Who Do You Trust?

The latest Street$marts has just been posted!



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Can You Trust the Experts?

One story related by Peter L. Bernstein in “Against the Gods: the remarkable story of risk” was the experience of Kenneth Joseph Arrow, an American economist and joint winner of the 1972 Nobel Memorial Prize in Economics.

Some officers had been assigned the task of forecasting weather a month ahead, but Arrow and his statisticians found that their long-range forecasts were no better than numbers pulled out of a hat. The forecasters agreed and asked their superiors to be relieved of this duty. The reply was: “The Commanding General is well aware that the forecasts are no good. However, he needs them for planning purposes.”1

Philip Tetlock, a psychologist at the University of California, Berkeley, has literally spent a lifetime looking at how well experts in their field do with respect to their professions. Over a period of 20 years he collected the predictions of 284 people who made their living “commenting or offering advice on political and economic trends,” including journalists, foreign policy specialists, economists and intelligence analysts. By the end of the study, Mr. Tetlock had quantified 82,361 predictions. How did the experts do? The vast majority of the predictions were worse than random chance. Post graduate degrees offered no advantage. Famous experts tended to do the worst.

Where did these individuals go wrong? According to Mr. Tetlock the main reason was overconfidence. Convinced that they were right, the experts ignored evidence suggesting they might be wrong. Another important bias is that most experts find it very difficult to make a negative prediction. Fear of “crying wolf” may be part of the reason, but there is also a desire to please the audience and be re-elected, or asked to speak again. Another important cognitive bias, Mr. Tetlock points out, is that most of us find it very difficult to change our minds.

Overconfidence and “confirmation bias,” where experts ignore evidence suggesting they are wrong, are of particular concern to investment advisers. With the financial security of our clients at risk, we can’t afford to become “prisoners of our preconceptions,” as Mr. Tetlock puts it. This is one reason why active management relies heavily on non-emotional, technical and quantitative analysis and mathematical relationships within the financial markets. Our goal is objectivity and discipline, checking our ego and emotions at the door.  The most important information for an active manager is not where the market has been or where we believe it is going, but where it is today.

By setting very specific investment rules as to when an asset will be purchased or sold, or when it is safe to be invested in equities or bonds or a specific sector, or when a defensive posture is better, our goal is to avoid letting our biases and emotions influence our decisions. I may be right in my belief that the market will recover from its current malaise, but to base a client’s portfolio on that belief ignores the consequences of being wrong. What if I am right on the market’s direction but completely wrong on the duration of the problem?

Active management is risk management. As with all tools to limit risk, it can also result in lost opportunities if conditions change quickly. But without risk management, without basing investment decisions on where the market is today, the risk of a major drawdown impacting the client’s future increases.

1 Against the Gods, Peter J. Bernstein, page 203.

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The Facebook Fiasco… A Guide of How NOT to IPO

Here is the latest Street$marts with a detailed article on the bust that is Facebook.


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JP Morgan, The Next Recession and The Wave of New Jobs

I did an interview with FOX Business on Friday where I offered my comments on the overblown mess at JP Morgan, which is the story of the day/week.  I also opined that the next recession in the US will likely be seen in 2013 or 2014.  I was somewhat surpised that the anchor thought that was so outrageous.  Except for the 1990s, we typically see one or two recessions per decade with one being more severe than the other when there are two.  Given that the last one ended in 2009 according to the folks who keep the data, by 2013 or 2014, we will be due for another. 

While I certainly don’t want to see another recession or navigate through another bear market, they are a fact of capitalism.  The key is what kind of shape the consumer and corporate America are in right before it hits.  I would argue that we are in a better position to weather the storm than at any similar period during the modern investing era.  And guess what happens on the other side of the next recession???



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Once Again, It’s About Europe

Socialist candidate Francois Hollande won the election in France, throwing the Eurozone into a tizzy as Germany no longer has a fiscally conservative partner in France.  This is going to get very interesting as we have Germany favoring austerity and a more hard line fiscal path, while France will look to curb the expense cuts, raise taxes and possibly increase spending. 

Markets cratered overnight, especially in Asia, but by the time the US opened, losses were more muted.  And by 4pm, all of the major indices were green except for the Dow.  Remember, it’s not so much what the news is as much as how the market reacts.  Frankly, I was a little surprised that our market took the news so well.  That could  be setting the US up for a bounce.  Closing below today’s low, 12,970 in the Dow, should set the wheels in motion for more selling with the major indices declining to new lows for the second quarter. 

Longer-term, this should be positive news for gold and US treasury bonds, but let’s let the market tell us over the coming weeks and months.  I still think gold sees a significant low this quarter that could launch a major rally.

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The Most Unloved Investment

Last Wednesday, I participated in an interesting discussion on CNBC’s Closing Bell regarding what I consider to be the most “unloved” investment.  Most continue to scratch their heads as to why they haven’t cratered with the trillions of the dollars our Fed has created over the past few years.  But there are bigger stories at play. 

For years, most have thought that inflation would really kick into high gear, but that certainly hasn’t happened.  You may have seen it at the pump or at the grocery store, but those are considered “transitional” and easily cured with higher prices.  Think about it.  The higher the price goes for a certain good, the more likely we are to cut back and/or find a substitute.  I am a big chicken eater,  but if the price of chicken doubled, tripled or quadrupled, guess what, I would find something else to eat like turkey.

That may be all well and good for chicken, but what about heating my house with oil?  Aren’t I stuck? After crude oil skyrocketed to $147 in 2008, alternatives really started to sprout up.  Americans dramatically cut back on miles driven and oil used at home.  They also started purchasing wood burning and pellet stoves, solar panels and geo-thermal systems.  In most cases, there are always ways!

Anyway, I digress.  Since 2007, I have believed that our biggest enemy would  be and is deflation, not inflation.  During the credit crisis, trillions and trillions were “vaporized”. Remember all those alphabet soup products that banks were inundated with?  CMOs, CLOs, CDOs, SIVs.  The ones that were AA and AAA but really were junk?  Think of all that money that went away!  Although the Fed has created trillions, it hasn’t come close to replacing the money that was lost. 

Wages are a component of inflation and wage growth has been essentially non existent.  And the elephant in the room, housing?  That’s the largest component of inflation and it would be very tough to argue that housing prices are and have been on the rise.  So in my opinion, we are in need of a little, controllable inflation. 

So I think I uncovered a good future topic.  Enjoy the video.


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Stocks at Inflection Point

Here is the article based on my interview with CNBC’s European Closing Bell from May 1.


The 2012 bull market still has further to run, according to Paul Schatz, president of Heritage Capital, an independent investment banking and advisory firm. Instead of a major selloff, Schatz believes that the equity markets will only peak later on in the year, or early in 2013. But he’s undecided about whether this will incorporate a “sell in May and go away” mantra.

Fuse | Getty Images

“We see two possible paths. One is that the major indices go right back to new 2012 highs in May and then race to all-time highs in the third quarter or early fourth quarter,” he told European Closing Bell. “The other scenario is that stocks use May to pull back and take out the April lows before bottoming and then heading to new 2012 highs in the third quarter.”

Schatz’s reasoning is that the huge amount of central bank liquidity in the system is only going to get bigger.

“The Fed remains, and there’s still a torrent of liquidity in the system,” he said. “The ECB is just warming up. They have printing presses for trillions and trillions of stimulus for the rest of the decade.”

Schatz also downplayed the effect of the euro zone debt crisis on the equity markets. “It’ll be hard-pressed to say that Spain being in a recession[cnbc explains] is going to end this bull market.”

Even though Schatz is bullish in equities, his company still has a sizeable position in U.S. Treasuries.

“The U.S. fiscal house may not be in good shape, but on a relative basis, it’s better than most of Europe and Japan and there remains a sizeable bid under the market from the Fed and foreign governments,” said Schatz.

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CNBC’s Closing Bell

I am going to be on CNBC’s Closing Bell with Maria & Bill at 3:10pm today discussing (defending) why I am the only treasury bond bull left on earth!

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Local Bank News in Connecticut

Long time readers know how critical I was of how the whole New Alliance Bank merger with First Niagra went.  While it was a good deal at the time for shareholders, their CEO and the bank said one thing over and over, yet their actions did the opposite.


New Canaan-based BNC Financial Inc., a $500 million institution, has hired Peyton R. Patterson, former NewAlliance chief executive officer, to lead an expansion that one day could include a public offering.

BNC Financial, the holding company for the Bank of New Canaan, The Bank of Fairfield and Stamford First Bank, announced Patterson will take over for M. Jay Forgotson in September. Forgotson will continue as president of the Bank of Fairfield and has no intention of retiring.

Patterson faced criticism in the press and in the community over the sale of NewAlliance, a New Haven-headquartered bank, to a New York institution and walking away with a pay package that was estimated to be worth between $16 million and $23 million. The deal, however, paid $14.09 a share, a 24 percent premium, for NewAlliance.

One such critic, Paul Schatz, president of Woodbridge-based Heritage Capital, said he didn’t like the way Patterson and the board at NewAlliance exited and the way the deal came together after rhetoric of NewAlliance being committed to New Haven and the community.

But Schatz said bringing in Patterson is a coup for BNC.

“She’s certainly a very qualified and talented business person with a successful career,” Schatz said. “It certainly is a big positive.”

But he cautioned time will ultimately tell if this is a great move for the bank. He said Patterson was on track to lead a mid-regional financial institution and not take over a community bank.

Schatz noted the environment for mergers and acquisitions is quite different today than when Patterson built NewAlliance.

BNC had been looking for its next CEO since last summer.

In August of last year, Forgotson, a founder of the bank and a significant investor, informed the board of directors he would not serve as CEO past June of 2013 and that the group should look for a successor.

“I’m truly amazed we were able to bring her into this organization,” Forgotson said Wednesday in a phone interview, citing Patterson’s role in merging three banks into NewAlliance, going public and acquiring three more, all between 2002 and 2010, when the operation was sold to First Niagara Financial Group for $1.5 billion.

Patterson has more than 25 years in finance, including nearly a decade at the helm of NewAlliance Bancshares and executive roles in lending and consumer services with Dime Bancorp and Chase Manhattan. She was named Community Banker of the Year by American Banker in 2008 and ranked as one of the top 10 CEOs in banking in 2006 by U.S. Banker.

While she has taken time off from banking since the deal closed in 2011, the BNC board expects her to take her new bank to the next level and maybe beyond, according to Forgotson.

“She’ll be a great driving force to bring this bank to the level of a regional bank,” he said. “We anticipate major, major success.”

BNC Financial was formed in 2007, five years after the opening of The Bank of New Canaan. The group added The Bank of Fairfield in 2008 and Stamford First in 2010. Assets have grown from about $200 million in 2007 to $500 million, according to Forgotson. And the company reported record profits of $2.2 million in 2011. It operates five branches.

NewAlliance had 88 branches and $8.7 billion in assets at the time of the sale.

Besides the branches BNC operates under its core brands, it has filed to open a limited commercial and industrial lending operation in Bridgeport under The Bank of New Canaan. The application is pending before the state Banking Department. When asked if the bank was looking to go public on a major exchange, Forgotson said it was too early to say and, ultimately, a matter of strategy like that would be something Patterson would have to review. BNC does have some shares traded over the counter.

He said flatly the “bank is absolutely not for sale,” noting they would not have brought her in just to sell it.

Forgotson is familiar with Patterson.

“My bank Cornerstone Bank was acquired January 2, 2006, by NewAlliance,” he said. “I was operating in Fairfield County. I didn’t work directly for her … but I got to know her a little bit.”

Patterson, a one-time Greenwich resident, lives in Madison and plans to move to New Canaan. She was not available for comment Wednesday, but said in an official statement she was honored to be joining BNC and sees its strong financial position as a good base from which to grow the bank.

Patterson serves on several boards and commissions, including the Connecticut Council for Education Reform, The Greater New York United Way and the Greenwich YMCA.

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Is Apple in Trouble?

My negative Apple segment on Yahoo’s Breakout continues to be picked up by other websites…


After a historic rise to nearly $650 per share, Apple stockhas dipped back below the $600 mark after a steady decline over the past week. As a result, the soothsayers have unsurprisingly emerged from the woodwork with their less-than-certain predictions about the company’s future.

And somewhat ironically, I’m going to make one of my own. But first, let’s see what everyone else is saying.

Apple on the Brink

Noting that he isn’t worried about Apple quite yet, Business Insider’s Henry Blodget gave his readers two reasons to consider regarding the company’s future.

“First, the Apple zealots have gone silent,” he writes. “Earlier, we reported a fact that could be construed as negative for Apple—that iPhone sales had plunged 24% quarter over quarter at Verizon—and we weren’t immediately attacked by a band of crazed fanboys.”

Noting this lack of blowback from the Apple base rather abnormal to say the least, Blodget appears to take such radio silence as an indication of deeper troubles within the company itself.

I, on the other hand, am not willing to let something that could so easily be little more than coincidence pass as one of the only two reasons to be “a bit nervous” about Apple’s long-term standing. Furthermore, consider the nature of the statistic used as supposed proof of the Apple base’s sudden silence.

First of all, the statistic about Verizon’s quarterly iPhone sales dropping is hardly surprising. With anticipation of the next-generation iPhone slowly building as we await an announcement from Apple, it makes sense that sales of the current version will begin to decelerate. After all, why pay full price for an iPhone 4S when you could wait and pay the same price for the iPhone 5 that’s right around the corner?

Second of all, the statistic is limited exclusively to Verizon iPhone sales, not all iPhone sales, which, according to a recent U.S. study, bested Android earlier this year.

Blodget’s second reason isn’t much more convincing. “Second, Apple is not backing off on the flawed gimmick known as Siri—instead it is doubling down,” he continues. “Apple is now paying celebrities zillions of dollars to hawk Siri on TV, when even Apple fans have gotten so frustrated with the feature that they’ve basically stopped using it.”

This, too, would come as a bit of a surprise if it had any factual basis whatsoever. Moving beyond the laughable exaggeration that “zillions” are spent getting the likes of Samuel L. Jackson and Zooey Deschanel to promote Apple’s virtual assistant (because only struggling companies employ celebrity endorsements), his suggestion that iPhone 4S users have “basically stopped” using Siri comes without citing a single report or study. Meanwhile, a study last month by Parks Associates shows just the opposite. The results of the study confirm that nearly 90 percent of iPhone 4S owners use Siri for at least one task a month. Furthermore, when asked if they were satisfied with the virtual assistant, 55 percent of respondents said they were while only 9 percent said they were dissatisfied.

Despite that reality, however, Blodget maintains that Siri is “not ready for prime-time.” In fact, he asserts that the late Steve Jobs would have felt the same way, suggesting that the legendary Apple CEO would have “ripped the Siri product team’s faces off, and then either killed Siri or fixed her.”

I find this difficult to believe. Would Jobs, like any right-minded executive, pushed for improvement to increase adoption? Of course. But berate the product team and scrap it altogether? Hardly likely.

Apple in Reality

Nevertheless, despite his position’s basis in conjecture, it is understandable that Blodget and others sharing his position have gone to the lengths that they have to distance themselves from the outrageous positions of those who think Apple can do no wrong. Those who suggest that Apple could double its value—currently resting at $500 billion—in just a few more years are, as Blodget points out in a separate piece, likely the ones who stand to gain the most from it happening.

In reality, we really don’t know what’s going to happen. Things could spike, slump or remain steady. We really can’t be sure.

“Such is life in the technology industry,” he rightly acknowledges.

Therefore, it’s understandable that amidst the lofty speculation and constant clamor of fanboys (and girls) that some would attempt to balance the scales by making equally supercilious claims in the opposite direction. While Goldman Sachs is urging investors to swoop in and buy up Apple’s dipping stock in anticipation of another spike, there is nothing written in stone that says it will pay off.

Case in point: Heritage Capital president Paul Schatz, who suggested today that Apple’s basic practices “couldn’t be better” than they currently are—possibly reaching up to $1,000 per share—is not under the impression that Apple’s high valuation is everlasting.

“Whenever that bull market peaks, I think Apple is headed, minimally, 30% down, probably 50% to 60% down,” he said immediately following what seemed like a display of unfettered optimism.

But this sobering prediction has less to do with Apple—or who’s running Apple—than it does with the stock market as a whole.

“This is the dot-com bubble all over again,” Schatz suggested. “I am not saying it will never recover, but when  you have the whole nation in one story stock, it never never never ends well.”

Given similar bubbles inflating around other tech companies—most notably Facebook and its $104 billion anticipated valuation—Schatz’s position is by far the most credible.

While current owners of Apple shares (and other bloated tech stock) are asking how high they can push values before an inevitable market-wide selloff ensues, the real question is how this fantasy world of speculation actually serves to benefit the technology industry as a whole.

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