Monthly Archives: July 2014

Tesla Reports Huge Earnings; Score One for America and Capitalism

Huge earnings from Tesla:

Tesla reported adjusted earnings of $0.11 a share, beating Bloomberg’s consensus for earnings of $0.04 a share and loss of $0.26 a year ago.

Revenue came in at $857.5 million, versus a consensus estimate for $813 million.

Of course, the libs cry ‘socialism’ because Tesla got a loan and subsidies; the loan was paid in 2013, and subsidies are only a small fraction of the sticker price. Now TESLA is profitable, posting a quarterly profit of $17 million. Tesla is an example of how government spending can assist the private sector to help unlock economic value in ways that the private sector cannot do entirely on its own. Other examples include the successful bank bailouts and defense spending. One can argue that government intervention is justified if it represents an optimal transfer of capital that would have not otherwise occurred, resulting in a very high ROI. For example, the bank bailouts which in 2011 the treasury reported a profit. Trillions of dollars in global wealth has been created in the six years that have followed TARP – not a bad investment. Same goes for Tesla, now valued at $30 billion from a $465 million loan – or a nearly 6000% ROI. The libs say it doesn’t count because government intervention somehow sullies the pristine waters of capitalism. To the left, everything is socialism unless capital is earned in the way they approve of. My response is cry me a river.

The left, especially the new York Times, wants Tesla to fail because they resent its success, and because only the rich can afford a Tesla. Perhaps the government should pick winners and losers – and to some extent it already does. Tesla is a winner. Low-IQ people on food stamps and the unemployed are losers, which is why we also need entitlement reform.

Enjoy the Decline? No thanks

Not much going on in this glacial news cycle. Just the usual blah blah blah about Iraq and Putin, like ambient noise of the air conditioner.

The gloomers like Aaron Clarey say that America will enter a major decline due to too much debt and the usual factors that have already been covered to death, but so far have been wrong.

The only decline will not be in America, but the trading accounts of anyone shorting the market or treasuries. Shiff, Taleb..all these liberals are broken clocks that only want capitalism by their terms, otherwise they cry socialism. The fed, by printing money, is stoking capitalism. Business want the fed to print more. So do investors, speculator, and so on. These libs like Nicolas Nassim Taleb think they are looking out for the best interest of capitalists by opposing the fed and deficit spending, but because these people only have careers spreading fear and hawking worthless books and other crap, they are oblivious. It’s selfish to want society to fail just because you don’t like the way things are being run. If you claim to be a capitalist and a republican you should support the fed, because the fed is helping to create wealth *, which benefits capitalists.

*(except for the Volcker fed that was a disaster, because he’s a liberal. By raising rates too quickly, he pushed the economy into an unnecessary recession, crashed the stock market, and caused the S&L crisis. Continuing in his tradition of destroying capital, under Obama, he created the rule that bears is him as part of the Dodd-Frank reform )

On to the video. Aaron is right about liberals being stupid, and they are, but in an attempt to oversimplify, his video is so ridiculous as to possibly be considered satire.

Yeah, but why would the factory suddenly sell two mints for a dollar. What if it it costs 90 cents to make a mint, selling two for a dollar would incur a loss. Even a republican like myself says that some printing is needed if the consequences of doing nothing exceed the costs . Bernanke, Paulson, Milton Friedman, Greenspan – all republicans, also agree. Also, in times of crisis and panic interest rates for reserve currencies such as the US dollar go to zero, so the costs of printing are next to zero, and it’s not like the money is going directly into the hands of consumers, as the example alludes to. It goes to bank recapitalization, buying bonds and other securities. The idea is to boost confidence by creating liquidity, because liquidity tends to evaporate during panic. Ironically, the tax cut , a republican policy, is the closest thing to the example you gave of literally putting more money into the hands of the consumer. Only recently is lending finally picking up.

If you treat these doom and gloom pundits as anything more than entertainment value and actually begin to make investment decisions off their prognostications, I guarantee you will fail. With the exception of brief spurts like the financial problem of 2008, in the long run, no one has made consistent money betting against the fed, the consumer, technological innovation, the free market, and the policy makers consisting of the smartest people that are ready to swoop in at the slightest signs of trouble. Consumers want to consume, smart people want to innovate, and businesses want to expand. These trends are immutable as the sun rising and setting. If you think that one day all of this is going to stop because the fed balance sheet is too big or some liberal says the the economy is weak, you’re in for a disappointment. There’s a lot of economic uncertainty and people lose losing their jobs, but that doesn’t mean the economy is weak or that we’re on the precipice of a crisis. Facebook and Google doesn’t care about the debt being too high or too much wealth inequality.

Out of Wedlock Births: Not Exclusively a Black Problem

If you go on most conservative sites, the decay of the ‘family structure’ in America tends to be presented as a predominantly African American and Hispanic problem, and this is true, but it may come as a surprise to some that outside of America, in predominant white countries, out of wedlock birth and cohabitation has an incidence as high as Hispanics and twice as high as American whites. I was certainly surprised by this.

The rate of illegitimate pregnancy in Iceland is only 10 points lower than for African Americans. All these Nordic counties need to get it together. These are predominantly liberal countries with a history of barbarism. You don’t expect the descendents of Vikings like in those Capital One commercials or like Conan the Destroyer to be privy to whole tying the knot thing. What’s in your wallet? Hopefully enough to cover the child support.

Lion discusses the causes in more detail.

Today’s Example of Bad Journalism

America’s Poorest Shoppers Are Putting Discount Stores Out Of Business

Sensationalism at its worst and yet another example of liberals, such as the author of the article, wanting to see successful businesses fail or the predicting failure of successful business. Same goes for liberals freaking out over Putin – lots of hype for clicks and pageviews.

The libs predicted, incorrectly, that Facebook was a fad, that profit margins would contract, that stocks would crash, that the student loan bubble would pop, that real estate in high-flying regions such as the Bay Area and Vancouver would crash, that the consumer would become more frugal – the list of failed predictions goes on an on and to write them all would take an hour at least.

A commenter astutely points out:

Let’s see. Dollar General has had constantly rising earnings since 2008. Dollar Tree constantly rising since 1998. Family Dollar earnings constantly rose from 1998 – 2013 with rising revenues in 2014, though a blip down in earnings. Walmart constantly rising earnings since 1998. And they’re all “slowly dying”?

In other words, slowing growth is NOT dying. I guess in today’s frenzied, click-hungry online media environment where writers are paid by the number of pageviews, slowing growth – whether it’s GDP or earnings – means certain doom. If Facebook is slightly losing its appeal among teens, the libs say the site is dying, glossing over the fact that some of these defecting teens are spending more time on Instagram (Facebook owned) or that overseas growth is far exceeding any loss of users in America. In 2012, the libs said Facebook would see a major slowdown in revenue due to people using the mobile version of Facebook instead of the more ad-laden desktop version, but it never occurred to the left that maybe people are spending MORE total time on Facebook, and that is exactly what happened. It’s not like mobile usage has to deduct from desktop usage. In contrast to 2007 when mobile speeds were slower and screens were smaller, now people are on Facebook twice as much: on the phone when away from home and then when they get back home. Also, Facebook has had great success at monetizing mobile users and will continue to do so.

As a possible culprit for the ‘demise’ of dollar stores, the author mentions:

Money spent by households earning less than $30,000 has been flat since 2008, WSJ reports, citing the Bureau of Labor Statistics.

Total income for that group fell 1% between 2004 and 2012.

Some counter arguments:

1. Even if wages and purchasing power are flat, that doesn’t preclude the possibility of a greater proportion of purchases going to dollar stores.

2. Increased consumption from those making over $30k. It’s not like only the poorest of Americans shop at dollar stores.

3. And if income is stagnant or falling, wouldn’t that make this demographic more inclined to seek bargains?

4. Finally, maybe people are realizing dollar stores are a terrible value with inferior products compared to Walmart and other stores. Technically you pay only a dollar, but you get a better value with Walmart by spending a little more. For example, at a dollar store a package of just four Ibuprofen will cost $1, but you can get a whole bottle of 500 pills at Walmart for $7 – a much lower price per pill.

Verbal Harder Than Math?

Steve Sailor and and Steve Hsu have new posts about education and IQ.

Hsu’s post mentions that the infamous Terman IQ Study excluded Nobel laureates Shockley and Alvarez, possibly because highly verbal loaded test hurt their score, causing them to narrowly miss the cut-off.

iSteve, referencing an article originally in the New York Times, discusses how many Americans are illiterate regarding math.

It’s odd how math is being held as this paragon of difficulty when the evidence, on the other hand, suggests verbal is harder than math. Yes, the useless literary arts major may be harder than a STEM degree. The NYT article laments how Americans are bad at math, but I can wager they are even worse at writing, grammar, and reading. Let’s take a look at the discrepancy between verbal and numeracy scores on the GMAT:

Such a discrepancy also exists on the SAT and GRE, with verbal scores being lower than math. From Wikipedia

There are many explanations, but how about the simplest one, which is that verbal is hard. Some of these tests ask the definitions of words that individuals seldom, if ever, encounter in their school reading or in conversation. The presumption is that those who do more reading outside of the classroom will score higher, and this is true, but it could also be that verbal ability, not math ability, is better correlated with IQ – or – that verbal scores have a higher correlation with IQ than math scores.

Another possibility is that verbal, being harder, has a higher ceiling than math and that harder math questions are needed to even it out. Not so sure if that would be effective. Verbal, unlike math, cannot be reliably taught beyond the fundamentals. With some patience, you can conceivably teach a person of average intelligence fairly advanced math, but you cannot cram thousands of obscure words into his head or make him better adept at digesting long, complicated reading passages in a time limit. Math has a ‘plug and chug’ element to it, whereas verbal requires the synthesis of the rules of grammar and style. If you make harder math questions, people will adapt and scores will go up.

I’ve always marveled at how authors can put words together in the precise order to both convey a message and captivate the reader…seems much harder than arranging symbols to make an equation, and from personal experience doing both, it is. People are impressed by calculus…nah that’s not impressive or hard…writing 500 words that aren’t full of grammatical errors and malapropisms and doesn’t read like total juvenile/amateur shit…that’s way harder.

Ultimately, we’re simply expecting too much from the double-digit IQ masses that fill the public schools. Studies show that the average IQ of a high school graduate is around 100, so many should be expected to fail. Harder standards will mean more failures and or more coddling to make slow kids catch up. The former is bad for the morale of the student and the latter will drive up education costs even more, as well as defeating the purpose of having higher standards.

High Sharpe Portfolios

I’m taking my own advice to stop reading the news, but unfortunately that means less to blog about.

Anyway, last Friday I discussed low volatility “Madoff’ portfolios. One of the most important statistics to keep in mind when constructing a portfolio is the Sharpe Ratio, which measures the risk adjusted return. A low ratio means you’re not being rewarded well for the risk you are taking. Generally, a higher Sharpe ratio is better, and a really good fund may have a ratio of 1.6 year-over year. After running hundreds of simulations testing various linear combinations of ETF allocations, the best I could come up with has a 3-year Sharpe of 2.35, and it looks like this:

Te biggest draw-down is around 3% versus 18% for the S&P 500. It’s rebalanced monthly and requires no trading or signals – simply buy & hold.

The YOY performance is even better with a Sharpe of over 4:

Of course, part performance is not indicative of future results, but this looks promising.

So this is now the official portfolio of the one-person Grey Enlightenment endowment fund

Most Americans Poorer Than Before Recession

Cannot tell if this is good news or not, but, in 2013 dollars, the wealth of middle class is below where it was before the recession:

The Typical Household, Now Worth a Third Less: The inflation-adjusted net worth for the typical household was $87,992 in 2003. Ten years later, it was only $56,335, or a 36 percent decline, according to a study financed by the Russell Sage Foundation.

This could be good news because the top 1% are getting, deservedly, all of the gains in wealth for the economic value these individuals create. Before 2008, we had a wage and job glut of too any people being overpaid to perform redundant work in obsolete or dying industries. Too many homes were built, too many financial services jobs, etc. Even better news is credit standards for mortgage applicants have gotten considerably more stringent, which is great for landlords as rents have skyrocketed due to huge demand from people that, a decade ago, would have otherwise been homeowners. So as the middle class may be getting squeezed, this is helping the economy in many ways, by forcing them to spend.

Some are blaming Obama, but we would still have record inequality and the usual pain at the pump and lack of good jobs under two terms of McCain or one term of Obama and Mitt Romney. The stock market and real estate markets, however, would post even stronger gains under a republican because of lower taxes and less regulation. Your best shot at getting rich is to get that STEM degree, buy Bay Area real estate, buy stocks or create a viral app.

The ownership society that Bush spoke about is still thriving, we just need better president and less class warfare. Silicon Valley and Wall St. is still capable of creating immense wealth, as much as the libs want to take it all away.

Bay Area the Center of the Universe as Home Prices Keep Surging

Robert Shiller says we could be in another hosing bubble, but the Bay Area didn’t get the memo. After a huge 2013, prices are off to the races again for 2014:

In the most expensive regions of the Bay Area, such as Palo Alto and Atherton, the gains since 2011 have been so pronounced, by looking at the chart, you wouldn’t have known a real estate bubble had burst in 2006 unless someone told you.

With the web 2.0 boom showing no signs of slowing and the huge influx of wealthy foreigners, as well as private equity, home prices will keep going up. Facebook just reported another blowout quarter and the stock is at a new 52 week high, enriching everyone from the employees, to the VCs, and the founders. The obscene wealth being generated in tech is flowing into the Bay Area economy – from homes to landscapers, to interior design, and restaurants. Do you need any more evidence the Bay Area is the center of the universe? As we wrote earlier:

America, especially since 2008, has become a hyper-meritocracy in overdrive. If you like coding, have a prestigious degree and a high IQ, now couldn’t be a better time to be alive, although having the first two qualities pretty much guarantees the third. We’re in a high-IQ, STEM, wealth creation feeding frenzy on a biblical scale. The Rockefellers, Vanderbilt and Carnegies actually had to build something to get wealthy, which took decades and thousands of people. Now start-ups less than three years old are making instant billionaires out of their youthful founders and early investors. Even in the 90′s – what many consider to be the epitome of a bubble – a typical tech start-up was seldom valued at over $60-100 million. Now that is just the Series A round. The Bay Area housing market is going nuts in all-cash bidding wars above the asking price due to endless fed money, rich foreigners, web 2.0 founders and investors flush with cash, and private equity. There is so much wealth being created in relatively few hands. Outside of the Bay Area tech scene and Wall St., there’s an abundance of low tech opportunities catering to the new rich, such as nannys, butlers, trendy restaurants, landscaping, and home restoration. America, more specifically its elite institutions such as Harvard, Stanford, and MIT as well as its tech giants like Google and Facebook and the Bay Area have become epicenters of innovation and wealth creation. The left predicted in 2008, incorrectly, that the over-hyped financial problem would usher in a post-America era. The exact opposite happened. As evidenced by historically low treasury yields, a perpetually rising stock market that has vastly outperformed its peers, a strong dollar, surging Bay Area real estate, tech companies and Ivy League institutions being inundated with foreign applicants, America has, more than ever before, become the center of the universe and envy of the world all over.

This is the greatest wealth boom in the history of the world, and it will only continue. Snapchat will soon be valued at $15-20 billion, Uber at $30-50 billion, Pinterest at $15 billion, Tinder at $10 billion, AirBNB at $40 billion, and so on… Just two or three of these companies will be equal to one Disney or a McDonald’s, but still not a bubble. The left said Facebook was a bubble at $15 billion back in 2007. Now it’s worth $190 billion. These companies each fill a niche, have no viable competition, and have huge growth. Just like there is only one Palo Alto or one Stanford, there is only one company that does what Snapchat or Facebook does. Other have tried, but they cannot gain traction. The moat is too wide, and unlike the demise of Myspace, teens aren’t getting ‘burned out’, as so many pundits predicted, incorrectly, would happen to Facebook and Instagram. Speaking of Instagram, now it’s obvious, in retrospect, that Facebook’s acquisition of Instagram for $1 billion was a steal instead of being a sign of bubble. Instagram would be another $10 billion company had they not sold out too soon. This is is the state of bay Area capitalism – a hyper meritocracy, where anyone, regardless of age, race or socioeconomic background can become obscenely wealthy in a very short period of time – by virtue of intelligence, hard work, and a little luck. You can code an app and be a billionaire in a couple years or invest in a web 2.0 start-up and increase you money ten-fold in just a year, as investors in Uber and Spanchat have done. Or buy some already expensive Bay Area real estate and watch it become even more expensive, as the left calls it a bubble and the usual blah blah blah.

Constructing a ‘Madoff’ Portfolio

As a diversion from the usual politics, using a linear combination of ETFs I was able to construct a ‘Madoff-like’ portfolio, without the whole fraud aspect to it. Here’s what it looks like versus the S&P 500:

As a rule, I only used liquid, long-only ETFs and no re-balancing.

Here’s Madoff’s actual portfolio just before the implosion:

It returns on average 5% a year with a max draw-down of 2.77% versus 19% for the S&P 500. The advantage of this is it can be leveraged very easily with as little as $15000-20,000 to control up to $300,000 in stock. A max draw-down of 3% means a maximum loss of $9,000 with the hypothetical portfolio.

Here’s an even better one with a higher Sharpe ratio, but it’s slightly harder to implement, because it requires more ETFs to construct:

The Good News: Washington Is Giving Up on Everything

Washington Is Giving Up on Everything

A can’t-do spirit is settling over Congress and President Obama, writes a leading political handicapper.

I, for one, applaud the do-nothing congress for not doing too much. Let Wall St. self-regulate. The private sector, with the help of the fed, has created more wealth in the past five years than anything Obama has done. The proliferation of defense spending that began at the turn of the last decade also creates value, but that was under Bush. Healthcare an hospital stocks going nuts due to the aging baby boomer population. Don’t expect Obamacare to make costs go down or, in the long run, to put a dent in the number of uninsured. We’re in an era of inflation that technically isn’t called inflation such as healthcare, education, beef, gasoline, rent, travel, and so on. Yet, in agreement with my earlier predictions, those 30-year yields just refuse to budge even as the services millions of people rely on keep going up with no end in sight.

Facebook reports blowout earnings and the stock closes at $75 – another historic high and 150% higher than when I recommended it back in 2012. Zillow and Trulia surge 20% each on a proposed merger. Zillow is 300% higher than it’s IPO. So much for that ‘obvious’ web 2.0 bubble that the libs insisted would burst, going back as far as 2007 or so. They the left can keep calling stocks, treasuries, real estate or tech valuations a bubble until they are blue in the face, like the sore losers that they are. Oh, and let’s not forget that the valuations of Snapchat, Pinterest, AirBNB, Uber and other fast growing web 2.0 apps also gained paper value today, thanks to the huge Facebook earnings. Bay Area home prices keep going to the moon. Lots of potholes on the roads and ppl in low paying jobs or unemployed juxtaposed with Silicon Valley prosperity that would make kings jealous.

Not much going on in this slow news cycle. The left, starved for crisis, is looking for any indicators, however small, for the next economic and stock market meltdown. It was supposed to be Putin, but that came up empty-handed. Or the negative GDP reading a few weeks ago, which to the disappointment of the left, was a dud. The anti-establishment left wants the college bubble to burst, but that refuses to happen, too. Just like biology is immutable, so are these trends and this is why they refuse to terminate, even when every liberal pundit says they should.

The good news is as a nation, we’re becoming smarter and more informed than ever, unlike as recently as a decade ago when laypeople didn’t care about economics. We’re still in a STEM economic recovery, with individuals as to quote Aaron Clarey with ‘bullshit degrees’ finding themselves unemployed and deep in debt. The bad news, but not really a surprise, is that we’re becoming a nation of whiners and crybabies looking for handouts, seeking crisis, and for someone to blame – be it the fed, Washington, the rich, tech companies, and so on. Sometimes, we need to learn to come to terms with job loss and the inability to find work as being an inconvenient, but necessary part of the evolution of the economy. Many college educated millennial, being more educated in economics and than any previous generation, agree with the Supreme Court decision to make Hobby Lobby exempt from Obamacare. Most men, especially of the neckbeard generation agree that women should pay for their own birth control, instead of corporations.