The Skyscraper Index Is Flashing Another Sell Signal

STOP! Before you flood my inbox telling me I’m an idiot to put any faith in such a stupid concept, know that this is just for fun. This is not anything to be relied on for any reason, unless you’re just curious about these things, as I am.

Now that I’ve gotten that out of the way, I find it fascinating that at this point in the business cycle we are once again witnessing a race to build a record-breaking skyscraper. The “Skyscraper Index” is a concept that suggests, “the world’s tallest buildings have risen on the eve of economic downturns.” Statistically speaking it may not be entirely accurate but I find the theme to be very intriguing nonetheless.

Although the index was only created in 1999, this concept dates back to time immemorial. In fact, the tower of babel should probably be the first instance catalogued by the index. In short, humans built a tower to the sky to celebrate their god-like powers (of uniting humanity under one language) and were soundly smote in response. This story can be found in many religions, actually. And ever since there have been many great monuments built during times of economic euphoria as a testament to our greatness. Only shortly thereafter do we realize it was not so much greatness as hubris.

Construction of record-breakers like the Singer Building and the MetLife Building coincided with the panic of 1907. The Empire State Building, the Chrysler Building and 40 Wall Street, were all built or launched just prior to the 1929 stock market crash and subsequent Great Depression. The World Trade Center and the Sears Tower opened just prior to the 1973-74 bear market. Today, we have two New York developers racing to build the tallest residential building in the Northern Hemisphere.

So where are we in the business cycle? I have no idea. Over the course of modern history, however, our economy has suffered a recession every five years or so. The last recession ended June of 2009, just over five years ago. (In and of itself, this does not suggest we are necessarily due for a recession but global growth is clearly slowing and I doubt the US will be entirely immune.) The longest expansions in American history lasted about ten years. It may be fair to say, then, that we are probably closer to the end than the beginning of this particular expansion. And regular readers should know where I believe we are in the financial market cycle.

Late in the economic cycle, then, in the financial capitol of the world, which has benefitted mightily from the greatest money-printing experiment in the history of the world, we have two real estate developers in a heated battle to build a greater testament to their own greatness than the next guy. To my mind, it is the height of financial hubris and a clear example of economic euphoria. And it’s all happening just as luxury apartment sales in New York are starting to slow. All in all, I wouldn’t be surprised to see this index correlate with yet another economic and financial market peak.



Can we please stop bashing forecasters already? There is a small but influential faction of bloggers/financial talking heads out there that love to bash everyone who doesn’t invest exactly along their prescribed investment philosophy which is usually some sort of “passive” methodology, writing off non-conformists to their style as “forecasters” (or, even worse, “active managers”).

First of all, there is no such thing as “passive investing.” Picking an asset allocation is, by definition, active investing. Second, there are problems with passive investing they just don’t want to discuss but back to the topic at hand…

Yes, I agree that most forecasts are almost worthless. Just take a look at how many analysts and market gurus were calling for higher interest rates on the long bond in 2014 (nearly all of them), for example. The only “worth” in these sorts of forecasts was in their contrarian message – buying long-dated treasuries turned out to be a great trade.

But I think it’s absolutely imperative to realize that EVERYTHING is a forecast – even a so-called “passive investment portfolio.”

If you tell me to own a total stock market fund over the next decade (or any index fund, for that matter) you are making a forecast about what sort of return you expect it to generate over that time. Clearly, you wouldn’t tell me to own this sort of fund if you believed that stocks were likely to fall 40% over the coming decade (like the San Fran Fed recently suggested may be a real possibility). No, you believe that I will likely receive a positive return, after inflation, or why take the risk of owning equities at all? It’s a forecast, plain and simple.

At the end of the day, then, trashing forecasters is simply a way of saying that THEIR forecast is not as valuable as YOURS. And if you want to make that argument then I’d like to know WHY you think yours is better rather than just bashing the other guy’s.

Ultimately, to be truly honest with individual investors and our own forecasting ability, we should be telling them that the most successful models suggest that, from current prices, they will likely receive a negative real return over the coming decade from equities. And at 1.75% on the 10-year treasury, they can’t reasonably expect anything more from that asset class. Those are forecasts based purely on facts and statistics and it’s probably the best we can do.

But you can’t play this game without making a forecast. In fact, you can’t even sit out of the game without making one because even that decision is a forecast (that cash is likely to do better than any other asset class). So, with all due respect, please STFU about it; it’s disingenuous. Stop bashing forecasters and instead tell us why you believe YOURS is so much better than anyone else’s.

record player for dad

Greatest Hits 2014

Here are the most popular TFR posts of 2014:

  1. Why Mr. Market Is Still Wrong About Apple
  2. This Is Probably The Second Worst Time In History To Own Stocks
  3. For Everyone Who Thinks Tom DeMark’s 1929 Analog Is A Joke…
  4. How To Time The Market Like Warren Buffett
  5. ATTN: DUMB MONEY – The Smart Money Is Selling To You (Yet Again)
  6. Don’t Believe The Hype Of Rising Interest Rates
  7. The New Wolves Of Wall Street
  8. Seeing The Forest For The Trees
  9. The Creative Destruction Of Wall Street
  10. The Problem With Index Funds

So we were bullish on Apple (up 70%) and bullish on bonds (up 20%) and bearish on stocks (up 15%). Well, two out of three ain’t bad.

Thanks for reading. I wish you a very profitable new year!


Wall Street Is #Winning In Full-Blown Charlie Sheen Fashion

We interrupt this financial blog for an important political message:

First of all, let me say I haven’t read the actual bill but I’m sure none of the folks in the house who voted for it haven’t either. What I do know is that Wall Street’s too-big-to-fail banks have basically held the federal government hostage by inserting their own provision into the latest spending bill that allows the government to avoid shut down.

The banks are essentially saying, ‘let us keep trading what Warren Buffett calls “financial weapons of mass destruction” with an explicit bailout backstop from the FDIC or else… [the government will cease to operate].’ To be clear, this is one way banks are allowed to play the heads I win (and keep all the trading profits), tails you lose game (and American taxpayers pick up the tab) in the markets.

What I find especially disgusting about this is that Citigroup lobbyists, not congress, wrote the entire provision that has been inserted into the spending bill. Then Jamie Dimon, CEO of JP Morgan, made personal calls to key players in the house to ensure the bill would pass.  What’s more, another provision in the bill allows for congresspersons to receive 10X as much money from lobbyists, like those from Citi who wrote the provision, in the future as they do already today.

Now I know this isn’t about ‘did we learn nothing from the financial crisis’? We certainly did learn something and the Dodd Frank reforms, with critical insight and input from Paul Volcker, went a long way toward rectifying the problems. No – this is more about the banks paying people off to put their interests above those of the American people.

And I, for one, am utterly ashamed of our political process at a time like this.

Full Disclosure: I have not been registered Republican or Democrat for over a decade because, in the words of Richard Jeni, it’s just too much fun to, “bitch no matter who wins.” 

Now back to your regularly scheduled market insights.

"It's A Wonderful Life... 2008 Edition"

5 Reasons You Should Avoid Bank Stocks Right Now

Josh Brown, blogger extraordinaire, wrote a post the other day about the breakout in the financials which argued that investors should overweight them. All due respect to Josh (who I think highly of), here’s 5 reasons why I think that’s a bad idea, especially in regards to the bank stocks:

  1. The yield curve has been falling all year and lately more like a brick. Because banks borrow at the short end and lend at the long end this always leads to pressure on profit margins. That’s why, until this year, banks’ share prices were so sensitive to changes in the curve. I don’t know why their share prices haven’t noticed yet this time around but I’m thinking it’s just a delayed reaction:sc-14
  2. The default cycle is about as low it can possibly get and now looks to be turning upwards again. The 40% crash in the price of oil over the past few month raises the real prospect of rising defaults in the energy sector. Canadian and Texas banks are especially vulnerable and their share prices have taken a hit recently. But if there’s one thing we’ve learned from the financial crisis it’s that these things are never isolated. They are all closely and inevitably intertwined.
  3. Everyone and their mom is overweight the banks and has been for quite some time. And if everyone already owns them where’s the incremental demand going to come from to push prices even higher or at least faster than the broader market? That’s a tough question to answer.BAML Allocations Nov 14
  4. What if these breakouts everyone is watching are nothing but a head fakes? False breakouts are one of my favorite chart patterns to trade because they are visual evidence of the crowd become overly euphoric for something. They are a text book example of price getting ahead of fundamentals (exactly where I think the banks are today). The resulting fall back to reality of sentiment usually brings with it a pretty dramatic price reversion, as well. (JPM, C, WFC all look vulnerable to me and BAC is merely working on a double top.)sc-15
  5. They are impossible to value. If the companies themselves can’t even determine how much money they made or lost in a given quarter how can anyone else be expected to? In fact, since FAS-157 was repealed (or “relaxed”) who knows if they’re even solvent? You just can’t possibly “invest” in something you can’t begin to understand (but speculate away; that’s your prerogative).

Ultimately, I think the banks might be the most vulnerable sector to a cyclical downturn and there are plenty of signs (global economic weakness, interest rates, commodities and bond market risk appetites) we could be headed in that direction fairly soon.

Disclosure: I am short financials.


Over A Barrel

A local craft brewer announced recently that they’re being bought out by Anheuser Busch and at first I thought, ‘Cool. Good for those guys.’ But then there was a fairly large customer backlash that got me thinking a bit more about it. Why does everyone get pissed when a company like this “sells out”?

The 10 Barrel guys say they sold because AB gives them opportunities they wouldn’t otherwise have. They obviously get better distribution but they also get access to used brewing equipment and ingredients that are hard to come by in today’s booming craft beer market.

That’s all fine and good but every company goes through these sort of growing pains. Surely Deschutes Brewery and Sam Adams went through these very same problems as they grew from small town craft brewers into two of the largest in the country. They managed to overcome these very same hurdles without selling out.

Ultimately, it’s easier to solve these problems by selling to a buyer like AB or even just to any buyer and then letting them figure it all out. But is it the right thing to do for your brand, for your customers, for the long-term health and vibrancy of your business?

I think the main reason people get pissed is because when a company sells out it sends a clear “show me the money” message. It tells people that profits are your top priority. And in the capitalism capitol of the world you’d think, ‘well, what’s wrong with that?’

What’s wrong is people want their companies to stand for something more than just profits. Look at the companies that have the greatest brand loyalty. Why do people love them so much? Apple, Twitter, Amazon. And smaller companies, like Ben & Jerry’s, In-N-Out Burger, Patagonia. What makes their customers so loyal?

It comes down to the company’s mission. Truly – don’t laugh. I know Twitter got some flack for the their mission statement last week but it’s precisely because the company puts their users first that they remain loyal. It’s simple, really. A company has to stand for something more than just profits for it to engender any sort of loyalty.

Apple has consistently told Wall Street that their top priority is creating amazing products. Period. Profits are an afterthought. Amazon clearly prioritizes their customers over profits. I don’t think they’ve made a dime of profit over the past decade. Ben & Jerry’s and Patagonia are both about doing social good while you sell top quality products. In-N-Out sells fresh, quality burgers at low prices.

Nowhere will you find any of these companies talking about how maximizing profits is their reason for being. Sure, they think about it but it’s not the reason they do what they do. They have a passion that goes totally above and beyond.

And I purposely left out Facebook in the list companies above because I believe they have a sellout problem similar to 10 Barrel. They sold out to Wall Street when they went public. They started prioritizing profits above their users and that’s why a little site like ello, with an inspiring “manifesto,” can come in and begin to steal Facebook’s users (whether they do on a grander scale is yet to be seen). I don’t have the data but I’d be willing to bet almost any amount that ello users are significantly happier with and more loyal to the site than Facebook’s. Because Facebook is a sellout.

So when you sell out, you’re effectively telling your customers that nothing really matters as much to you as making a buck and that’s just a bummer. It’s also why people hate Wall Street. Because Wall Street’s whole reason for being is to make a buck. There is no higher purpose.

Disclosure: I own Apple for myself and for clients. I’m short Facebook for myself and for clients.

UPDATE: My friend Lee notified me that Ben & Jerry’s sold to Unilever back in 2000. Looks like they setup the deal in a way that allowed them to maintain their mission (see: “Ben & Jerry’s to Unilever with Attitude“). Who knows? Maybe 10 Barrel will find a way to do the same.