including the lead (print) article, excerpted above, and a piece in the "Money & Investing" section titled, "Housing Market is Still Facing a Blizzard."

The Wall Street Journal Whiffs on Warren

Protecting Consumers From Banks

It turns out that Harvard Professor Elizabeth Warren will head the new Consumer Protection Financial Bureau, after all.

The Bureau, which Warren proposed creating, is charged with ensuring that "consumers are protected from unfair, deceptive, or abusive acts and practices and from discrimination."

Seeing as how millions of consumers are routinely deceived, abused, and dealt with unfairly by the nation's biggest banks, that would seem to be a good start.

So, what exactly is the Wall Street Journal up in arms about ("Elizabeth III")?

Here is their case against her, followed by my rebuttals in italics:

WSJ: [Senate leaders] have warned the White House that Warren probably isn't confirmable. A President with more political and Constitutional scruple would have nominated someone else.

Ross Kaplan: Most of the Senate's senior leaders depend on Wall Street cash to fund their election campaigns. The surprise would be if someone hostile to Wall Street's interests was confirmable.

WSJ: Ms. Warren was a vociferous opponent of allowing regulators charged with maintaining the safety and soundness of banks to control this new bureau.

Ross Kaplan: Regulators just presided over the biggest financial debacle since The Great Depression, and did nothing to stop it -- in fact, they facilitated it. Why should Warren answer to them??

WSJ: The new bureau [is] destined to be a bureaucratic rogue, inside an agency (the Fed) that it doesn't report to, with a budget not subject to Congressional control.

Ross Kaplan: And exactly who are the too-big-to-fail banks accountable to? Yes, there are "rogues" running amok and threatening the Republic . . . but it's not Warren and her tiny, new federal agency.

In truth, installing Warren by Presidential appointment instead of Senate confirmation -- what the Journal is putatively upset about -- could very well be a tactical blunder.

That's because a Senate confirmation hearing would shine a huge, public spotlight on a dysfunctional U.S. Senate, and the interests it truly serves.

Strategic Default Double Standard

Business Decisions,
Big and Small

What happens to a homeowner who strategically defaults? (that is, they walk away from their home because it's worth less than what they owe).

Their credit is damaged -- if not wrecked -- for as long as seven years.

What happens to a commercial property owner who strategically defaults?

If it's a REIT, its stock goes up, due to its improved cash flow -- and hence greater appeal to investors:

In the business world, there is less of a stigma [associated with strategic default] even though lenders, including individual investors, get stuck holding a depressed property in a down market. Indeed, investors are rewarding public companies for ditching profit-draining investments. Deutsche Bank AG's RREEF, which manages $56 billion in real-estate investments, now favors companies that jettison cash-draining properties with nonrecourse debt, loans that don't allow banks to hold landlords personally responsible if they default. The theory is that those companies fare better by diverting money to shareholders or more lucrative projects.

"To the extent that they give back assets or are able to rework the [mortgage] terms, it just accrues to the benefit" of the real-estate investment trust, says Jerry Ehlinger, RREEF's co-chief of real-estate securities.

--"Commercial Property Owners Choose to Default"; The Wall Street Journal (8/25/2010)

Good luck getting Joe and Jane Homeowner to honor their underwater, $300,000 mortgages when Corporate America is ditching their $30 million (or $3 billion) mortgages.

What's that line about "what's sauce for the goose is sauce for the gander?"

Preservation vs. Development

"Heart of Community?" Not Exactly

When it comes to development vs. preservation . . . I'm strictly an agnostic (or maybe the term should be "ad hoc-ist," given that I favor a case-by-case analysis).

So, when developers want to replace a decrepit, generic-looking hardware store at 26th & Lyndale with something newer and more functional, I'd say "sure, why not?"

However, when developers want to scrape a unique and historic building and replace it with something cheap, the answer should be "no."

The Fate of the West Side Tennis Club

Those trade-off's came to mind as I read yesterday's Wall Street Journal piece on the West Side Tennis Club in Forest Hills (pictured closer to its hey day a century ago, in the photo above -- and less than one mile from where I'm spending the week).

In a nutshell, a showdown is brewing between a developer who wants to buy the Club and rejuvenate it, vs. locals who oppose new development.

As a member of the local preservation community put it:

"Losing the club would be the equivalent of ripping the heart out of Forest Hills."

Frozen in Time

The foregoing sentiment would be right except for one, small fact: that 'heart' stopped beating in the late '70's, when the U.S. (Tennis) Open left for nearby Flushing Meadow.

Ever since, the Club has basically been sitting idle and decaying, in its very prime spot.

It's hard to believe that that constitutes the "highest and best use" of the space -- another time-tested criterion for weighing development proposals.

Financial Reform and Straw Cattle (er, Men)

WSJ: 'Financial Reform Hurts Farmers'

"Finance Overhaul Casts Long Shadow on the Plains"

--Headline, The Wall Street Journal (7/14/2010)

So, according to The Wall Street Journal, regulating derivatives -- as the financial reform bill before Congress weakly proposes to do -- will in fact hurt Midwestern farmers.

That's because it will cost them more to hedge the sale of their crops, livestock, etc.

There are only two problems with that argument:

One. It's far from clear that regulating derivatives will make them more expensive.

In fact, buried in the Journal's own article are quotes from several experts who argue that better regulation and more transparent trading will make derivatives less expensive.

Two. The cost of not regulating derivatives (just so far) has come to trillions in new federal debt, a crashed financial system, and a nasty, ongoing recession.

Not exactly good for farmers -- or anyone else!

P.S.: my alternative -- and more correct -- headline: 'Finance Overhaul Lifts Long Shadow Over the Plains.'

Getting the Jump on the (Wall Street) Journal

"Told 'Ya So" Department

You read it here first -- by four days, to be exact:

No, it's not good when already volatile markets lurch downward like they've done the last couple days. However, astute financial observers know that such turbulence is also accompanied by a "flight to safety" -- in this case, U.S. debt. The silver lining is that anyone who's on the cusp of refinancing can do so at rates that are temporarily "on sale."

--"Flight to Safety = Rate Drop: Market Melt-Down Creates Refinancing Opportunity"; City Lakes Real Estate blog (5/20/10)

Now compare that with what's in Monday's Wall Street Journal:

The financial turmoil in Europe is providing an unexpected windfall for American home buyers, as international money seeking a safe haven is flowing into the U.S., pushing domestic mortgage rates to the lowest levels of the year and back near 50-year lows.

--"Mortgage Rates Decline"; The Wall Street Journal (6/24/10)

Nice scoop, if I say so myself!

P.S.: No, I'm not clairvoyant -- it's typical for print articles to post online the night before publication.

"Do What You Enjoy With People You Like"

Career Advice From Ex-CEO of P&G

"I want to do things I really enjoy with people I really like."

--Arthur G. Lafley, former P&G CEO; The Wall Street Journal (4/8/2010)

Lafley, who just retired from P&G to join a private equity firm, gave the above explanation for his career move.

Skip all the career counseling books, and take Lafley's advice!

Of course, it certainly helps that Lafley doesn't have to worry about financial considerations.

It's also true that being a partner at Clayton, Dubilier & Rice LLC, the private equity firm Lafley's joining, is one of the most lucrative gigs in the world.

The WSJ . . . Brought to You By Acura??

Ending the "Newspaper Blackout" (for a day)

Noted a curious, full-page ad in the bowels of the first section of today's (print) Wall Street Journal: the online edition of the paper is available, free, courtesy of Acura. Typically, non-subscribers can only see headlines followed by brief annotations.

(Note: per my earlier post, "Are Newspapers Stealing a Page From Banks' Playbook," my print copy continues to arrive daily, months past the end of my subscription.)

Acura's gambit recalls the days when a big, local advertiser would buy up the last bloc of unsold NFL tickets, officially rendering the game "sold out" -- and lifting the league's mandatory TV blackout in the home team's market.

Online vs. Print Media

What's curious about Acura's "ad buy" is that you have to be reading the print copy to realize the online version is free -- which sort of makes it a moot point.

The second curiosity has to do with the nature of online news, which regular consumers such as myself already know (I get about 99.9% of my news online, and have for years).

Namely, there really is no such thing as "today's paper."

Rather, articles are posted continually, 24/7, then slip in prominence as new articles supersede them.

So, yeah, articles from "today's" Journal are available unabridged, but they're intermingled with annotated articles that were posted before and after today's edition went to press.

I have no idea what Acura paid for its plug, but I doubt you'll see a repeat . . .

WSJ headline: 'Americans Pare Down Debt'

So THAT's What *Lehman Bros. Did

If all you did was skim The Wall Street Journal's headlines today, you could be mistaken for thinking that the average American's financial health was improving -- sort of like a dieter finally losing those pesky, excess pounds.

The reality is a bit different.

As the Journal article makes clear a couple paragraphs in, the reason household debt is falling dramatically at the moment isn't because consumers are taking out less debt, or repaying what they owe. Rather, it's because they're filing bankruptcy and defaulting, in record numbers, on their mortgages.

If that's nuance (spin?), so is the difference between successfully completing Weight Watchers and having your stomach stapled.

Or having no food to eat (the "ultimate diet," or what used to be called "starving").

*If you didn't know (or already forgot), Lehman Bros. filed for bankruptcy -- the largest in U.S. history -- in September, 2008.

"Restraint," Wall Street-Style

Wall St. Pay: the (Dis)Honor System Lives!

So, how do people on Wall Street -- and their defenders, like The Wall Street Journal -- define "restraint?"

A. Turning down the heat to 65 degrees.
B. Cancelling their cable subscription.
C. Taking public transportation to work, instead of the car.
D. Paying one's self only $9 million, instead of $68.5 million like in 2007 (when A LOT fewer people were paying attention).

If you need an answer key . . . you're a newcomer to this blog!

And exactly who is this paragon of virtue and self-restraint?

None other than Lloyd Blankfein, CEO of Goldman Sachs.

The Journal was quick to paint Blankfein's 2009 bonus (yes, we're talking about a bonus -- not base pay, not benefits, not lots of other goodies) . . . . as an act of sublime selflessness.

The steep drop from 2007 pay was a "bow" to public pressure, it declared in its headline.

Not only that, the compensation was all-stock.

The Journal's not-so-subtle (or convincing) defense of Blankfein's pay continues:

As Goldman rebounded in 2009 to its most profitable year ever, the 55-year-old Mr. Blankfein became the focus of anger about sky-high bonuses on Wall Street. That criticism continued even after Goldman said last month that it would make the smallest employee payouts relative to to revenue since the firm went public in 19999.

--"Goldman CEO Bows on Pay"; The Wall Street Journal (Feb. 6-7, 2010)

How reasonable of Goldman and Blankfein.

How fair of them.

How disgusting.

Party Like It's 2007

The truth is, Goldman and Blankfein's record 2007 compensation was a lot like popping champagne on the Titanic at midnight the night it sank.

Incredibly, instead of feeling horror and shame for steering the financial system into an iceberg -- and make no mistake, Wall Street was doing the steering -- Wall Street effectively engineered a bailout that made itself (more than?) whole.

At the taxpayers' expense.

And they're still at the helm! (versus, say, in jail, or, banned from the financial industry for life, like disgraced Merrill Lynch analyst Henry Blodget was for causing .000001% of the havoc.)

As I said before, "disgusting."

Pro Athletes' Pay

I remember a cartoon that ran several months into the last baseball players' strike (in the early '90's?), when ballplayers made a whole lot less than they do now.

The cartoon showed an unshaved, unwashed baseball player knocking on a suburban front door, with the caption, "mow your lawn for $25,000, Ma' am?"

In fact, I don't begrudge pro athletes a dime of what they make, because: a) it's not coming out of my pocket; and b) it's truly set by the marketplace.

For the vast majority of pro athletes, stratospheric pay is also extremely short-lived, and limited to a handful of truly gifted, high-performing individuals.

None of the above is true of Wall Street pay.

Successor to "The Magazine Cover Indicator": 'The WSJ Diss'

"Shame on You, Wall Street Journal!"

Long-time stock market watchers are familiar with "The Magazine Cover Indicator": when Business Week (or Fortune, or Forbes, or Newsweek) runs a cover with the title, "The Death of Equities," or some such -- stop what you're doing, call your broker (does anyone still have one??) . . . and buy!

Buy big cap's, small cap's, U.S., foreign, emerging markets -- buy everything! Then borrow to buy some more.

Because such magazine covers, when they appear, are as sure-fire a (contrarian) indicator as they come.

In that vein, it seems increasingly apparent that an investing product such as exchange-traded funds have truly come of age -- and pose a real threat to Wall Street -- when The Wall Street Journal deigns to attack it directly (or more commonly, undermine it indirectly):

The world of exchange-traded funds looks like an ocean of liquidity: billions of shares trading all day long on easily accessible exchanges.

But beneath the surface is a treacherous landscape of potential trading problems that can raise costs for individual investors.

The ease of buying and selling ETFs, which typically resemble index-tracking mutual funds but trade like stocks, has helped make them the darlings of investors big and small. But as ETFs delve into more esoteric areas of the market such as high-yield bonds and commodity futures, trading them has become more complex.

Also contributing to problems with liquidity—or the ease with which these products can be bought and sold without big trading costs—are things like regulatory scrutiny, strong investor demand for certain ETFs and the fact that many of these funds now launch with the bare minimum level of assets—often just $2.5 million or so.

There are "a lot of dissatisfied customers" discovering snags in ETF trading, says a Morningstar analyst.

--"Risks Lurk for ETF Investors"; The Wall Street Journal (Feb. 1, 2010)

Sounds scary until you realize that the "risks" The Journal cites are associated exclusively with tiny, narrowly-focused ETF's: precisely the kind that indexing investors avoid in the first place.

Rather, the entire reason to index --increasingly via ETF's -- is to get (passive) exposure to the broad market, at minimum cost and tax exposure.

As a result, the lion's share of the now-$800 billion committed to ETF's is held in mega-funds tracking the S&P 500, MSCI EAFE (Europe and Asia), and other very broad, very liquid vehicles.

And nobody no knows that better than The Wall Street Journal.

P.S.: Get the imagery of the sailing ships heading over the edge of the cliff? Subtle.

Can't Anyone Write a Headline Anymore?

Misleading, Sensationalized Headlines

Just days ago, Barry Ritholtz called out The Wall Street Journal for its (increasingly) misleading, out-of-context headlines.

I just ran into another example yesterday on the otherwise credible RealClearMarkets.com, which aggregates the top 30 or so business-related print and blog pieces daily (mine have appeared more than a dozen times in the last two years!).

Compare this headline on RealClearMarkets (look under "Evening Edition" for Jan. 26):

"Looks Like the S&P Is Going to 1,200 or Higher" -- Jeremy Grantham

With this quote, directly from Grantham's (excellent) piece:

I thought last April that the market (S&P 500) would scoot up to 1,000 to 1,100 on a typical relief rally. Now it seems likely to go through 1,200 and possibly higher. The market, however, is worth only 850 or so; thus, any advance from here will make it once again seriously overpriced.

Just in case the foregoing is too subtle, Grantham continues:

Equity markets almost always peak when rates are low, so moving in desperation away from low rates into substantially overpriced equities always ends badly.

See my point!!?

P.S.: If you haven't read Grantham's missives, you should; they're every bit as pithy as Warren Buffett's. In particular, his "Lessons Learned in the Decade" at the end of his most recent quarterly newsletter is full of great nuggets.

In fact, when it comes to "pithy financial insights," these two are really on a plane of their own (Michael Lewis and Thomas L. Friedman also write at this altitude, but, unfortunately, they both cover business all too rarely).

Estimating Home Upkeep

"Lumpy" Home Repairs

How much should you earmark for annual home upkeep?

According to one LA-based Realtor:

Homeowners should have 1% of the purchase price of their home in savings for improvements and surprise expenses. That is the absolute minimum. It's better to have 2% to 3% socked away somewhere.

--"Home Costs Keep Going Up"; The Wall Street Journal (12/28/09)

Before parsing this advice, however, first an aside: notwithstanding the article's headline, it gave no examples of how home costs are rising at the moment.

In fact, big ticket items like property taxes, as well as capital repairs like roofs and exterior painting -- not to mention major appliances -- are now getting less expensive, thanks to the recession.

Back to upkeep . . .

Yes, I agree with the 1% rule, but with a major caveat: home repairs are likely to be "lumpy." In other words, most years, homeowners will likely spend well below 1%; however, intermittently, they'll likely overshoot that quite a bit.

That's because things like roofs, exterior paint, and furnaces can last a decade or longer, but when they go . . . they go.

In the meantime, I'm a big fan of home warranty plans, which for a fairly reasonable monthly premium cover homeowners against major, unexpected outlays.

In fact, my standard advice to my Buyer clients is to get coverage for a calendar year, until they know their home, what reliably works -- and what doesn't. After that, they can re-assess as appropriate.

P.S.: Is The Wall Street Journal getting sloppy with its headlines? Consider this one, also from today's paper: 'Adjusted for Inflation, Dow's Gains Are Puny.' The article then goes on to note that the Dow, currently at 10,500 and basically unchanged from a decade ago, is only 8,140 when adjusted for inflation.

Since when does a 2,000 point drop qualify as a "puny gain"??

Advertising Rebound Riddle

The Wall Street Journal really got my attention this morning.

No, not because of some riveting story.

Rather, because when I picked up the blue bag it comes in -- it's my one remaining paper subscription, and only because I could use frequent flyer miles to pay for it -- it was twice as thick as usual.

Hmm, I thought, is that evidence of a so-far awfully quiet advertising rebound?

Nah.

The snowstorm held up delivery yesterday, so today's delivery bag included both the Wed. and Th. papers.

"Our" New Paymasters?? Define, "Our"

Confusing "Us" and "Them"

Today's Wall Street Journal is running a house editorial decrying government wage controls on the top 175 executives at seven companies that are still using money from the Troubled Asset Relief Program ("TARP").

The title of the piece?

"Our New Paymasters: wage controls are politically easier than genuine reforms."

I can see how if you're one of the 175 affected executives, it would certainly seem like the government was your new paymaster.

But where does "our" come in?

"Our" presumes an "us."

"Us," of course, would be the 99.9999% of Americans who don't make millions annually running banks that were bailed out by the government, and are being sustained even now by free money from the Federal Reserve.

Time-Saving Technique

Coke Didn't Make America Fat.

--Wall Street Journal headline (10/8/09)

Pressed for time? (and who isn't)

Then do what I do, as I hurriedly scan the Op-Ed pages (online and off) for the 8-10 pieces I want to "dig into" that day:

1. Read the headline;
2. Jump to the byline at the end, to check the author's title, credentials, etc. to see if the author has an "an agenda" or other, obvious bias;
3. Based on #2, decide if you want to read the article.

So, applying the foregoing, guess who the author of the "Coke" Op-Ed piece is?

A. A nationally recognized nutritionist.
B. Head of a non-profit, child advocacy organization.
C. The CEO of Coca-Cola.
D. The President of the company that makes Fruit Loops, Captain Crunch, and Cocoa Puffs (presumably confessing).

While "D." is certainly intriguing . . . the correct answer is "C."

Murmurs of "Coiled Springs"

More Half-Full Glasses

The deeper the slump, the zippier the recovery.

--The Wall Street Journal (9/19-20, 2009)

Just six months ago, the mantra of the hour was, "the bigger the party, the nastier the hangover."

That was succeeded by the "green shoots" metaphor.

Now, I am seeing variations on "the steeper the fall, the more robust the recovery" (also known as the "V-shaped" recovery scenario).

Do I hear any murmurs of economic "coiled springs" about to be unsprung?

(Yes, I do -- that's the metaphor being pushed by Charles Schwab's chief investment strategist, Liz Ann Sonders).

"Half-Decade" Mentality

"Obama Saw Successes, Then Harder Times"

I've read (or skimmed) Barack Obama's two autobiographical books, and followed his political rise, so the above headline in today's Wall Street Journal caught my eye: was there some, heretofore hidden chapter in his life?

Nah.

The "successes" referred to Obama's first three months in office; the "harder times" the second three months.

Glad the journalist has a sense of perspective . . .

P.S.: Once upon a time, a "half-decade" referred to 5 years.

Strangling "Financial Innovation"

Tighter Regulation = Less "Innovation"?

Thirty years ago credit cards were exceedingly simple. They charged high annual fees just to own them (often $40-$50), high fixed interest rates (approaching 20%), and offered no cash rebates.

Today credit cards are more complex, but they are also better. They offer no annual fees for no-frills cards, flexible interest rates, and more benefits. Competition is fierce and consumers have a wide range of choices.

--Todd Zywicki, "Let's Treat Borrowers Like Adults"; The Wall Street Journal (7/08/09)

What I find interesting about Zywicki's op-ed piece is not his (rather lame) case against creating a consumer financial products safety commission, the goal of which would be to curb predatory lending practices.

Rather, it's his pitch-perfect channeling of Wall Street's strongest argument -- being revved up and honed as we speak -- for fending off tighter financial regulation.

Namely, that it would stifle "innovation."

Let's see . . .

On one side of the ledger, we have: almost $10 trillion in financial damage (and counting); the worst recession since the Great Depression; and the spectre of runaway inflation caused by huge Federal deficits ostensibly incurred to mitigate -- if not repair -- said financial damage.

On the other side of the ledger, we have -- exactly what?

No-annual fee credit cards with frequent flier miles??

Are you kidding me? Are they?

Bring on the regulations!

P.S.: let's hear it for simple credit cards that charge only 20%.

IPO's, REO's & Market Manipulation

Bank Foreclosure Sales Recall '90's IPO's

We've seen this movie before.

Specifically, many of the practices embraced today by banks selling foreclosures, or Real Estate Owned ("REO"), echo tactics used by Wall Street more than a decade ago to sell "hot" tech IPO's ("initial public offerings").

Consider these 3 parallels:

One. Artificially low prices.

At the height of the tech boom, it wasn't uncommon to see IPO's priced at $15 or $20 a share skyrocket to $100 or more the first day of trading.

Similarly, I can point to dozens of foreclosure sales in the Twin Cities this Spring that have attracted at least 10-15 offers, and sold for huge premiums over the artificially low list price.

In each case, the effect is to whet "investor's" appetite -- also known as "pump demand" -- for the next offering. Pretty soon, you have a full-blown feeding frenzy on your hands -- at least in the short run.

Two. Favored insiders.

In a practice called "spinning," Wall Street firms doled out cheap shares to favored customers -- existing and prospective -- who could quickly sell to dumb outsiders -- the public -- clamoring to get in on the "boom."

With foreclosure sales, the favored customers are the Buyers represented by the listing agents -- who also represent the banks!

Tech IPO's -- The Sequel?

Imagine you're conducting an auction with multiple bidders. If Buyers #1, #2, or #3 -- all of whom have their own agent -- submit the winning bid, you split the commission.

However, if Buyer #4, who happens to be your client, submits the highest offer, you get all of the commission.

As listing agent, you see all the other offers.

Now, guess how often Buyer #4 prevails?

Interestingly, such "dual agencies" are enough of a red flag that I've now seen an off-shoot practice: the listing agent steers Buyers to a supposedly independent agent in return for an undisclosed kickback.

Three. Legions of Losers.

We all know how the late '90's IPO boom turned out: eventually, the IPO market got sated, tech share prices collapsed, and the ensuing bloodbath brought down the rest of the stock market (and economy) with it.

We all know what that ushered in: free money, courtesy of the Fed, to revive a prostrate economy (be careful what you wish for!).

Do we really want to see what happens when the foreclosure feeding frenzy subsides, and the "winners" of all these bidding wars wake up with hangovers? What then: REO's -- the Sequel?? Pump-and-Dump . . and Dump again?

Even if foreclosure Buyers didn't overpay, it hardly excuses all the market manipulation on display, and what should instead be a focus on "discovering" -- honestly -- market-clearing prices for a huge class of assets.

If government is serious about (re-)regulating financial markets, a good place to start is policing how banks sell their REO's.