Evening Edition

Unethical Investing

There are a lot of views on this. Do you invest in companies that are hurting the environment, killing people (tobacco/alcohol), supporting child labor or suppliers in countries with poor labor safety standards - and so on and so on. Let's avoid for the moment the challenge in identifying these companies, much less the challenge in identifying mutual funds that invest in them. I know there are organizations that track this stuff, but who has the time to track the organizations that track them. Anyhow, with so many ways to make money out there I do generally tend to shy away from the sin profit. Nonetheless, during recessionary times, certain corporations that cater in vices do quite well, so you have to think about it. Here is a brief discussion on some dirty investments, if you are interested.

http://brontecapital.blogspot.com/2008/12/post-script-climate-change-from-left.html

You Are All Wet

A friend recently borrowed a big tarp I have to cover his campground as he was going on a weekend campout and they were calling for rain. It did rain and the tarp worked just as advertised. That may be the last TARP to work as advertised.

I am outraged that we have given so much money to someone who seemingly has no idea what to do with it and, most certainly, is not doing what he should. The right thing to do is withhold the rest until we can make sure it is spent (as in given away) wisely.

http://www.portfolio.com/views/blogs/market-movers/2008/12/10/finding-holes-in-the-tarp

Chart of the Day

Regression to mean is a common phrase, but do we truly understand it. Well, I borrow this definition of regression to mean from Wikipedia:

"Regression toward the mean[1][2] is a principle in statistics that states that if you take a pair of independent measurements from the same distribution, samples far from the mean on the first set will tend to be closer to the mean on the second set, and the farther from the mean on the first measurement, the stronger the effect. Regression to the mean relies on random variance affecting the measurement of any variable; this random variance will cause some samples to be extreme. On the second measurement, these samples will appear to regress because the random variance affecting the samples in the second measurement is independent of the random variance affecting the first. Thus, regression to the mean is a mathematical inevitability: any measurement of any variable that is affected by random variance must show regression to the mean."

Now that really clears it up - correct? Well, the way that I understand it is that some things maintain a relative correlation over time. Some fundamental changes can alter their correlation but overall they stay within a range of correlation. Notably, the mean or average is not the usual correlation. Most of the time the correlation is off the mean in one direction or the other. And sometimes the correlation stretches to be in extreme positions away from the mean - standard deviations away. This is all statistics and not my field, so ask you friendly neighborhood actuary or statistician for a better explanation. But let me try to explain a bit better with an example.

Median housing prices typically bear a fairly constant relationship to median incomes. This makes sense because your income determines what you can afford on a mortgage. Over the past few years when credit got stupidly easy to get, the median price of housing went far above the mean in terms of its correlation to the median income. This was because lenders did not care if you could afford what you were purchasing and purchasers, expecting prices to continue to skyrocket, did not care if they could afford payments. This came to an end and housing prices are reverting to mean.

There are an unlimited number of correlations for which this is used. House prices to rent is another common house price correlation. Why buy when you can rent the same type place much cheaper?

Regression to mean even might work for the stock market. With that in mind, the following, with a nice chart, is worth consideration. Keep in mind that when you go way over mean and begin regression, overshooting to below mean is not at all uncommon. On the market, we are still a smidge above mean and shooting below is probably more likely than not, but what do I know.

http://www.ritholtz.com/blog/2008/12/regression-to-the-mean/

Let It All Fall

Some of the blogs I follow are in favor of the government stepping back and letting the $%# hit the fan. It wouldbe an interesting exercise but not politically palatable, so do not expect it any time soon. I am not saying I am yet there, but certainly I think there are areas where government "support" is more a problem than a cure. Still, hopefully those in charge start to give serious thought to (a) whether we are better off without government intervention and (b) what are the unintended consequences of government support AND lack of government support. In other words, a bunch of geeks have to sit down and think through the alternatives. Kinda like the military war game exercises they constantly play to see what happens. Maybe the Fed and Treasury need to borrow a page from the military playbook and start running some simulations. Problem being that the shadow banking system is hiding all the critical inputs from sight, so we are always guessing at what "might" happen.

Input . . . Need Input

One of the robot movies featured a robot who needed input. Well, I would appreciate input too. Mind you, maintaining this blog in the evenings and morning when I am not working means I have a lot to look at in short order and the blogs and news sources I follow are so full of input I can only scratch the surface of what I want to read, much less what I want to learn, but if I am going to blog I want to have this be interactive. I don't have time to look at it all and appreciate your input and you giving me tips and links to important points. Please, focus here as I have to focus, but I do truly appreciate your input.