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The 8 Most Fascinating Things I Read This Week

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Happy Friday! There are more good news articles, commentaries, and analyst reports on the Web every week than anyone could read in a month. Here are the eight most fascinating ones I read this week.

Stocks for the long run
Political blogger Matt Yglesias added up annual profits for the entire airline industry going back to 1948. Cumulatively, it comes to -$32 billion:

Hopefully the start of a trend
A team of doctors from Memorial Sloan-Kettering Cancer Center show what is hopefully a new trend in fighting the runaway cost of medicine. From The New York Times:

At Memorial Sloan-Kettering Cancer Center, we recently made a decision that should have been a no-brainer: we are not going to give a phenomenally expensive new cancer drug to our patients.

The reasons are simple: The drug, Zaltrap, has proved to be no better than a similar medicine we already have for advanced colorectal cancer, while its price -- at $11,063 on average for a month of treatment -- is more than twice as high.

This won't end well
I'm skeptical of most long-term economic predictions. But if I had to pick one that seems unavoidable, it's that public pensions will face a painful future. Via Reuters:

The largest 100 public pension funds have around $1.2 trillion of unfunded liabilities, about $300 billion above the nearly $900 billion they reported themselves, according to a new actuarial study to be released on Monday.

Wealth matters
Matt O'Brien of The Atlantic gives a simple explanation of how different income groups have fared in the last decade:

The 25th percentile barely saw their wealth increase during the housing bubble years because they weren't buying houses, and wages barely kept up with inflation. But then wealth evaporated as jobs did after panic hit in 2008. Meanwhile, median households did see their wealth shoot up sharply during the housing bubble, as their homes rapidly appreciated in value. But then wealth evaporated as housing equity did after the boom turned to bust. And then there's the 90th percentile -- their wealth barely budged since less of it was in housing equity, and more of it was in equities that quickly rebounded in 2009.

Misery and money
Tobias Levkovich of Citigroup (NYSE: C  ) created a new "misery index" that "combines unemployment rates with the change in food stamp recipients." He then pasted the index next to the S&P 500 (INDEX: ^GSPC  ) . The results are fascinating; click here to view his chart.

Man vs. machine
Reuters financial blogger Felix Salmon writes about the downside of the rise of high-frequency computer trading:

The more obvious problem with exchanges run by computers is that computers don't have any common sense. We saw this on the 6th of May, 2010 -- the day of the so-called "flash crash", when in a matter of a couple of minutes the US stock market plunged hundreds of points for no particular reason, and some stocks traded at a price of just one cent. It was sheer luck that the crash happened just before 3pm, rather than just before 4pm, and that as a result there was time for the market to recover before the closing bell. If there hadn't been, then Asian markets would have sold off as well, and then European markets, and hundreds of billions of pounds of value would have been destroyed, just because of a trading glitch which started on something called the e-mini contract in Chicago.

Wall Street vs. Man
Financial advisor and blogger Josh Brown shows why it still pays to be in finance:

[Americans have] $41.8 trillion in financial assets. $28.6 trillion of that is in so-called investable assets and the other $13.2 trillion is in retirement accounts (401ks, pensions, etc). $41.8 trillion is a big number.

Someone asked me yesterday why there was so much financial advertising going on if so few Americans have money put away for retirement. That number is the reason why. Because in our have and have-nots nation, those who have been saving have saved quite a lot. And everyone wants to clip a fee from that number -- the bigger, the better.

That's why there will never be a golf tournament without a financial services sponsor. There's so much money out there it is absolutely staggering.

Can't beat the real thing
Financial blogger Eddy Elfenbein gets tough on Coca-Cola's (NYSE: KO  ) valuation and makes a broader point about risk:

Coke is going for 17.1 times next year's earnings estimate. I just don't see how Coke can justify an above-market premium in an environment like this. Coke's earnings growth for the next five years is estimated to be 7.43% which is 2.75% less than what's expected of the S&P 500.

The current quarterly dividend is 25.5 cents per share which makes the payout ratio exactly 50%. For the S&P 500, the payout ratio is running close to 30%. Even with that high payout ratio, Coke's dividend only comes to 2.7%. Many high-quality stocks pay yield much higher than that right now.

By my math, Coke's fair value is close to $26. Perhaps investors see the Coke brand as similar to a U.S. Treasury. After all, there aren't many better representatives of American capitalism than Coca-Cola. I think this way of thinking is a huge mistake, but I can see how investors can reason a 17 P/E for Coke in a world where a five-year Treasury has a P/E of 130.

The major mispricing in the market right now is that investors are vastly over-paying for security, and are under-paying for risk. I think this will slowly unwind -- in fact, it's already started. That explains why U.S. stocks have advanced this year even as earnings estimates have come down. The market is slowly reverting to normal.

Enjoy your weekend. 

Fool contributor Morgan Housel has no positions in the stocks mentioned above. The Motley Fool owns shares of Citigroup Motley Fool newsletter services recommend The Coca-Cola Company. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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  • Report this Comment On October 19, 2012, at 10:09 AM, rhealth wrote:

    Tobias Levkovich of Citigroup (NYSE: C ) created a new "misery index" that "combines unemployment rates with the change in food stamp recipients."

    That is fascinating! Any explanation for the correlations?

  • Report this Comment On October 19, 2012, at 8:22 PM, TheDumbMoney2 wrote:

    I love these compilations.

    1) On public pensions, note that our low-interest-rate environment arguably causes them to appear more under-funded than they are. Pensions are required to discount liabilities to present value using the present discount rate. That makes them seem very large. (For the same reason that if you discount the future cash flow of KO at 4% it seems like it's worth more than if you discount that cash flow at 10%: it's just the math.)

    The counter-argument is that present pension assets, particularly fixed income, are also earning very little, too, now, which means that they have lower present value when looked at prospectively than they otherwise have: they too will have lower "magic of compounding" value over the future life of the plan, because they have earned less in these years.

    The biggest problem with this counter-argument is it ignores that depressed fixed income only makes up a portion of current plan assets. To the extent pension plans have owned index funds or funds or hedge funds that have even come close to matching the S&P, they have actually done very well during this challenging interest rate environment of the last three years.

    In my view, one day interest rates are going to rise and discounted calculations of future liabilities are going to shrink, and by and large the financial media will be shocked, shocked to discover that pensions aren't as underfunded as previously thought. It will be big "news." I could be wrong, I'm not a pension expert, but this is my layman's understanding of it.

    2) On the airline piece, note that the wild swings in profitability began after the industry was deregulated. Deregulation has been great for consumers, and horrible for airlines, even though as I understand it (though this is a bit before my time) airlines fought for it and consumer-advocates decried it. Extremely ironic and amusing. It's analogous to the banking industry, in that both are properly thought of as "utility-like" industries, which should be subject to regulation, not to protect consumers, but to protect themselves: they will tend to immolate themselves without significant regulation. Unlike banks, airlines do not pose a systemic-enough risk to merit bailouts though. I and others on this site have said many times that airlines are never appropriate for anything other than a speculative short-term trade. LUV has proved an popularly-thought-of exception, so far, but it's return on invested capital has never exceeded 8% and is presently under 2%. It's just one of the best businesses in a terrible industry.

    Have a nice weekend.

  • Report this Comment On October 21, 2012, at 8:32 AM, Tomohawk52 wrote:

    "If there hadn't been, then Asian markets would have sold off as well, and then European markets, and hundreds of billions of pounds of value would have been destroyed, just because of a trading glitch which started on something called the e-mini contract in Chicago."

    I don't understand this, would someone care to explain it? I can see how hundreds of billions in price would be lost, but the companies would still exist so why would that change their value?

  • Report this Comment On October 22, 2012, at 7:27 PM, sciencedave wrote:

    I wonder what the chart looks like for the cumulative and annual profits from the auto industry....might be starting the same trend if not already. The taxpayers have bailed out the airline liabilities thru the PBGC and it looks like the same will happen for the auto industry. Most of the unregulated airlines have always been bad investments because of the uncontrolled cost structure. The auto industry is in general also a poor investment because they are killing their own future due to uncontrolled costs and better quality and designed vehicles lasting longer.

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