Zero Beta

Some thoughts on the Fed's two day bender (aka "Mr. Bernanke's Wild Ride"

The last few days will no doubt be included in the Fed's perverted little scrapbook and many investors as well as the wild roller coaster ride saw the market basically cover nearly as much ground as it has moved since the beginning of the year, but essentially remain unchanged.  As I watched the market bounce around like a maniac on a pogo stick, some thoughts and questions came to mind, that I figured I would share.

• Immediately, when today's Term Auction Facility was announced I thought, "Why wasn't this announced yesterday?"
• Extending the the puzzlement above, I wonder if anyone was privy to this information, allowing for a VERY profitable two days of trading - much more profitable than the futures/spot "reporting error" that occured back in February.
  
• Many people believe this was a response to the  market's reaction to the disappointing 25bp, but somehow I don't think Bernanke recieved a ton of angry phone calls from Wall Street, Hank, and Dubya, and said "Don't worry, I'll whip something up by tomorrow morning"
• Rather I think this was the equivalent of a fire extinguisher they developed, put behind glass with a sign saying, "In Case of Emergency, Print Money" and in this case they were forced to use it. 
• Didn't a Fed cronie hint that the Fed was toying with an idea of using an alternate method of providing liquidity to the markets and would discuss it at its December meeting? (Can't find any links to articles but feel free to share. 
• Is its action today just a way in which the Fed will try to make its 100bps of rate cuts a reality.  Since its old tricks have failed to be effective
• Does anyone find an issue with the fact that this process is completely opaque, subject to expansion, and could further add moral hazard to the system?
• Is this essentially telling companies such as Citi and Bear Stearns if you need money don't go to Abu Dhabi or China - "If you need money then you come to me!" and doesn't think create an image of Pauly from Goodfellas in your head.
• Does this have anything to do with the fact that the SIV bailout plan is falling apart?
• Does the collusion with other countries show just how weak the dollar is (along with our credibility).  We have moved from telling other nations "It's our currency but your problem" to "them now telling us, "There is a real problem with your currency. 
• Does this $40 billion injection enable Wall Street to pay year end bonuses, and is it really politically wise under these conditions to pay a bonus this year.
• Is this why they all downgraded each other today - so as not to be seen as benefiting from such greed?
• How odd was the Citi CEO press release two minutes before the Fed?
• Did the structure of this announcement allow dollar holders abroad to sell dollars into yesterday's rally, before today's announcement put the greenback back in its place?
• Who or what sold off furiously around 3 pm today, as the major indices dropped 50 bps in a few minutes?
• Is this Term Auction Facility the equivalent of issuing the major banks and brokers a Federal Reserve equivalent of the American Express Black Card?
• How many more bailouts can be rolled out before people really start to get pissed off and turn off "Dancing with Stars" to scrutinize all these undertakings?

A Note on Inflation without Inflation

 

Bias Disclaimer: Please refer to the post on my biases if you wish to read this post without having to guess where I am coming from.

I apologize for the lack of posts.  These next two weeks I have a lot of studying to do so I may not be able to get that much out.  I promise after June 2^nd things will change.

Last week we got some more CPI data and once again inflation increased almost 50 bps.  Some will say CPI with food and energy and is unimportant – the real number, 20 bps is very modest.  I will argue that its not THAT modest.  Annualizing at about 4.8% puts our real interest rates somewhere around 0.  If you add in food and energy we have negative real interest rates – which have existed for quite some time now.  Fixed income investors are not really being paid to invest in Treasury Bonds – which are essentially at this point the equivalent of putting cash under your mattress with any spread the difference between the risk that your house will be robbed or that the Government will default. 

CPI with food and energy is very important.  The reason why Bernanke says the inclusion of food and gas prices is unimportant is that it is irrelevant to him in his daily role of whatever the hell he does.  In my day to day life the price of snow globes is meaningless, but may not be the case with snow globe enthusiasts – such as Corbin Bernsen.  Since these price changes apparently come from outside forces, he as Head of the Fed believes he should only focus on containing the inflation that he can contain.  The market has taken this to mean that food and gas is meaningless, and their misunderstanding of this concept is dangerous.  Separating the CPI into these two numbers is the equivalent of taking a company's earnings and separating it into net income and net income (excluding extraordinary items and one time charges).  Investors would not buy Company XYZ if 4 quarters running, their earnings had the similar one time charges.  An analyst following the stock would (hopefully) pick up on this and bring it to the attention issuing a sell rating because earnings quality has diminished if not earnings in general.

I will contend that at times this number can be unimportant and difficult to analyze, if oil prices spike during a hurricane season and America has to pay more at the pump for a few months the economic significance will be minor.  But when this happens continuously it becomes important – and more so to the stock market no matter whether Ben likes it or not.  Since it is somewhat difficult to address the sustainability, of this type of inflation let's examine and increase in gas and food prices from the standpoint of a tax. 

Since food and gas are necessary to the lives of just about everyone, they income inelastic – meaning that a change in income will not affect the quantity demanded.  Food and gas consumption as a percentage of income decreases as income gets larger.  There is only so much gas you can shove down your car and food down your throat, so those who have higher incomes will bear less of the incidence of such a price increase than those who earn less.   In tax terms this is a regressive income tax.  A regressive tax's rate decreases as one's income increases.  The income tax we pay the federal government is the opposite – the tax rate increases alongside income. 

The real problem with such a tax is that it is inconspicuous and difficult to plan for is that it is very painful for those living paycheck to paycheck. Regular income taxes are not changed often so when budgeting and planning, people can take the net pay number from their paystub and count on buying what they want to buy.  If most people are anything like me, they spend a majority of their paycheck within the first few days – usually paying off bills.   Items such as gas and food are bought weekly if not daily and the increases seen in them are not as obvious.   If every morning I eat get a bagel and coffee, and the price has risen from $2.00 to 2.25, my breakfast expenses have risen 12.5%.  In my mind (if I even notice…and I do), it only went up a measly quarter which I seem to find in my pockets all the time.  In addition if I have a 10 gallon tank in my car that I have to fill up twice a week when gas rises from $2.50 to $2.75 per gallon my weekly gas expense jumps 10% from $50 to $55.   On a monthly basis we are looking at around $100/month increase in expenses (with very conservative estimates).  A family of four with three other hungry mouths will see these numbers add up quite quickly, but will they really see it?   

Food and energy are consumed on the go – meaning they are not bought in bulk at the beginning of the month.  They usually are not bought in bulk at the beginning of the month but bought continuously throughout – in small quantities.  Since the quantities are small the price differentials are not noticed as much.  Even for a housewife who does the shopping for a family of four. A 10% increase in food would not be much to raise an eyebrow on a grocery bill that is usually $100 and is now $110.  Perhaps some items weren't on sale this week or maybe it was because she bought different dish detergent or what about those ice pops that the kids asked for.  No matter what – there will always be something to explain this away as most people are not obsessed with inflation.   

As the month wears and meals and visits to the pumps continue, people begin to notice that they may be tight for this month.  The same housewife who went shopping at the grocery store now has to buy her son soccer cleats and her daughter a new pair of jeans.  Since she is not aware quite why she is so tight, she believes that this is a "one time event" and puts these items on the charge card, so that they can live for the next week and a half.  When the next week's paycheck comes, she pays down the debt along with her other bills and goes along her business until she is forced to do the same thing yet again at the end of the month except now she borrows more.  The cycle more or less continues. 

The biggest problem with a regressive tax such as this is that if it were really a normal income tax, people for the most part would see that it comes straight off the top and after a few months plan and budget it for it.  I can tell you very accurately what my paycheck is going to be next month but will probably be wildly off on what I will spend on food.  The randomness and stealth nature that surrounds such a tax causes people to get stuck at the end of the month forcing them to borrow to buy things they may want or need such as more food and energy.  Complicating things is the regressive nature of such a tax.  If the housewife was married to a husband who was earning more and the family was not living paycheck to paycheck, the extra money spent on food and gas was just taken away from their usual amount of money they save or invest each month as opposed to being borrowed at high interest rates (usually credit cards).  So on one hand you have one group of people paying an extra 10 – 15% in credit card interest due to a 10% increase in fuel and food, and another not making a small 5-7% on the same dollar increase.  So, for an equal $500 dollar rise in expenses the first family feels it as if it were $550 and the second family feels it as a $525 rise.  As things start to compound and interest expense becomes greater this can quickly get out of hand. 

So inflation in food and energy is a problem – a big one at that.  Just because the actual price of other baskets of goods have not risen as much, the average consumer has seen them rise dramatically as a percentage of their income left after buying items necessary for survival.  In fact, if Energy and Food continues to rise, the demand drop on the less elastic goods could cause prices to fall substantially.  Therefore, when CPI minus food and energy didn't increase as much as expected and the prices of food and energy increased more than expected – there is a point at which the this spread may indicate a lower level of consumption – which is not a great economic sign.  So, just because Bernanke doesn't pay attention to that number, and the consumer doesn't fully comprehend the number, does not mean the market should be exempt from the same logic. 

-β

 

A Note on Biases

Lately I have been thinking a lot of Media and biases.  Therefore, before I post again, I want to digress a moment on biases.  I think the biggest problem in our Media is the lack in disclosure of biases.  This causes a dangerous polarization of our citizens into two extreme groups: 1) the cynics who see the bias but resent that someone is blowing smoke in their face – further fueling their cynicism. 2) blanket believers who don't look for biases and are in turn "brainwashed" by those who wish not to disclose them.  I believe the biggest idea or development that has emerged from the advent of Google is the classification of information as an Asset.  Media is simply information and its higher orders – knowledge and wisdom.  As information begins to be recognized as an asset, Media Professionals and their Outlets become less like Reporters and more like Portfolio Managers – with the "fiduciary" responsibility of managing their "clients" (or readers/subscribers/viewers/listeners) informational assets.  Financial Professionals should know that any conflict of interest should be disclosed when acting as a fiduciary, therefore any media outlet should disclose biases beforehand so that "investors" are neither tricked nor disenfranchised – enabling a "market" for information to exist. 

As a realist, I know that it is impossible to eliminate biases from Media – especially blogs.  I believe bias is very dangerous in New Media (financial or otherwise) because it always exists and can be assigned an intangible but real dollar value.  The idea of personalization of one's informational sources inherent to New Media allows biases to thrive and grow.  A blog or website that vows to go against Media Bias introduces a new one.  This doesn't help matters but only makes them worse. Even the blogger who is simply posting news stories transmits an inherent survivorship bias in what stories get chosen (See Drudge Report and Huffington Post).  Bloggers have the advantage of simultaneously being their own editor and self employed (in most cases), therefore they have a much greater opportunity to break down the wall of biases than "old" media journalists.   I have already disclosed that I am a 24 year old – which I hope does not take anything away from my ideas because I believe they are much more sophisticated than some people twice or even thrice my age, and a voice for my generation is a relatively scarce asset.   Instead I disclose my age to reveal the biases that come with that number and are unavoidable – naivety, lack of experience, and a tendency towards idealism. 

That being said I plan on disclosing any biases I believe I may have before my posts in hopes of more widespread acceptance of this idea.  Although it may take something away from the "journalistic experience" – I believe the rampant existence of biases along with the widespread ability to choose one's source for information threatens Media and Society as we know it.  Although the disclaimer on a pack of cigarettes may take something away from the smoker who has to glance at it every time he/she lights up – society as a whole is much healthier and now thinks about what they inhale.  I hope that my choice to disclose biases up front in a blatant manor will be accepted more widely and have similar effects.

That being said, I will list what I believe to be my informational biases and COI's below. In addition before any future post I will include a reference to this post and any other biases that I feel are specific to that discussion – in hopes that other "Informational Asset Managers" (aka bloggers, reporters, newspapers, television stations, magazines, data sources, publishers, etc.) follow suit.  If you ever read this blog I encourage you to read all of these things.  It may seem like an arbitrary list and some items may appear to be unimportant or superfluous but I assure you that I took great care in the scrutiny of myself in order to make certain that any bias that may come through in my work is fully disclosed.

 

Biases inherent to my posts

1. I am a 24 year old male with less than 3 years in finance.  I have primarily witnessed a historic bull market and grew up in the time of MTV, the internet, hip-hop, Wal-mart, and "bling".   
2. At the core, I am very bearish on the Economy right now and on the future of this country as a whole.  I believe that demographics was the cause of our prosperity but people in general don't want to believe that something so great but at the same time uncontrollable explains this phenomenon.  Instead the existential desire to find meaning causes misplaced ideas and money.   
3. I work in Private Wealth Management managing client's assets. I do not believe my blog is a conflict of interest as I am not widely read enough nor is there a disparity from what I write here and what I tell clients (for the most part).  Any ideas that I have are not a recommendation for investment but rather an idea that I have on the economy and markets.  I understand the implications of this fact but I dislike the fact that the financial industry is legislated based on what a few "bad eggs" have done.  In the end of the day it hurts the investor as he or she can no longer be told what is or isn't true.  Instead disclaimers, broad language, and lack of ability to convey ideas skew and distort the important facts that they must receive.
4.   I believe in conservative asset allocation and focus on managing risk over return.  I believe that passive management should be coupled with active management and believe the most important decision an investor could make is their percentage allocation of equity to fixed income – the rest creates limited alpha for your client and does more to satisfy their "emotional" financial needs – which still are important.  A client who is happy that you put him in an interesting or new investment for part of his/her equity allocation (and has something to talk about with his/her friends) is much less likely to question his/her actual allocation to equity – which is much more important and will do them better over time.  Although for most individuals an indexed portfolio is the best and most cost efficient way to ensure they meet their financial goals – money is a very emotional object and active allocation is at times necessary to prevent boredom and the subsequent bad decisions that it causes the common investor to make.  I believe someone is much more likely to move the majority of their money from a conservative indexed portfolio to a speculative fund or company if they don't have a new idea or something to talk about on the golf course or the cocktail party.  I would much rather choose that "risk' than have them blindly throw money in an emotional "trade" taking the chance that they do not realize their intended return to the mean. 
5. I went to the University of North Carolina at Chapel Hill and majored in Economics and minored in Mathematical Decision Sciences.  I did not go through the Undergraduate Business program because I was not accepted.  I take it as a blessing as I have since come to believe that undergraduate Business Programs are nothing less than cookie-cutter Vocational School where nothing important is actually learned.  It is causing homogeneity of beliefs and ideas in the business community and the ignorance of sciences and humanities such as Mathematics, Psychology, Economics, History, and Philosophy.  You may interpret this as spite but I urge you not to employ that skepticism in this instance. I disclose this information as I am very skeptical of the education received by my generation – and this is where the skepticism derives from.
6. I come from a middle class family and a middle class town 50 miles north of NY.  I went to a public school and graduated from a class of about 500.  I played sports, enjoyed an active social life, and did well academically.  I hung out with the "popular" kids on the weekends and had classes with many of the "nerds" (I use this term with a hint of sarcasm).  I disclose this only because I believe it lends light on some of my views on my generation and society – not to brag or to show that I was some sort of jack-of-all trades. 
7. I come from a very liberal background.  My parents are both educators and staunch Democrats.  I am very middle of the road in my political beliefs.  I would consider myself a Libertarian and believe in free markets and small government.  I am very dissatisfied with our current political situation which includes the Bush Administration and the majority of the Republican and Democratic parties.   I believe that our political system is broken and our leaders are corrupt, incompetent, and puppets to their corporate and wealth donors on hand and their extremist voting bases on the other hand.  Please do not take any criticism of Bush or the Administration as a liberal bias but as this type of political bias.  Remember correlation does not mean causation.
8. I grew up without a religion.  My mother was Jewish and my father Catholic.  I did not go to church and quite frankly do not like organized religion at all.  I could care less what people believe in as long as I am not forced politically, socially, or otherwise to go along with them.  I would not want to force anyone to live my empty life devoid of Faith and God and in turn do not want to be forced to live someone else's life filled with what I see as Blind Faith and Ignorance.  I do not mean to offend anyone by this admission but rather to allow them to understand my ideas more clearly and without obscuring fact for belief.
9. Beginning college in 2001, I was forced with the problem of what I thought to be my college savings gone.  I do not blame my parents for this as I know that it happens.  Instead I have set out to educate those who may make the same mistake and encourage wise financial planning.  You can say this has left me very biased towards avoiding bubbles – admittedly probably too biased.
10. That lack of college savings along with some past foolish financial decisions has left me with more debt than I would like to have at this age.  Although I have a good job that pays well – the amount of debt I have sickens me and this bias will be evident in any posts on credit.  Take this however you wish.  I know my mistakes are not universal but also understand debt more than people who have none.
11. I have a tendency to believe that I am smarter than other people and have everything and everyone figured out. It is a curse of intelligence and an awful way to live.  I know that this is something I can not change and rather than live in a state of denial, I confront the fault.  Sometimes I am correct, most times I am not.  Instead of coming off pretentious and condescending I choose to disclose this instead of having it bleed through my ideas and be criticized for it.  I believe that most people of high intelligence have this problem in one form or another, but without recognizing it and working around it they are never fully able to realize their full potential. 
12. I believe markets are largely inefficient but that our lack of understanding of what efficiency is limits our ability to capitalize.  The lucky who take a stab and succeed in turn believe that their success is indicative of their understanding.  Without understanding what efficiency is or equilibria exist any attempt to capitalize on them is a random crapshoot where the winners are deemed experts.  It both as abstract and, in turn, useless a term as heaven, hell, love, hate, freedom, or hope.  I believe efficiency is defined post-facto by those who believe they uncovered it's opposite "inefficiency" and defining something by something it is not proves utterly useless.  Markets are always inefficient. 
13. I believe that little real value can be obtained through P/E ratios, ROE, Gordon Growth Models, and other financial measures on their own.  The only value is in the market's perceived reaction to some value but a stock is not "cheap" because it is trading at 7x earnings, it is cheap because you believe there will be increased demand and a higher price for that asset later – period.  Whether the P/E ratio justifies this is up for debate.  I would argue that looking at its business, future market conditions, economic outlook, and growth opportunities are much more important.  Since these ideas are difficult to quantify we rely on such numbers as a crutch.  Since we have no idea what will happen in the future, I would much rather invest in something that is logical than lean on estimated numbers in an imperfect formula or model to reaffirm my beliefs and add to my bias. 
14. I chose to write this blog primarily as an outlet for my thoughts and my desire to convey ideas to others.  I would be remiss if I failed to also recognize my opportunistic and egotistic to be noticed.  I am a young adult beginning a career in Finance.  I believe that I know much more and have greater ambition and love of Finance than many of my colleagues who have better jobs that I would kill for.  Since I chose not to go the B-school route and graduated with a less than stellar GPA I have been forced to work my way up.  Since I don't have the pedigree that is necessary for what I really want to be doing, I believe I must have something that shows not only my mind but my dedication, sophistication, and general interest in this subject.  Although this is primarily academic in nature to fail to disclose my opportunistic intentions would be negligent and wrong.

-β

Hi, My Name is America and I am Addicted to Debt…

Mastercard's EPS:                 $1.57

 

First Call Estimate:                $1.14

 

Market Reaction:                $129.10 + 14.25

 

America's 25 Year Debt Bender:        Priceless

 

Wednesday, Mastercard was the talk to the street as it blew away earnings estimates with a 70% increase in profits. The market stopped to applaud as it continued its drunken ascent. I believe that Mastercard bulls are justified in their bullishness. However, I don't think Mastercard's success can coexist with the rest of the market in the current lending environment we face. As buried in that earnings report are signs of a global Debt-addiction quickly spiraling out of control.

Whether you believe in the materiality of sub-prime lending's effects on the Economy or not, consumer lending has and will continue to tighten up. Congress is going to investigate the practice and most people will not want to be even associated with a sub-prime loan. Well, nobody except the credit card companies (more on that later). Although Mastercard benefitted greatly from global growth (as many of our companies have), its U.S. purchasing volume still increased nearly 8%. After hearing the earnings call on Bloomberg, I was struck by a comment by one of the commentators when she said, "This confuses me. Where is this borrowing coming from?" Mastercard and its Homeboys – The Plastic Pushers. Let's look at the figures. I have graphed data obtained from the latest consumer credit report of Revolving Debt and Real Estate Debt Outstanding:

Source: Consumer Credit Report Data

It was quite difficult to find good data to state my case so bear with me (It's funny how the data that portrays reality is either discontinued or updated infrequently – probably just a coincidence). The actual credit card data was not adjusted for seasonality, and rather than tinker with data I put this up. If anyone has any better or more accurate data they would like to post either supports or refutes my case be my guest. I'm not that big on Economic Data anyways ever since meeting with someone who once put it together. He said they basically would "make up" data in order to hit a deadline – similar to my actions to dealing with Physics labs in High School. Moving on - although Revolving Debt includes loans other than credit card debt – credit card debt is revolving. I know this is poor logic but revolving loans are usually unsecuritized, therefore should command a higher rate. We can see this relationship pretty much throughout the data – with lower cost readily available debt for the most part takes up most increases in debt use. Clearly, real estate debt took a nose dive in the first quarter, but revolving debt didn't come along for the ride. This is because the American Consumer is addicted to debt and its effect – Consumption. With the Government cracking down on sup-prime mortgage loans (called "Brick" on the streets) and their dealers feeling the heat – what is a Consumer left to do but try to go score some unsecured debt, aka "Liquid Plastic". Since the consumer has inflated the value of his/her securities (i.e. their house – not to mention the stock market and retirement assets), her or she must move on to the harder stuff – the Liquid Plastic. Sub-prime loans, or "Brick" can be thought of as the "Gateway Debt" and as we all learned in health class – if not used recreationally, this kind of debt is much more expensive, dangerous and will eventually screw your life up. Let's see how "Liquid Plastic" is a much more expensive Consumption fix than "Brick". Let the extended metaphor begin…

Below I have listed quarterly lending terms:

Source: Survey Terms of Business Lending

This chart is straightforward, Liquid Plastic is much more expensive than any secured debt – which closer to the New Car Loans (or "Speed"). Below I have listed an additional table which portrays how Brick can be so addictive.

Source: FreeLunch.com

 

This chart shows the Prime Rate plotted against the 30 Year Mortgage Rate. It basically shows the economics behind a Brick addiction, aka SUB-prime loans (see 2005 onward). This data was updated for the 1^st Quarter and from here on out the 30 year rate is worthless to most consumers. They are more likely to pay a rates of Prime or higher if they want some Brick, but they've already used too much of their home equity on that anyways. If you are an average consumer basically you can either finance your house or get a personal loan or credit card. Personal loans will be offered at or above Prime because they are unsecuritized and require a higher rate of return. Therefore, at this point people are and will continue borrow at a higher cost than they have in the past. Since consumption has remained strong and Real Wages have been somewhat stagnant, consumers are now starting to drain their personal equity at high costs to Consume.

This data illustrates how addicted the Consumer is to Brick and why Liquid Plastic is going to be dangerous. With a modest job recovery offset by inflation there has been stagnant wage growth. Falling home prices add on to this along with abysmal savings rates – yet Consumer Confidence remains high. How can this be so? Well, maybe the Consumer is "high" on Consumption.

The availability of Brick, Speed, and Plastic has severely altered has severely screwed up collective consumer and market psyche. Benjamin Franklin wrote, "The definition of mental Insanity is doing the same thing over and over and expecting different results." We did our fair share of Brick in the '80's and saw some of the effects, after a few years of trying to stay clean – we experimented with Liquid Plastic in the 1990's as well as Corporate Brick and saw the effects again. A tragedy struck us in 2001, however and it really hit home. Unable to deal with our emotions we decided to drown ourselves in debt – chasing another Consumption Buzz and soon enough got heavy into Brick, Speed, and now appear to be moving to Liquid Plastic. Let's examine how this progression has occurred in more detail. (From here on out I will use the collective "we" to describe Debt-addicts – because we all are).

A major side effect to debt-abuse is inflation. Our experiments with Brick in the 1980's caused housing inflation, in the 1990's liquid plastic and Corporate Brick helped add to stock market inflation. Well, surprise surprise…it turns out that Over-Consumption can lead to inflation. We not see this, instead we lump the two together because of the positive response mechanism it brings. As we see our assets inflating with their use of Debt we believe this is good – and at first it is. However when food and energy prices start to go up because of using Speed to Consume Hummers and Tahoe's, we need more debt to get the same buzz. After Brick helps us get that buzz back from buying a McMansion or a beach house – they soon find ourselves unable to get the buzz from that either. We believe we need more debt to get out and fellow Brick-heads shout on CNBC yelling at the Fed to relax some of the regulations so that we can get more cheap Brick. The Fed, in attempts to curb an epidemic stands ground – at least it seems. While appearing to fight a war on Debt behind the scenes, a covert operation is going on in the background to try to make Brick, Speed, and Liquid Plastic more readily available on the streets - using the tax revenues the added Consumption brings to fund some of its less than popular missions (much like the CIA has rumored to have done in the past and continues to do with heroin, cocaine, and other common street drugs). Debt addicts start to become unstable and desperate as they hear that their Brick supplies are drying up and begin to go on a binge of consumption and inflation hardly awakening from its Debt-induced stupor. At this point Brick, Speed, and Liquid Plastic have spread overseas and are beginning to develop the same collective psyche's – altering correlations and relationships that were once the norm, as Barry Ritholtz points out. Enter Mastercard.

When I think of credit card companies, 70% EPS growth isn't really something to expect unless you have a world of Debt-addicts – which is what he have. Mastercard knows this and like other companies who produce addictive products (Phillip Morris, Wynn, MGM, Merck), they have a strong lobby and have already insured that they can reel in as many Addicts as possible with the Consumer Credit Card Protection Act of 2005. Similar to a bartender or casino who reels addicts in with freebies or "first one's on the house" type deals, this act allows companies to offer teaser rates and other perks and makes it much harder for them to leave eliminating Universal Default – even when they have had too much.

So yes, Mastercard's earnings were good. I have no reason to believe they won't continue to improve. With a nation, moreover, a world filled with "debt-heads" and by securing themselves as the lender of last resort, they have probably booked those gains for another year. But, debt-heads will soon learn that their consumption of Consumption through Debt is killing them. The other thousands of companies and their shareholders will feel the sting as well – as they are also debt-heads and consume through the income they generate from other debt-head's Consumption. In Economics it is called the Multiplier and is directly related to the Marginal Propensity to Consume. Hopefully, the future won't be so bleak, but Mastercard's latest quarter and the tape would say otherwise.

-β

Caveat Empt...or Maybe Not

Today at about 8:30 am, my eyes were glued to the TV as if it were the Super Bowl, Sopranos finale (although not as much since Season 2), World Series, NCAA Finals, all rolled into one.  The irrational exuberance of the past few weeks, has left me confused, frustrated, and downright scared.  I know the economy and the market are two different entities, but I figured a economic release like GDP would be a number that would wake up the market to things to come.  So, when GDP came in at 1.3% with 4% inflation, I thought this may be the day.  Slower growth AND inflation?  Isn't this the Anti-Goldilocks?  Isn't this what Ben Bernanke would think as the ultimate Armageddon?  Apparently not. 

As both the indexes were making new highs mid-afternoon, I was thinking:  Who is out there buying at this moment?  Who could sit back and say, "Wow that report foretells great things to come in the next few months."  I don't care if you are bearish, bullish, dovish, hawkish, cattish, doggish, or goldfishish - what causes someone to create a new long position on a day like today?  Now I have my opinions and I don't claim to be right that we are heading for something awful, but I will admit that I am so utterly confused that I don't want to take the risk to find out.  It's like hiking in the woods in the summer.  If I see something that could potentially be poison ivy, I assume that it is and stay the hell away.  This led me to think, who was buying today?  Who saw something that could be poison ivy and and rubbed it all over their skin like it was aloe leaves?  And if nobody in particular than WHY?

Suspects

1.  Joey Odd-Lot - The Odd Lot investor may have been getting into the market today.  He may have just gotten his tax-return (as I did today), or maybe he put his Christmas bonus to use. Sources of cash aside, let's be honest here Joey Odd-Lot isn't that familiar with some of the market leaders the past few years.  Names like Google, Amazon, Microsoft, Apple, and Texas Instruments, are much likelier targets for his investment dollar.  So when he starts to see them move coupled with the Dow 13,000, emotions cause  him to take Cramer's advice and Buy.  I hope this isn't the case, as every day I meet someone who bought into the market in 1999 during the last push and are still hurting. 

2.  Neo-Contrarians - The term "contrarian" is thrown around all too loosely these days.  American Culture is obsessed with the Cowboy, so when investors see some of the success of the best Contrarian Investors, they start to put on their cowboy hat.   This has led to the emergence of the Neo-Contrarian  - the Contrarian investor who goes against everything even his own logic.  It is Literal Contrarianism and would very reasonable explain the market movements the past few weeks in such a low-volume environment.  The other day I sat back and and said to myself, "What would be a contrarian play on this market at the moment?"  One can argue both bullish or bearish.  In the recent low volume sessions - this Contrarian school of thought could move the market against reality.

3. Nobody - There was no real discernible buyer, just some light trading on a rainy Friday, when everyone was tired from a busy week. The phones in my office barely rung - all week actually seemed quiet.  Those who were bearish have gotten out, those who were bullish are already in and most traders just didn't feel like tackling the idea of slowing growth and rising inflation today (I hear ya, me neither). 

4. Black-boxes - I am starting to put together a post on black-box investing and its implications so I will be brief.  We have no idea what these Nuclear Physicists given billions of dollars are coding in Midtown and Connecticut - and to be quite honest we may not want nor even comprehend it.  Just as Gary Kasparov had a hard time understanding Deep Blue, we may have a hard time understanding a slew of them with a major bankroll.  My computer is not logical when it starts shutting down with 5 minutes of battery life left and me still typing something up, but that's what it is programmed to do.  We need to understand this.      

Welcome

Welcome to Zero Beta.  This will be a place for thoughts, ideas, and discussions that do not move with the overall market.  Much like an stock's beta is determined by it's correlation to the broad market, this site's ideas are determined by their correlation to the mainstream media.  Hopefully this page will provide visitors with a diversifier for their portfolio of knowledge and a realization of some form of alpha.