One of the great things about having children is that one can keep up on the latest trends and expressions. Years ago, I was introduced to the concept of “TMI” or Too Much Information.

The concept of TMI is not limited to preteens trying to out-cool one another, however.

When it comes to financial markets, the desire to collect and analyze information and data is insatiable. In the past, only the largest financial institutions had the resources and capabilities to handle truly massive amounts of data and information. Now, with the internet wired into our PCs and other devices, the average investor can easily swim in the “data sea”. As our RSS Readers and email inboxes clog with unread messages and articles, we should ask two questions: Why is information so important? And, is there such a thing as too much information?

Why is information so important?

One of the first principles of the Efficient Market Hypothesis is that the current market price of an asset equals the discounted value all available information.

While that statement is designed to point out the futility of trying to outperform the market by reading the newspapers, it has spawned an effort by investors to actually try to gather “all available information” in an attempt to more fully understand the asset prices and thereby gain a marketable edge. Naturally, the effort is doomed to some level of failure. Because it is impossible to gather “all” the information, financial firms endeavor to capture a statistically significant amount of information and data. This still represents a massive amount of information and data that must be organized so that analysts and fund managers can use it to make investment decisions. The sum total of this data collection, crunching and processing is generally marketed to the investing public as the insurmountable barrier to entry that can be surmounted by becoming a client. When financial firms talk about what they sell (whether the buzzword is “mindshare”, “intellectual capital” or whatever), the fruits of their information gathering is front and center.

Can we have too much information?

This question is heresy in most corners of the investment world because so much effort goes into the acquisition of information and that in turn is the core of the value proposition offered to clients. It also violates conventional wisdom because more must be better. The more we know about a situation, the better we will be able to address it. The principle certainly holds in most professions. Doctors are constantly seeking to upgrade their knowledge of the latest developments and procedures.

But the question remains: Do your decisions improve with greater amounts of information? Specifically, will your investment performance improve in proportion to the amount of information you acquire?

Surprisingly, the answer is only up to a point. A number of studies have shown that while a certain amount of information is beneficial to decision making, extra information piled on after that point may add or detract from the decision maker’s conviction but the quality of the decision making actually tends to deteriorate.

The reason is tied to the nature of the information in the financial markets. Unlike medical knowledge, financial information does not have as rigid a framework. The old children’s song about “the hip bone connected to the leg bone” does not have a financial markets equivalent because the connections between the data and the resulting market performance are not as robust as regression analysis would seem to suggest.

What’s an investor to do?

In an effort to help streamline the decision making process, we have initiated a new feature on the Fund King website that will review market resources that we feel represent the critical information that one needs to make good investment decisions.

We call it WebSource and we expect it to serve two purposes.

The first purpose is to highlight sites on the web that we believe can add value to your investment process. We break it into three categories:

• Market data and charts
• Fundamental information and opinion
• Economic outlook

The second purpose is to demonstrate how much useful information is available for free or very low cost. There is a tremendous amount of information out there in cyberspace but that doesn’t mean you have to pay over the odds to access it.

We hope you will find this new feature useful and look forward to your comments.

Over the weekend, I met up with a couple of friends at a local bar. One of them was chatting intently with a financial advisor who had tagged along. The financial advisor was pushing the concept of bonds quite strongly to my friend. There was nothing particularly wrong with his arguments except for the fact that they were very one sided. Knowing how hard the bond market had run (bond funds have outperformed equity funds for a 23 year record of 30 straight months), I was reminded of the urban legend of the shoeshine boy giving tips to Joe Kennedy in 1929. It seemed a good time to check in on where the biggest bond market is today.

Bonds in general and US Treasuries in particular have had a good run since 2000 relative to the equity markets. That run is an extension of the bull market that has prevailed since 1981.

Source: The Big Picture, chart from Bloomberg

With charts like this (and interest rates at record lows), it is easy to see why some smart investors may be getting a little nervous. The 30 year bond is trading at an implied inflation expectation of 1.93%…not an outcome anyone who remembers the 1970’s would like to bet on.

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The markets are flopping around aimlessly. Investors are confused. The media is having more and more trouble trying to whip up enthusiasm or maintaining credibility: the latest doozy to float through the market was the Hindenburg Omen (a technical formation which predicts equity crashes 25% of the time).

What is going on? Why are the markets so directionless? Are we staring into the abyss of deflation plus the second part of a double dip recession or will we have to dust off the 1970’s era Misery Index to describe the upcoming years of stagflation? With warning signs of both inflation and deflation in the economy, there is little wonder that professional and individual investors alike are confused by the signals.

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Since FundKing started managing a live account, and tracking multiple portfolios, he has seen the following:
1. FundKing systems almost uniformly said “SELL” two years ago in August 2008. FundKing obeyed, as he always does.
2. Markets entered an extended period of paroxysm. FundKing was very frightened.
3. FundKing systems had their first “BUY” signal in March of 2009; another in April 2009. FundKing dutifully bought.
4. After a serious jolt to all asset markets with the defibrillator paddles, they have been going sideways again for almost a year.

And this is where we find ourselves now – after 2 years, our portfolio has done nothing, except for a furious jump in Q2 2009. FundKing would be a little bored/unexcited by this performance if it were not the case that most managers have been in the same boat, and suffered horrific losses in 2008.

Almost all FundKing systems are saying “cash” now. U.S. Mutual Funds end their accounting year in October, which usually results in heavy selling in down years. Could this be repeated?
FundKing systems say there is a good chance.

Stay tuned…..

Source: The Market Oracle

This week, we look at Treasury Secretary Timothy Geithner’s Op-Ed piece for the New York Times.

There are two reasons:

First, as one of the key dispensers of US economic policy and taxpayers’ money, what he thinks and says is important. If he says “Welcome to the Recovery”, one should try to figure out if he is right.

Second, there is an important lesson in this Op-Ed. Mr. Geithner’s arguments for a recovery rest on manipulations of scale, a common problem one confronts when making investment and other business decisions. Learning how to scale numbers properly will make you a more effective investor.

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The title of this post is not newsworthy. It happens regularly. Despite all 4 nations having their own currencies, exchanges and regulatory regimes, this trade could happen with little fanfare. Maybe a little cajoling of the settlement department, but nothing ground-breaking.

Now try this: “Thai Broker sells Hong Kong Stock to a Korean counterparty and settles in Japanese Yen”
This would make headlines, because it crosses rigid regulatory, currency and exchange boundaries. Asia is further from a unified capital market environment than ever, and the walls are set to be built HIGHER, not lower.
This article  Financeasia.com calls for Increased Regional Integration is a pipe dream. It will never happen. FundKing has nearly 5 decades of combined experience in Asia, and understands full well that these ideas will meet with an extradition amount of resistance. Corruption, along with typical market distortions that occur when “The Government” has a large pecuniary interest in the economic outcomes, will tilt the results in a way that will preserve the local monopolies of financial institutions and exchanges.

The impact of this will be to create huge gaps between countries that only large global financial institutions can bridge. Spreads will be wide, and remain wide, as these intermediaries benefit from this regulatory arbitrage for at least a decade. Institutions such as HSBC and Standard Chartered, which derive large portions of their income from Asia, will see the biggest gains relative to their total bottom line.
What does this mean for smaller Asian firms looking to table regional capital markets? It means they must curry favor with a bank which has a large regional presence, and understand that they will be locked into this relationship. The conflicts this presents, on so many levels, will serve to stifle small and mid-cap company growth, and keep it at current levels, when it could potentially be a source of some of the most explosive creative growth the world has ever seen.

A long interview with Meredith Whitney but she brings up some key points about the US Financial Sector in this CNBC interview. Chief among them that the latest earnings improvements are masking a serious structural weakness in the revenue line. We have seen recent news of Fairholm buying big into financials…perhaps this is the news item one should be paying attention to:

If you want to see the key members of the SPDR Financial ETF and how they rank, go to this link

The latest TED video on how monkey economy participants function like their Homo Sapien cousins has made the rounds:

• When offered the chance to gamble on the upside, monkeys (and humans) usually pass, and take the sure thing.

• When offered the chance to gamble on the downside i.e. take a sure loss or gamble to limit the loss, monkeys (and humans) usually gamble.

The payoffs from these individual exchanges are identical, it is just the framing of the question – “gain” versus “loss”. And that is always contextual.
So how can we boil this into “market speak”.

How do these payoff profiles resemble options?

1. Increased upside is the hallmark of a long call option – the participant buys a call. Monkeys and humans sell this – they sell calls on the potential economic outcome. Increased gain does not interest them.
2. What about on the downside? Monkeys have the choice of “buying insurance” ie. limiting loses and preserving some of their gains. This is commonly referred to as a put. The monkeys (and humans) have the choice to buy a put, but more often than not, they forgoe this opportunity, and “let it ride” in the hope of a winning outcome.

Monkey/Human bias is to sell calls on their existing positions and leave their downside exposed. Using put/call parity equations,
Stock + Put = Cash + Call
rearranging the elements we get:
Stock – Call = Cash – Put
So monkeys and humans instinctively (and therefore synthetically) sell puts by maintaing this bias.

Do the facts bear this out? Yes. More than 90% of quant and stat-arb strategies are net sellers of options (see Taleb et al). Now not all these guys might feel comfortable with this strategy, but this is what the boss and investors want. And who can blame them – it is a strategy that conforms to existing biases.
It is interesting to note that Taleb’s first fund – Empirica – was oft ridiculed for taking the opposite side, and buying truckloads of cheap options. It worked, eventually. He was fighting 35 million years of evolution after all.

So how to make use of this?

1. Be aware that your instinct is to take the sure thing  – sell stock/funds too early, etc.
2. Be aware that your instinct is to expose yourself on the downside – insurance is good. If you have company stock that you are planning to use to fund a future home purchase, do not risk that money. Either buy puts, or sell enough stock to reasonably meet your goals, but retain enough stock to “let it ride” and participate in the upside.
3. In addition, remember that the payoffs to the monkeys were identical – it was the framing that determined their decision. Am I losing something that has been temporarily given to me (in which case I will gamble), or am I looking at more than I have already been given (in which case I tend to take the sure thing)? Stock grants and 401k matches and IRA tax-free investing have a very different impact on investor decisions than if they were given the cash equivalent and went into the marketplace to buy securities. This is a powerful bias driving both institutional and retail investor behavior.

FundKing knew many many market participants who were paid in broker/bank stock, and now regret that decision. Hank Paulson, when being confirmed for Secretary of Treasury, boasted that he had “never sold a single share of Goldman stock in my time at the firm”. That was the culture, and it bit almost everybody else in the ass.

Monkeys on Wall Street will tend to sell options, in a variety of contexts. As a market participant, you should strive to buy these cheap options,to both maximize your upside (do not sell calls) and limit your downside (buy puts when prudent).

The financial markets are definitely not showing much direction overall but the relatively calm surface is hiding turbulent and conflicting currents not far beneath the surface. The Fund King System remains in a “risk off” stance with recommendations across our main portfolios all tending towards US government bonds (TLH & TLT), cash, gold and silver. None of the readings on these individual asset classes are particularly compelling…but they are positive. So, as we wait to see just how awful US 3Q GDP numbers might be, the System is not recommending any risky positions. What currencies do you want to be in? It looks like the US Dollar and Japanese Yen are the best for now. The Euro has staged a bit of a comeback on the completion of EU wide bank “stress tests” but is still weak. A bet on the Euro is certainly a bet on the health of the European Banking system which remains overly dependent on potentially fickle wholesale financing (as opposed to deposits). The Australian Dollar is also a bit weak largely due to a potential economic slowdown in Mainland China (a huge consumer of Australian minerals).

The currents underneath the surface derive from the powerful forces that are struggling to define the next phase of global economic development.

Option 1: Deflation

Long Term US Government Paper is attracting money from those who see the current lack of consumer demand growth as an intermediate trend and a signal that we will enter a period of sustained deflation. When the Global Financial Crisis started in 2008, analysts who suggested that the US or European economies might experience some of the deflation and stagnation that Japan has endured since 1990 were summarily dismissed. However, that dismissal now seems to have been premature. Even in the early 90’s, investors had a hard time believing that Japan would not shake off the slump in short order. The country that had given us the economic miracle, just in time inventory, quality circles and firms that could buy up Rockefeller Center and Pebble Beach would surely continue their inexorable rise as the leader of the dawning “Pacific Century” (now redubbed the “Asian Century”). Deflationary fears are also driven by the evidence that massive government stimulus combined with very accommodating monetary policies has not delivered as advertised. If the Fed is “pushing on a string”, then perhaps it has run low on viable options. With Middle Class America taking serious hits on income (high unemployment) and wealth (underwater mortgages), the deflation camp is betting on continued sluggish consumer demand. The main risk to a deflation geared portfolio is a change in consumer demand. Signs of a positive change in consumer demand will send investors scrambling out of Treasuries (and the US dollar) and back into riskier assets (High Yield, Equities and eventually Commodities).

Option 2: Inflation

On the other side of the debate are those who see governments (particularly in the US but also in Europe and Asia) increasing their weight in their respective economies. Governments are beholden to voters and usually choose paths that lead to the least amount of pain in the short term. That suggests a risk of currency debasement and sustained inflation. Debtors prefer to pay back money far in the future after inflation has worn away the value of future dollars. Since the big debtors include most of the G7 Governments and their Mortgage Paying Electorate, there is no doubt about which way political will is positioned. The fear of currency debasement is at the core of the Gold Trade. So, while both Gold and Treasuries have been moving up together over the past few years, their performance should diverge sharply once it becomes clear whether we are heading into deflation or inflation.

Option 3: Healthy Global Growth

And what about the middle road between these two outcomes…decent growth with inflation at 2-4%? That outcome is the only one on which very little is being wagered because it seems the least likely. This recession is different from what most of us are used to because it is due to a financial crisis, not the usual manufacturing inventory overstock. The NBER, the official arbiter of recession timing, has yet to declare an end to the recession which started at the end of 2007. Perhaps their caution, which was criticized toward the end of 2009, was justified after all.

What should investors do?

For now, one would be wise to follow the advice first given by Oliver Cromwell:

“Put your trust in God; but mind to keep your powder dry.”

There is no reason to embark on risky or illiquid trades now. Avoiding a nasty drop is just as important as participating in market rallies to the overall health of your portfolio. At best, you will rack up a big commission bill, at worst, you could get stuck in a position that looks wrong footed in the autumn. Despite all the promises from internet penny stock newsletters, this is not the right time to go chasing after “the next big thing” with any more than a few percentage points of your portfolio.

With Gold on the radar of most investors, much of the conversation has switched from whether to buy gold to how to buy gold.

To date, the ETF GLD has been the most popular option for investors seeking to add some yellow metal to their portfolios. It is liquid and easy to store (unlike bullion). But for true believers, GLD is not good enough because its claim on actual metal is far from absolute enough for a hardened gold bug. Several sponsors have jumped in to offer products with tighter links to physical gold.

Wherever you lie on the gold buyer’s spectrum, there is at least one method of acquiring gold that seems worse than holding onto a bunch of GLD shares…

Fools Gold: Inside the Glenn Beck Goldline Scheme