Friday, June 15, 2007

Just In Case You Missed It

Sicko = Socko!; + Mea Culpa

Mea Culpas come particularly hard to politicians since even one admission of error is a clear indication that he (Mr. Bush, for example) or she (substitute Mrs. Clinton here) is not infallible. Despite the unease that results from a mistake, in the case of my imprecision, it is not of the caliber of Mr. Bush’s entry into a wasteful war, or Mrs. Clinton’s vote to support that decision. However, since these two are pros when it comes to responding to accusations of miscalculations, to paraphrase Mr. Bush, I too relied on faulty intelligence, and as Mrs. Clinton has not so convincingly stated, “If I had known then what I know now…,” well, I would not have understated the opening date of a new film by over one year.

Yes, an article that appeared in this blog in August, 2005, contained a timing error. The article in question was Part III of a series titled, “Pharmaceutical Follies,” dealing with some of the transgressions associated with the large pharmaceutical companies. The article’s opening paragraph stated, “About six months ago, the Los Angeles Times ran a story stating, ‘at least six of the nation’s largest companies already have issued internal notices to their work forces, preparing them for potential ambushes.’ Warnings at these companies had nothing to do with terror attacks or homeland security matters. The initial cautionary pronouncement came from a Pfizer Global Research and Development spokesman, citing the latent danger as ‘a scruffy guy in a baseball cap.’ He went on to say that if you see such an individual, ‘you’ll know who it is.’”

It turns out that the various pharmaceutical companies anticipated that the “scruffy guy” was preparing a film with the name, Sicko, a name most appropriate for describing the status of the health industry in this country; a film that would depict the dark side of not only the drug manufacturers, but the health organizations, the insurance companies, and the politicians beholden to these institutions for political contributions.

That film, that I predicted would appear sometime in the Spring of 2006 just premiered at the Cannes Film Festival in mid-May, and will be opening country-wide on June 29 th of this year, some 13 months later than my article stated. The reaction to the film in Cannes was overwhelmingly favorable, one review using the entertainment jargon “Socko” to describe the film’s potential. As a result, the most popular celebrity in Cannes was the film’s creator, that scruffy guy in a baseball cap, the very controversial, Michael Moore.

Salon.com described the premier showing of the film as follows: “There wasn’t a single empty seat inside the [theater] — which holds more than 2,000 people — for ‘Sicko,’ dozens of stragglers were locked out on the sidewalk. Moore’s screed against the outrageous state of American healthcare was received with uproarious affection, but one might argue that Cannes provided the softest possible crowd — an American left-wing populist, attacking America’s profit-motive, private-sector ideology before a roomful of international intellectuals, at least half of them Europeans. May I introduce a new phrase into the Franglais dictionary? C’était un slam-dunk”.

The targets of this movie, the health industry, the insurance companies, and the pharmaceutical manufacturers, the very ones that have lobbied our legislators so generously and therefore so successfully, are, understandably, less then enthusiastic. For example, as reported by The Wall Street Journal, “The industry trade group, Pharmaceutical Research and Manufacturers of America (PhARMA), has already prepared a press release it is sending out when asked for comment on the movie, even though no one at PhARMA appears to have seen it and their knowledge of the contents is secondhand. In the press release, the group says Mr. Moore is a sensationalist and will not make a documentary that is ‘balanced, thoughtful, and well-researched.’” A lobbying organization talking about balanced and thoughtful? Give me a break!

By the time you read this, the question about the legality of Moore’s trip to shoot scenes in Cuba may have exploded into some type of federal action, and if so, it would merely add to the film’s publicity and popularity. If that occurs, the publicity would merely accelerate ticket sales, assuming the Justice department does not try to confiscate the film. Remember the opening date of June 29 th. Unlike the consequences of the Iraq war, this movie does look like a slam-dunk.

Timing — The Holy Grail of Investing?

If you were prescient enough to time the stock market perfectly — with money in a broad basket of stocks in months when the market went up, and in Treasury Bills in the down months — $1,000 invested in 1926 would be worth $30 trillion today, compared to a mere $3 million if that same $1,000 had been invested in stocks and remained untouched. That was the conclusion reached by the illustrious research firm of Ibbotson Associates, and reported in the February 19 th issue of Business Week. Viewed from a more recent and shorter term period, $1,000 invested in the Standard & Poor’s 500 Index 10 years ago would be worth some $2,224 for the buy-and-hold investor, and $14,561 for those more prophetic.

Obviously timing is the way to go. Well, wait a minute! Timers are a special breed. They generally rely on data, all kinds of statistics, some quite arcane, found within the market itself. They eschew the more traditional fundamental information such as company revenue, price/earnings ratios, and earnings. Broader economic and market fundamentals are also ignored. According to Business Week, the performances of the 100 leading market-timing newsletters are followed by Timer Digest, and after reviewing the results, the question that must be asked is, “Who cares?”

In 2006, for example, only four of the timers were able to beat the performance of the S&P 500 index, and the next seven best merely matched the index—that’s before deducting taxes, trading costs and the costs of the newsletters. The Hulbert Financial Digest followed the record of 103 market-timing strategies over a 10 year period and determined that by the time you get down to the 10 th best timing system, it is only slightly better than the S&P 500 Index return. Animal entrails, anyone?

More years ago than I would like to admit remembering, and certainly well before the steroid era, baseball players who had a batting average in the .300 range (give or take) were considered respectable, while the few well over that number were at the exceptional level. Those in the .250 area were viewed with skepticism and at .200 and below were destined for the minor leagues. Today however, even .250 hitters receive multi-million dollar contracts and are considered celebrities. That same more recent syndrome can be applied to investment timers and analysts, either individuals putting out newsletters, or those employed by large investment institutions.

In the May 21 st issue of The Wall Street Journal, a report titled “Best on the Street 2007 Analyst Survey,” published the identities of the top five performing analysts within 45 industry groups. Although not stated specifically, the implication was that these were current market masters of the investment universe and fortunes could be made by following their advice, thus justifying the money spent on subscribing to the Journal.

That once stately news source, currently looked upon by Rupert Murdoch as his next juicy acquisition, also published the survey’s performance numbers that rated a total of 85 investment firms based on their individual analyst performances using (unspecified) benchmarks. The survey itself and the rating process was quite extensive in nature since a total of 1456 so-called experts working for 85 firms were considered qualified to participate in the finals although there were many more analysts eliminated for poor ratings. (It is not known if they were sent back to the minor leagues.) The baseball analogy is pertinent because the Journal’s survey ratings of the various investment firms were called “Batting Averages.”

So, what did this industry-wide survey prove? There ain’t no Holy Grail. Of the 85 firms surveyed, about half employed between 10 to 62 analysts, and the rest were in single digits with 22 employing 5 or less. Only 26 of the 85 firms enjoyed a batting average of .300 or more. This rating indicated that 30 or more percent of a given firm’s analysts were worthy of an award. Putting it differently, 70 percent were not deserving of recognition—that’s not too reassuring is it? Quite notable was the fact that by and large, the best results were attained by those firms employing the smallest number of analysts. Only three firms with 10 or more analysts made the cut. Eight firms with only one analyst batted 1.000, and four firms with two analysts batted .500.

Significantly, not one of the largest and best-known research firms such as Merrill Lynch, Bear Stearns, Wachovia, Lehman Brothers, Bank of America, Sanford Bernstein, and Raymond James achieved the .300 mark. Index funds, anyone?

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