Would you let this man manage your money? Victor Niederhoffer edition!

This profile of Victor Niederhoffer in the New Yorker is pretty entertaining. Clearly, a fascinating guy who could star in an Axe Shower Gel or Dos XX commercial.

But it makes you wonder who'd be crazy enough to give this gentleman a dime to manage. He doesn't have anything resembling a minimally coherent investment strategy, placing large, exposed, short-term bets on whatever catches his fancy.

I guess they do it just to have the privilege of hanging around with him. (Not as crazy as it sounds if you have enough money).

Anyway, Niederhoffer --whose funds have blown up twice now--is a walking "famous last words" factory. He reels out three of them consecutively:

“The market was not as liquid as I anticipated,” he said. “The movements in volatility were greater than I had anticipated. We were prepared for many different contingencies, but this kind of one we were not prepared for.”

The construction employment puzzle, redux

Unbeknownst to me, during my summer break many bloggers commented on the construction employment puzzle (see yesterday's post). Brief recap: housing construction has, by all measures, fallen more than 40% from peak while residential construction employment has barelly budged.

Here's Nouriel Roubini's take and Jim Hamilton's is here. The WSJ's Economics Blog also has good info on this (see here and here).

Severl months onwards, the original mystery has only deepened and no one has provided a convincing answer.

I will say that the argument that states that employment hasn't fallen that much because the workers fired so far have been off-the-books illegals is nonsense. Construction employment rose sharply over 2001/2006 tracking housing construction and it should follow it on its way down.

Also take into account that the underlying force driving housing demand, household formation, is expected to be pretty steady over the next decade (a bit less than 1.5 million annually). Thus, it wouldn't make much sense to argue that residential construction employment registered a permanent jump in employment over the past few years and builders are "hoarding" employees while the storm passes.

Death according to the IRS

What is death? This question has occupied philosphers and religious figues since the dawn of mankind. Jack Bogdanski provedes us with his take on what our beloved tax authorities would define as "separation from life" (hat tip: Argmax):

[T]the Treasury will consider a service provider to be dead if the service provider’s death meets the criteria necessary for a separation from life. ... A service provider separates from life with the service recipient if the service provider has a termination of all mental and bodily functions. However, the service provider’s life is treated as continuing intact while the individual is temporarily unconscious, having an out of body experience, cryogenically frozen or experiencing another bona fide leave of absence from the individual’s conscious state, if the period of such leave does not exceed ten minutes, or if longer, so long as the individual retains a right to regain life and/or reanimation under an applicable contract (with the devil or otherwise) or other arrangement.

If the period of leave exceeds ten minutes and the individual does not retain a right to regain life and/or reanimation under an applicable contract or otherarrangement, the death is deemed to occur on the first minute immediately following such ten-minute period. Notwithstanding the foregoing, where a leave is due to any medically determinable physical or mental impairment that can be expected to result in death, where such impairment causes the service provider to be unable to perform the essential functions of life without mechanical support, a 525,600 minute period of absence may be substituted for such ten minute period. ...

Employment crow for breakfast

My gloomy outlook for today's payroll figures was, to put it charitable, quite misplaced. The 110k jump in September and the upwardly revised August figures certainly demonstrate a surprising degree of resilience. Which, I might add, is welcome news.

Yet....

My skepticism is not totally unfounded. Just take a look at the following graph, which charts residential construction employment and housing starts.



The relative strength of residential construction employment has been downright freakish considering that housing starts have pretty much fallen of a cliff. Yes, there are lags, but housing starts have fallen for a year and a half, while employment has fallen less than 5% from peak levels. Real estate sales and credit employment has held up just as well.

Something does not compute. In any case, Dr. Gloom himself, Nouriel Roubini, argues that the payroll figures hide some underlying weaknesses.

Unemployment Friday

Is poised to be more entertaining than usual, and I don't mean that in a good way. Apparently, the consensus expects payrolls to rise by 100,000. Now, this is not an outlandish possibility, given that unemployment claims have been pretty steady.

Nonetheless, as I argued last month, there's something very, very fishy about the employment numbers. Sooner or later they'll catch up to a rather unpleasant reality. Will it be this month? I don't know, but my hunch (yes, hunch) is that the payroll number will come in flat to slightly negative, like September. The carnage will probably start this quarter.

It'll be interesting to see how it plays out with long term rates and stocks. A flattish figure probably won't cause stocks or rates to fall much, given that most investors know that the balance of risks is tilted to the negative side.

Sexy dividends

In this age of massive stock repurchases, dividends have a distinctly stodgy, old-fashioned air about them, despite the fact that over the past few years they've been taxed at the same rate as capital gains. Yet, according this paper (PDF) published by fund manager Tweedy, Browne Company (ed. man, that's about the stodgiest, WASPiest name I've come accross in a long while).
(Hat tip: Abnormal Returns)

It concludes that there's plenty of evidence that high dividend yield stocks outperform market averages. (Not surprisingly, Tweedy, Browne recently launched a fund with this investmen strategy).

Needless to say, this is interesting. I must confess that I'm rather partial to dividends, as they're the most transparent way to return cash to investors. However, the paper solely emphasizes correlation and does not delve into causation, which is very unsatisfactory.

There are many possible explanations to account for the apparent success of a high dividend yield strategy. Maybe it's a sector effect. That is, perhaps firms in successful sectors happen to pay dividends. Or it could be that dividends are indicative of some positive trait, such as high capital spending discipline. I'm sure the academic literature has many other theories.

Also, the paper neglects to present studies that fail to support this conclusion (such as this this one).

As always, beware of research with deep conflicts of interest, no matter how academic it may look.

What mutual fund flows say about rising stock prices

Given all the negative economic news, many are wondering why stock prices are rising (the S&P 500 has jumped 10% from its August 15th low and has gained 6.3% from its end of July level).

Valuation factors certainly don't seem to justify this rise. After all, many forecasters are slashing U.S. growth forecasts significantly. Goldman Sachs reduced expected 2008 growth from 2.6% to 1.8%. And long term interest rates haven't changed much, although certain credit spreads have eased.

Most likely, stocks are benefiting from asset allocation changes, as noted here. Lower short-term interest rates make money market investments less attractive, while corporate bonds don't look very attractive given the recent turmoil. That leaves stocks as pretty much as the less ugly alternative.

Capital flow data from mutual funds (a less than perfect indicator, but the only current one we've got) backs this up, to a degree. In August, according to AMG Data, equity funds received a net inflow of 5.7 billion, while taxable bond flows saw an outflow of 0.8 billion. However, money market funds saw a staggering inflow of 156 billion.

In the second quarter, taxable bond inflows were twice as big that equity inflows.

More recent weekly data has been seen similar trends, although it seems that taxable funds are attracting some interest again.

No wonder I'm not rich: Grooming edition

As a proud customer of $7 a haircut shops, who spends around 3 seconds a day combing and believes that shoes need shining every couple of weeks (give or take 4 weeks), this article is rather distressing.

Then again, on your death bed would you regret having spent insufficient time grooming?

Nokia's content gamble

Nokia announced yesterday that it was spending a cool 8 billion to acquire Navteq, a provider of digital maps and navigation solutions. This is just part of a shopping spree that has seen the Finnish giant buy a mobile ad firm and a provider of navigation software.

The deal will only make sense if the value added to Nokia's phones and mobile services derived from the Navteq purchase outweigh the value destruction resulting from clients (existing and potential) turning away from Navteq as a Nokia subsidiary. In other words, I doubt that Motorola, Samsung or Sony Ericsson will be very enthusiastic about purchasing Navteq's maps from now on (Gamin, a leading GPS device maker, saw its stock drop sharply after the announcement).

I don't have an answer. However, these hardware/software synergies are often elusive. Just ask Sony how the Columbia Pictures acquisition worked out. But they're not doomed to failure, as the IPod/ITunes combo has shown, although ITunes is more a distribution platform than content per se.

Having said this, there is a wilder, intriguing possibility. Maybe Nokia wants to reinvent itself as a mobile services and software firm, eventually selling its hardware biz. This is not as crazy as it sounds. Competition in the handset market is intense and all firms have seen wild variations in their market share. Services are a higher margin, more stable business. And Nokia has undergone a radical transformation before (it used to be mainly a manufacturer of forest and rubber products).

GM: The free lunch that isn't

Last week, the deal between GM and the UAW to end the strike was hailed in the press almost as a miraculous solution that will save health benefits for current and retired workers and resotre the automaker's competitiveness.

The UAW will manage the health benefits plan as a trust separate from the firm, which won't have to pay those crippling health care contributions from now on. This article by The Economist illustrates the tone followed in much of the coverage.

Sounds like a free lunch? We should know better and so should the press.

To get rid of its health care obligations, GM will have to deposit a lot of money into the VEBA trust. Where will it come from? From its shareholders' pockets, as its contribution will be paid in GM stock (thorough convertible notes).

Would it be any different if the firm made a secondary share offering and kept managing the health plan? Nope, unless I'm missing some sort of fiscal angle. Nor are workers much better off risk-wise, since they will still be tied financially to GM's stock performance.

Actually, the fact that this deal wasn't struck long ago (it's not as if this problem is a recent one) is telling. It's another sad reminder of the low quality of most financial journalism that even The Economist falls for this smoke-and-mirrors trick so easily.