The View From Main Street
June 2007
06/30/2007 - posted by Davy Bui
Some interesting tidbits in Barron's this week that support the case against perfectly efficient markets. The markets may well reflect all information that can be known and synthesized into a stock's price but information is not insight. Two people can look at the same information and arrive at drastically different conclusions.
First up, the rag printed a short excerpt from a note penned by Benjamin Pace of Deustche Bank Private Wealth Management. He thinks housing will pick up in the second half of the year. He also puts forth that foreign interest in US acquisitions is a strong indicator of the health and vibrancy of our economy. I think he's wrong on both counts.
Perhaps from an economic standpoint, housing as a measurement of GDP may not drag on the numbers as it has the last few quarters. That's why you shouldn't trust economists! Things as complicated as the economy don't easily compartmentalize. Even if new home construction stabilizes, the fallout from empty houses and falling values will/(is) hit/(ting) the economy. Everything is connected. The housing market will stabilize when people can afford to live in them again. Simple as that, barring some intervention or artificial manipulation like the easy credit that created the housing bubble in the first place.
As to the matter of foreign interest in US acquisitions, it's an illustration of why people talk about two economies: the market economy and the real economy. Foreigners want to buy US companies because they're cheap relative to their currency. The Dow might be up 7.7% YTD but if you're an investor in Europe or Canada invested in the Dow, then returns aren't as good. Against the euro, the Dow is up less than 5% while in Canadian dollars, the Dow is actually down 1.9%. So if you're a Canadian with money to spend, items (or companies) priced in US dollars are cheaper now than at the beginning of the year. For people like Mr. Pace and his clients, that may mean good times for now but eventually the real economy intrudes upon market machinations.
Finally, the Barron's cover story was a rating of the presidential front-runners based on their stands on certain financial-related issues. Wholly predictable, all of the Republicans rated better for the markets than the highest-rated Democrat. At the end of the article, they posted a bar chart showing market returns for all administrations going back to FDR. Also wholly predictable, the chart clearly demonstrates superior market performance during Democratic administrations. They didn't even include Hoover, a Republican, who presided over the crash of 1929 and the onset of the Great Depression.
I'm not a die-hard Democrat (I think a Ron Paul/Dennis Kucinich ticket is exactly what America needs) but such ideological-driven views prevent true insight and leadership. Contrast that with the wisdom of people like Warren Buffett or Charlie Munger and it's not hard to see why Wall Street and integrity will never be mistakenly associated.
We sold our Mueller Water Products position this past week. The market feels like it's teetering a little and MWA had some special circumstances where it was better safe than sorry. You can read about it on the Mueller page.
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