The Tycoon Report

Democracy and Investing

Monday, August 13, 2007 | Wayne Mulligan

Well, there’s no need to talk about “why” I chose to write on the topic of democracy – with primaries and elections right around the corner, the media is having a field day dishing dirt and gossip on all of the candidates.  But one thing we’re seeing the most of this year – or at least more than we’ve ever seen before – is how the web has become such an integral part of the electoral process.

We’ve all seen the headlines ...

Everything ranging from Rudy Giuliani’s daughter’s Facebook account to the hacking of McCain’s MySpace page – the media is sparing no one!

We’ve even seen the debates recorded and posted on YouTube where real voters had the chance to view, comment on, and even discuss the debate with other voters right from the comfort of their living rooms.  It’s pretty amazing stuff, and definitely adds to the whole concept of democracy on the web.

But what about democracy with respect to investing?

Is investing a democratic process?  If not, could it become one?

These are the questions that have been going through my head lately.

Most people think of investors as solitary souls who hoard their information and use it to get an edge over other investors.

But then again, isn’t the market simply a reflection of the collective “votes” of all the investors out there?  If a stock trades higher than another, doesn’t that just mean that the stock is the “winning” candidate?

Answer:  Yes and No.

Yes, because just as the famous value investor Ben Graham was fond of saying, “In the short term, the market is a voting machine.”  The more popular stocks will do better than the less popular ones.

But Mr. Graham was also quick to say that the market was a “weighing machine” in the longer term – meaning, the stronger companies will always outweigh the weaker ones.

And while I do agree that the market certainly reflects some sort of democratic process (depending on how deeply we want to define the term “democratic”), it is still the “representation” of many independent investment decisions.  Meaning, there are thousands of independent decisions being made by thousands of different people who have no idea what the other people are doing.

What if there were a way we could bring those independent people together to make a single collective decision before actually committing to a trade in the market?

What if, by leveraging web technologies, we could have the entire investing population make a collective “guess” as to where a stock’s price will be in one month, in six months or even a year?

Will this produce better results than a handful of large, “expert” institutions?

If you believe in the “Wisdom of Crowds”, as I do, then the answer is YES, the “crowd-based” decisions will outperform those of the experts (assuming the crowd isn’t influenced by the “experts”).

Just to relate a quick story from the book, The Wisdom of Crowds, here’s what happened when a group of “non-experts” went head to head with a smaller group of so-called experts.  This story was extrapolated from the accounts of Franics Galton, a 19th century economist and anthropologist:

At one of England’s many fairs, he noticed a wagering competition in which people had to guess on the weight of an ox.  In effect, it was like one of those “how many jelly beans in the jar” competitions.  Eight hundred people wrote their guesses on slips of paper; some were butchers and farmers, while others were casual guessers.

Averaging the estimates, Galton expected the result to be nowhere near the mark, because so few of the guessers were professionals in the meat business.  To his surprise, however, the crowd had come within one pound of the ox’s weight.  The group as a whole had guessed that the ox would weigh 1,197 pounds, and the ox’s actual weight was 1,198 pounds.

He also states that the average of these collective guesses was more accurate than the estimates of the few experts who were polled.

To bring this back to politics, one could argue that the best way to find out who will win the upcoming presidential election isn’t to ask people who they “want” to win, but who they “think” will win.

Now let’s bring this back to stocks.

Instead of asking people what they “hope” the price of a stock will do – we should start asking what they “think” it will do.  And not over the short term, but ask them about performance over the long term.

I can’t tell you how many times I tried to get people to buy stocks when I was an analyst/broker on Wall Street, and I’d hear, “Wayne, this looks like it’ll be a good long-term play, but I don’t know what it’s going to do tomorrow.”

This is a profound statement for a couple of reasons:

1. It shows how short-term oriented most people are – and that’s why we’re always able to find bargains in the market.
2. People are smarter than they think – if most folks thought independently instead of listening to the news every day, then they’d see the forest through the trees and pick up these long-term stocks when they were selling on the cheap.

So let’s do a little experiment today – let’s see how “smart” our crowd is at Tycoon. 

I’m going to pick three stocks (I’m not going to give my opinion on ANY of them). 

What I want you to do is tell me where these stocks will be in one month, in six months and then in a year.  We’ll revisit this topic at those points and see how well everybody did.

Who knows?  We might be the first web site that gives away amazing recommendations for free because of how smart the “Tycoon Crowd” is!

Here are the symbols:

Microsoft (Nasdaq: MSFT)
Apple (Nasdaq: AAPL)
Google (Nasdaq: GOOG)

Again, don’t listen to any of the so-called, “experts” here – go with what your gut is telling you.  I want to see what you think the prices of these stocks will be in one month, six months and in one year – so that’s a list of three prices for each of three stocks.  We’ll average them all together here and post our findings next week.

Have an awesome week!




Wayne Mulligan
Contributing Editor
The Tycoon Report


Mark Your Economic Calendar: What's ahead for the week of August 13, 2007

Editor's Note:  For some reason our friends at Briefing.com did not provide the usual "Big Picture" write-ups for this week's economic announcements.  If you desire more detail, please feel free to visit them directly at http://briefing.com/Investor/Public/Calendars/EconomicCalendar.htm. 

Monday, August 13

8:30 - Retail Sales (for July): Consensus 0.2%, Retail Sales ex-auto (for July): Consensus 0.3%

Implications: The retail sales report is a measure of the total receipts of retail stores.  The changes in retail sales are widely followed as the most timely indicator of broad consumer spending patterns.  Retail sales are often viewed ex-autos, as auto sales can move sharply from month-to-month.  It is also important to keep an eye on the gas and food components, where changes in sales are often a result of price changes rather than shifting consumer demand.  Retail sales can be quite volatile and the advance reports are subject to rather large revisions.  Retail sales do not include spending on services, which makes up over half of total consumption.  Total personal consumption is not available until the personal income and consumption reports are released, typically two weeks after retail sales.

10:00 - Business Inventories (for June): Consensus 0.4%

Implications: The business inventories report includes sales and inventory statistics from all three stages of the manufacturing process (manufacturing, wholesale, and retail).  But by the time it is released all three of its sales components and two of its inventory components have already been reported.  Because retail inventory is the only new piece of information it contains, the market usually ignores the business inventories report.  However, sometimes retail inventories swing enough to change the aggregate inventory profile.  This may affect the GDP outlook.  When it does, the report can elicit a small market reaction.


Tuesday, August 14

8:30 - PPI (for July): Consensus 0.1%, Core PPI (for July): Consensus 0.2%

Implications: The Producer Price Index measures prices of goods at the wholesale level.  There are three broad subcategories within PPI: crude, intermediate, and finished.  The market tracks the finished goods index most closely, as it represents prices for goods that are ready for sale to the end user.  Goods prices at the crude and intermediate stages of production often provide an indication of coming (dis)inflationary pressures, but the closer you get to crude goods, the more that these prices track commodity prices which are already available in traded indexes such as the CRB (Commodity Research Bureau).

8:30 - Trade Balance (for June): Consensus -$61.0B

Implications: The trade report is most widely watched for trends in the overall trade balance.  But trends in both exports and imports of goods and services bear watching as well.  The export data in particular are important to watch for indications that a strengthening competitive position at home and/or strengthening economies overseas are boosting U.S. growth.  Imports provide an indication of domestic demand, but given the severe lag of this report relative to other consumption indicators, it is not particularly valuable for this purpose.  The volatility in the monthly trade balance can play an important role in GDP forecasts.  Net exports are a relatively volatile component of GDP, and the trade report provides the only early clues to the net export performance each quarter.


Wednesday, August 15

8:30 - CPI (for July): Consensus 0.2%, Core CPI (for July): Consensus 0.2%

Implications: The Consumer Price Index is a measure of the price level of a fixed market basket of goods and services purchased by consumers.  CPI is the most widely cited inflation indicator, and it is used to calculate cost of living adjustments for government programs and it is the basis of COLAs for many private labor agreements as well.  It has been criticized for overstating inflation, because it does not adjust for substitution effects and because the fixed basket does not reflect price changes in new technology goods which are often declining in price.  Despite these criticisms, it remains the benchmark inflation index.  CPI can be greatly influenced in any given month by a movement in volatile food and energy prices.  Therefore, it is important to look at CPI excluding food and energy, commonly called the "core rate" of inflation.  Within the core rate, some of the more volatile and closely watched components are apparel, tobacco, airfares, and new cars.  In addition to tracking the month/month changes in core CPI, the year/year change in core CPI is seen by most economists as the best measure of the underlying inflation rate.

9:15 - Industrial Production (for July): Consensus 0.3%, Capacity Utilization (for July): Consensus 81.8%

Implications: The index of Industrial Production is a fixed-weight measure of the physical output of the nation's factories, mines, and utilities.  Manufacturing production, the largest component of the total, can be accurately predicted using total manufacturing hours worked from the employment report.  One of the bigger wildcards in this report is utility production, which can be quite volatile due to swings in the weather.  Severe hot or cold spells can boost production as increased heating/cooling needs drive utility production up.  In addition to production, this monthly report also provides a measure of capacity utilization.  Though the rate of capacity utilization is seen as a critical gauge of the slack available in the economy, the market does not completely trust this measure.  Capacity is very difficult to measure, and the Fed essentially assumes that growth in capacity in any given year follows a straight line.  One can therefore predict the capacity utilization rate quite accurately based on the assumption for production growth.  The 85% mark is seen as a key barrier over which inflationary pressures are generated, but given revisions to these data and the difficulties with capacity measurement, the 85% mark should be viewed cautiously.  It would be appropriate to look for corroborating inflation indications from commodity prices and vendor deliveries.


Thursday, August 16

8:30 - Housing Starts (for July): Consensus 1410K, Building Permits (for July): Consensus 1400K

Implications: Housing Starts are a measure of the number of residential units on which construction is begun each month.  A start in construction is defined as the beginning of excavation of the foundation for the building and is comprised primarily of residential housing.  Building permits are permits taken out in order to allow excavation.  An increase in building permits and starts usually occurs a few months after a reduction in mortgage rates.  Permits lead starts, but permits are not required in all regions of the country, and the level of permits therefore tends to be less than the level of starts over time.  The monthly national report is broken down by region: Northeast, Midwest, South, and West.  Briefing recommends analyzing the regional data because they are subject to a high degree of volatility.  The high volatility can be attributed to weather changes and/or natural disasters.  For example, an unexpectedly high level of rain in South could delay housing starts for the region.

8:30 - Initial claims (for 8/11): Consensus NA

Big Picture: Initial claims can be somewhat volatile, but the 4-week average has remained in a lower 300K to 320K range for 14 weeks after topping 330K in mid April.  Aberrations are watched for clues on the labor market and economy, as the recent levels reflect an even tighter labor market.  Continued claims are showing more lift than initial claims as the 4-week average nears the year and a half high of early March.  Claims provide a nearly real time read on layoffs and the labor market as the low 4.6% unemployment reflects the broader read of layoffs and hiring.

Implications: Initial jobless claims measure the number of filings for state jobless benefits.  This report provides a timely, but often misleading, indicator of the direction of the economy, with increases (decreases) in claims potential signaling slowing (accelerating) job growth.  On a week-to-week basis, claims are quite volatile, and many analysts therefore track a four week moving average to get a better sense of the underlying trend.  It typically takes a sustained move of at least 30K in claims to signal a meaningful change in job growth.

12:00 - Philadelphia Fed (for August): Consensus 8.0

Implications: There are many regional manufacturing surveys, and they tend to be ranked in order of timeliness and the importance of the region.  The Philadelphia Fed's survey is first each month, actually coming out during the third week of the month for which it is reporting.  Several smaller surveys are then released before the Chicago purchasing managers' report on the last day of each month.  A few, such as the Atlanta and Richmond Fed surveys, are released after the NAPM and are of little value.  The purchasing managers' reports are measured like the national NAPM - 50% marks the breakeven line between an expanding and contracting manufacturing sector.  For the Philadelphia and Atlanta Fed indexes, 0 is the breakeven mark.  These surveys can be of some help in forecasting the national NAPM - particularly the Philadelphia and Chicago surveys which are more closely watched due to their timeliness and the fact that these regions represent a reasonable cross section of national manufacturing activities.


Friday, August 17

10:00 - Michigan Sentiment-Prel. (for August): Consensus 88.5

Implications: The Michigan index is almost identical to the Conference Board Consumer Confidence index, though there are two monthly releases, a preliminary and final reading.  Like the Conference Board index, it has two subindexes -- expectations and current conditions.  The expectations index is a component of the Conference Board's Leading Indicators index.


Source:  www.Briefing.com