Friday, September 5, 2014



Telling Blacks How to Think

I live in a Republican stronghold. Most of the elected officials are Republican and the local paper offers "Metro Atlanta's Only Conservative Voice". The local attempt at balance, is a weekly column by a liberal transplant who now lives in the area. (There's not really an independent, or libertarian columnist). The need for a Republican counter is real, but our columnist, Kevin Foley, is mostly just mean. His columns are often full name calling and insults of Republicans, with little policy or philosophy.

Last week, Foley chastised blacks in Ferguson for low voter turnout and suggested they were to blame for Michael Brown's death. 

I find it disgusting that Foley does not respect the choice of blacks not to vote. (Why do liberals shout for choice in health issues but not on other issues?) More sickening is that he tries to alter their choice by laying blame for the death of Michael Brown on those who did not vote. Foley can logically construct a counter-factual where blacks voted, and different leaders were elected, but it does not follow that there would have been a different outcome for Michael Brown. Are cities controlled by blacks, and Democrats, immune to police involved shootings of young blacks? (Of course not).

I know I risk being seen as defending the status quo in Ferguson or supporting Republicans. Neither is true, but it is worth the risk to address Foley's racism.

Dear Editor,
Friday's MDJ included a column by Kevin Foley in which he tells black people what is best for them and criticizes those who have chosen not to vote in the past. Why does Foley hate democracy? Or does he just hate black people?  The beauty of democracy is that it places the power of choice in the hands of each citizen. Those who support democracy by definition support the rights of citizens to make their own choices, including the right to chose not to vote. For Foley to criticize the blacks of Ferguson for low voter turnout is to show disrespect for democracy and for the capacity of black people to decide for themselves what actions (and votes) are appropriate. This is a prime example of what George Bush called "the soft bigotry of low expectations". For Foley to suggest that non-voting blacks are responsible for the death of Michael Brown is disgusting. Were that suggestion made by a Republican, that person would be labeled a racist. We should not let Foley get away with his assault on the authority of black people just because he is a white, male, liberal.
Russ Wood

Sunday, August 31, 2014

Understanding Ethics Complaints

It seems to me there are ubiquitous calls for more and tougher ethics regulations. I doubt it will do much good. The way to reduce corruption, or ethics failings, is to reduce the size of the money pile that politicians and bureaucrats control. When they can give funds to small groups, of individuals or businesses, those who miss out will always cry foul.

In my local community, pols are using north of $360 million to benefit a professional baseball team. There have been a number of legal challenges and ethics charges, due to the secrecy of the process and lack of transparency and oversight.

The man behind the curtain claims his critics don't understand economic development. I counter that he is the one lacking understanding.

Dear Editor,
In Wednesday's MDJ, Cobb County Commission Chair Tim Lee defended himself against formal ethics charges by claiming his accuser "doesn't have a good, clear understanding of the process and procedures for economic development". In reality it is Lee who lacks understanding.
Economic development occurs every day in thousands of markets via billions of transactions. Most of those transactions occur without direct action by local pols such as Lee, much less the secret meetings and private deals Lee claims are normal. And as economists have documented countless times, when pols and bureaucrats step in, the marketplace suffers. As long as governments spend taxpayer funds to favor specific individuals and businesses, government officials will always come under fire for ethics issues. Lee could avoid these hassles by leaving economic growth to the private sector. But that would require him to gain some understanding of his own.
Russ Wood
West Cobb

Sunday, August 24, 2014

Trip Report: Aruba, No Farting.


Way back in 2010, I signed up for a new credit card for the sole purpose of getting the free 100,000 miles on the British Airways frequent flyer program. The points were easy to get, and the card was free for the first year. These types of offers were common for folks with good credit, as the rest of the economy was still frozen due to the great recession. My original intention was to get a free round trip to Hawaii. The points involved were enough for two to fly round trip to Europe, or South America or for four to fly domestically on British Airways' domestic partners. (If you doubt these offers exist, or are full of catches, bookmark and join the nitcast team). Long story made short, it was time to redeem my miles. Due to my schedule, I could not make Hawaii work, but I was able to book a round trip flight for two to Aruba during the week of my twentieth wedding anniversary. 


We had to leave Atlanta early and there was a line at security, as usual.  After finally getting through the line to the ID check, the agent asked my wife why she didn't use her Pre-check status to skip the line. She looked at her boarding pass and noted she had Pre-check authority. During my research for the trip, I had read that this seemed to happen to some BA members flying domestically, but the assignment appeared to be random. I had checked my pass when printed and assumed both were the same. regardless, my wife would have been stuck waiting for me even if she had known. 

We flew on American Airlines, the BA domestic partner, one stop each way.  Atlanta to Miami is a short, easy flight. We sat in our usual coach. We enjoyed a nice layover, rocking in the rocking chairs and watching tourists, even Americans, take pictures in front of a tequila display near our gate. Our Miami to Aruba leg was a step up. First class seats, first to board, and very good service. We enjoyed mimosas prior to takeoff, cocktails in flight, warm mixed nuts, and a great salmon salad. Still food is just food. What makes first class different for a 6' 4" frame is the amount of room. I fear I've spoiled all future flights unless I somehow luckbox into first class again. The return flights were a reverse itinerary. First class from Aruba to Miami and then coach to Atlanta. The last leg was like a cold shower but it did serve as an adjustment back to daily life.


I generally stay at Marriott or partner properties. For this trip, I opted for the Renaissance in Oranjestad. It is close to the airport, convenient to downtown shopping and dining in Oranjestad, and has lots of amenities. It really is two hotels in one, as it has an ocean front property and a marina property located a few hundred yards away. The marina property is adults only (for lodging) and sits on the high end shopping mall. We stayed in the ocean front complex, to have a traditional beach experience. Or so we thought. Ocean Suites has two nice pools (with swim up bar), and a man made lagoon which opens to the ocean. There is no natural sand beach here, but the hotel has created two, both nice. (click for more relaxing images). The primary beach is just beyond the pool but the second is on a private island owned by the hotel. To access the island, one has to take a 5 minute boat shuttle. The amenities of the island are similar to what is available at the hotel. The allure of the island being that it is secluded from the daily bustle of the hotel. However, it has two detractions. First, the hotel does not allow you to bring your own food or drink to the island, as they want you to pay their high prices. On our first attempt we were kicked off the boat for having a cooler. We weren't too upset until we eventually made it to the island and found others had successfully brought their own drinks. So we were unlucky to get the lone diligent boat crew. The other detraction is that the island is adjacent to Aruba's only airport. when jets arrive there is mild noise. When they depart, there is a tremendous roar. This is much worse on the island than it is on the main hotel property. 

The rest of the hotel was quite average for a resort. The hotel is being updated, but we stayed in one of the older rooms which had a nice balcony view of the pool and lagoon. The rooms were plenty big, and had a mini fridge which was not stocked so it could be used for our own food and drink. The only oddity of the room was the location of the light switches. There were none in the bathroom. The bathroom light controls were completely outside the room, blocked by the door. Even after a week, I wasn't used to this.

The lobby of the hotel was interesting. It was traditional from the front, street side but was open air in the back facing the pool and lagoon. The front was mostly glass, including all glass elevators. During the heat of the afternoon, this was a problem, as the elevators were easily 100 degrees, and the lobby was in the mid 90s. Our room was on the second floor, so after the first day, we avoided the elevators at all costs. During mornings and evenings, the lobby was ideal. Regardless of temperature, the lobby was always full, as it was the center of the hotel's complimentary Wi-Fi. In the guest rooms, Wi-Fi was $10 per day.  It was funny to see all the teenagers with their devices and the random businessman huddled in the lobby for free internet. Here, we got lucky. Our room was only 3 from the lobby (on the second floor) and the complimentary Wi-Fi was very strong in our room. We weren't in the room often, but scoring free internet was a nice surprise.


Upon check-in, the desk clerk (who, like all the staff, spoke Dutch, English, Spanish, and the native tongue of Aruba, Papiamento) informed us we could purchase an all-inclusive package for our stay.  All our food and drink on the property, was offered for $130 per person per day. That is high, even for the high prices of Aruba. Just for reference, the $260 per couple made the food and drink more expensive per day than the room. We opted to go a la carte. First, night the dinner buffet at Captain's Corner (Mexican themed) was $30 per person, and very unsatisfying. The next morning, the buffet breakfast was much better. So we developed a plan to eat a big buffet breakfast each day, skip lunch as we lounged by the pool, and try different places for dinner. This worked well. We ventured over to Aquarius at the marina property for their surf and turf buffet, which was expensive but quite good. Then we hit several local places out in town. We hit Casa Tua twice, once for really good wood-fired pizzas and once for grilled fish and eggplant parmigiana. Tua is located in the mall next to the hotel, and we also enjoyed a great Chinese meal in the mall at Hung Paradise where I had the best Chinese soup I've ever had. 

Still, by far our best meal on the island was at Yemanja. I enjoyed the grilled triple tail, parmesan risotto, and grilled asparagus. There is a lot to say about this place. You should probably get reservations as this is one of the top restaurants on the island. We went early, and were able to pop in.  The menu is diverse, with great steaks, fish, and desert. But they also have vegetarian and vegan options. That seems unusual for a remote island needing to maximize their appeal to consumers, but it fits with what I call the Tesla model. Tesla markets electric vehicles not to the minority who are focused on the environment but to the majority who are focused on performance. Personally, I think a vegan diet is unhealthy, but if it is to spread, it can probably be done by appealing to the masses, alongside traditional menus, and not by appealing just to those who oppose eating animals.  I was pleased to see Yemanja succeeding by offering good food for all diet types.


We didn't do much out in town. There are several casinos, including one within the Marina property and in the mall by the Ocean suites. However, there is no live poker to speak of. We did a little shopping and walking. Oranjestad is great for this. There are very high end shops near the Marina hotel, and there are many reasonable local shops within short walking distance of the hotel. This is in addition to the small mall right outside the hotel. On the first day, we walked to a local grocery store. They didn't have much selection, so I jut grabbed a cold Bright, a light beer made by Amstel and very popular in Aruba. We ended up getting bottled water in the mall near the hotel. The next day we ventured a few blocks farther to the Kong Hing Supermarket on Havenstraat, directly behind the Marina property. Plenty of American style food, and beer, wine, and liquor. Here we loaded up on drinks and snacks for our week. It was expensive but not nearly as expensive as paying the hotel prices. This allowed us to pack our own coolers and lounge by the pool or lagoon all week.

Our only meaningful sight-seeing was crammed into a single day. We rented a jeep to cruise the island. However, the rental company said they couldn't locate me, so they gave away all the jeeps and we settled for Suzuki. It was smaller, with smaller tires, but it had four wheel drive. 

We took off around 10am and headed up the west side of the island. At the northwestern tip of Aruba is the California Lighthouse. It is no longer operational (or necessary) but it does offer great views of the ocean and the northern part of the island. (click for more touristy view).

From the lighthouse we drove south down the eastern coast of the island. This area is mostly uninhabited, but borders the ocean and protects the nice homes and golf course in the center of the island. It is an easy drive with lots to see. We saw wish rock gardens (thousands of zen statues put up by tourists), coves, the natural rock bridge, and an old gold smelter ruins. Here are a few shapshots worth clicking for larger images.

From there we drove south, got lost, but eventually found the Arikok National Park. The entire southeastern edge of the island is consumed by this park. Lots of hiking trails for those who like to walk through the desert. Not much landscape other than hill after hill covered in grey brush. There are a few interesting caves. We visited the Huliba Cave (tunnel of love) and then continued past the windmill farm down to the southern tip of the island. 

We got lost again after we left the park, as Valero has built a huge refinery which wasn't on our map. But we made our way back up the coast, past the airport and back to the hotel. Overall, a great way to see the island.


Two interesting sights. At the natural rock bridge there was a tourist trap selling souvenirs, cold drinks, and restrooms. That's right, they collect a dollar from everyone wanting to use the bathroom. Here's their rationale (click to read):

Makes sense. And they take the treatment of waste seriously. This sign was posted at the bar of the same establishment.

This has nothing to do with our trip, other than the music is a fitting soundrack for Aruba.

Thursday, August 21, 2014

A Letter to the SEC

Earlier this week, Richard A. Fleming, the Investor Advocate at the Securities and Exchange Commission gave a speech to the 38th Annual Southwest Securities Conference, Dallas, Texas.  The title of the speech was The Case for User Fees. For those unaware, the SEC is charged with, among other things regulating financial advisors. Just as the IRS only audits a tiny fraction of tax returns, the SEC audits a small percentage of financial advisors. The primary reason given for this by the SEC is budget constraints. Since Congress is unlikely to give the SEC the necessary funding, there have been proposals to have the SEC charge a fee for every registered advisor (or firm). The Investor Advocate was making the case this week.

I think he is unaware of some serious concerns raised by user fees. I outline them below. 

Full Disclosure: I work for a registered advisory firm, so these fees would impact me and my firm. 

Dear Sir,
In your speech on The Case for User Fees on August 19th, you noted "the main objection to a user fee is a philosophical resistance to growing the government."  While that is a valid criticism of user fees, I think it is not the strongest argument against user fees.
One significant problem of putting the burden of higher SEC funding on advisors, is that higher costs will drive marginal firms out of business, as there will be no corresponding rise in income. This will happen either as firms shutter or consolidate. The end result will be a landscape of fewer, larger firms serving the investing public. As history has shown, most recently with the banking crises, a system of fewer, larger firms is less robust than one consisting of more and diverse entities. User fees would make the investment advisory industry more fragile, less robust.
User fees also present a potential conflict of interest for the regulators. If regulators find evidence sufficient to prevent a firm from further operations, proceeding in the best interest of the public will cause them to reduce their own budget. Regulators could face the prospect of sanctioning the very firms that pay their salaries. This seems like a terrible burden to place on the SEC employees. In the investment industry, current laws and regulations bestow fiduciary status (and responsibility) on those advisors who align their interests with the investing public. I suggest the same should be true of regulators. Regulators are to serve the public, and thus should be paid by them. For regulators to be paid by a third party, the one they are tasked with monitoring, is not in the best interest of the public.
Russ Wood


The experiment continues. I read a random tweet.

Wednesday, August 20, 2014

Daily Twitter Reading

Here's a neat feature I am trying out. I record my reading of a random tweet.

Wednesday, August 6, 2014

Apple Pie

Rotary Wednesday means desert.
For me, that means pie.

Thinking it Real

Broadly speaking, I think inflation is an easy concept. I presume most people have a basic understanding of the potential for prices to change over time due to a decline in the value of the currency. The mechanism, the measurement, the theory can be quite complex, but I think most understand there is a difference between nominal value and real value.

Part of the challenge is to monitor the divergences in a timely manner, as they are best seen through long swaths of historical data. We don't think in real terms on a daily basis.

The financial media was buzzing about the record highs for the stock markets throughout the month of July. Even the Federal Reserve Chairwoman took notice. There seems to be a general sense that stocks have risen significantly and the bull market is long in the tooth.

Only in nominal terms.  If you can think it real, you know the market hasn't done much.

Consider this chart (click for a more real image).

The chart shows an inflation adjusted history of the S&P500 since 2007. In this case, the inflation measure is the price of gold, so the chart shows the price of one share of the S&P500 priced not in dollars but in ounces of gold.  The far left shows the large decline during the great recession. Then from 2009-2012 the stock market was flat in real terms. There has been a nice recovery since early 2013 when the Fed signaled the end of their QE programs, but stocks remain well below levels at the start of the 2007 recession. The bull market many see as getting old and tired, in real terms, has only begun. A longer term chart shows stock values are quite low in real terms, relative to the 1990s, 2000s, and 1960s (not shown).

Thursday, July 31, 2014

When the Bough Breaks

At the mid point of 2014, it is looking like another good year for investors. Every major asset class has positive returns year to date.  In fact, the U.S. stock market indexes have posted gains for five consecutive years and now sit at all time highs. Given the slow, tepid pace of economic growth, the stock market appreciation seems excessive to some. Many market pundits (and investors) are asking “should I continue to invest money at these high levels?” It is a reasonable question, one we’ll discuss shortly, but not the most important one. Of greater importance for investors, at all times and under all market conditions, is to have an answer to the question “what will I do if the market declines?” How should one prepare for when the bough breaks?

Investors who stress over current market highs are echoing the research of Professor and now Nobel Laureate Robert Shiller. His findings can be paraphrased as stock markets have a normal range, and when prices get beyond that normal range, investors should be cautious (i.e. stay out of stocks).  Today, the valuation metric attributed to Dr. Shiller is quite high, indicating markets are overvalued and investor exposure should be low or nil. Ironically, the same day Dr. Shiller earned the Nobel prize, it was also awarded to Dr. Eugene Fama. Fama is famous, and earned his Nobel prize, for the idea markets are efficient. Fama teaches us there is little or no value gained from Shiller’s warning, as everyone knows the state of the market and one cannot benefit from it. In fact, Fama is correct, at least on the point that Shiller’s warnings are of little practical use. Stock markets have been “expensive” many times in history, and they often remain in that condition for months or years. Historically, concerns over valuation offer no predictable value as a signal for exiting the market. (As an aside, even if valuation gave a great tip on when to sell, it would be of zero value without an equally predictable signal on when to buy back in.)  Investors who follow a valuation sell signal such as Dr. Shiller’s, might take comfort in the fact they avoided losses by selling. However, this is a hollow victory as one can always avoid losses by not investing, regardless of the market valuation. Anyone who chooses to invest, and identifies themselves as an investor, does not have this opportunity. What remains is to prepare one’s portfolio for the inevitable downswings regardless of their cause or the market valuation when they occur.

Robust portfolios are those which can withstand not only the instances of high valuations but more importantly the inevitable surprises such as terror attacks or  tsunamis.  In general terms, one might build robustness with two simple components: portfolio construction and tactical rebalancing. Neither of these can promise to avoid losses, but they offer the potential of a prudent level of risk management.

Portfolio construction is a complex process but for purposes of this discussion, consider the importance of multi-layered diversification. The first layer consists of being diversified among the major asset classes such as stocks, bonds, real estate, etc. If one is concerned that a particular asset class is overpriced, exposure to the other asset classes is a form of risk management. Interestingly, in today’s environment stocks do appear expensive by some measures, but so do bonds. In fact, one of our valuation tools indicates U.S. stocks are in the top 20% most expensive valuations since 1950, while bonds are in the top 5% most expensive valuations. In short, the typical safe haven for investors selling stocks due to valuation concerns carries even more valuation risk than stocks. In situations like this, the second level of diversification, diversification among investment styles within an asset class, is vital. Within an asset class, there are ways to reduce risk while remaining invested. Consider two such styles within equities. One approach involves maintaining exposure to stocks but managing the risk via the use of hedges. Options, futures, and short-selling are all techniques used by some managers to limit the downside risk of holding equities when prices seem extended. These risk management techniques come at a cost, but that cost may be preferable to the possibility of a sharp market downturn. A second approach involves active management based on valuation. Here, Shiller and Fama tend to agree. Market valuations are generally calculated on stock indexes. Yet even when indexes are hitting new highs and valuations seem rich, this is not true of every stock. Some managers adhere to a strict valuation style, which invests only in the stocks below certain valuation metrics. Of course, these active decisions come at the cost of potential underperformance to their benchmark, but they can offer some level of risk reduction for an investor concerned about high prices. A truly diversified portfolio will have access to various risk management styles as well as index exposure for every major asset class.

Portfolio rebalancing is also part of a simple approach to risk reduction. Strategic rebalancing refers to a regular process of selling assets which have appreciated and now comprise too large a share of the portfolio combined with purchasing assets which have declined and now comprise too small a share of the portfolio. This is a traditional buy low, sell high technique used broadly in the industry. Tactical rebalancing involves similar buying and selling on a more dynamic timeframe in response to valuations, policy changes, or other macroeconomic variables. For an investor concerned with stock valuations, tactical rebalancing might help reduce risk. Consider a simple portfolio where the allocation to stocks was invested 100% in index funds. When valuation measures become alarming the investor might reallocate the equities one-third to index funds, one-third to hedged strategies, and one-third to value style managers. The investor addresses his concerns about valuation risk without rebalancing to bonds (with higher valuations) or going to all cash (and ceasing to be an investor).