Posts Tagged ‘Speculation’

If the Bailout Should Fail

Remember these words:

“It would be a mistake to be buying anything now if the government was going to walk away from the Paulson proposal… There is no Plan B”.

Those are the words of Warren Buffett. A man who has his money where his mouth is. Buffett seems to have a lot of faith in America, in its Government, in Hank Paulson and definitely in his old Wall Street associates, Goldman Sachs.

But one thing should remain crystal clear. This is not a matter of recession or no recession. This is a matter of depression or a recession. In the event that the bailout would not go through, in the words of the greatest investor in the world “The entire financial system would break down and take years to restructure”.

It seems that investors should have one fundamental question on their minds: Will the bailout go through or not. If it doesn’t the financial system is obsolete and we have a breakdown 1929-32 style: The Dow loses 90% and everything starts over. If it does all work out then we have inflation 1970s style, possibly worse ($1 trillion is a lot), the Dow has a standard consolidation that lasts a few years and the economy sucks for a while.

Thus, we look at the Dow. What the stock market is saying is “I don’t want to be a seller. I want to buy and hold, even if my gains aren’t all that good”. The simple these are mostly the same investors who bought when things were attractive in the first place. Consider the fact that they may still be getting 8-10% on dividends, why should they sell? You’ll never hear any value investor tell you he wants the Dow to go to 20,000. That’s preposterous! Why would he want the only asset he knows to buy cheaply rise in value?

But then there is the speculative crowd. And I say speculative not because they don’t know what they’re buying, many do. But because they buy for appreciation. They believe the Dow will soon go to 20,000, and they want it to. They buy and hold betting that tomorrow some new idiot will come and buy their stock at a premium to their cost. These are the people who will be selling when the sailing gets tough, because their ships are made of cardboard. They will sell and they will be the ones to send the Dow down, possibly to 8,000. Furthermore, they won’t have the gall or bladder to buy at such times. Investors will for once in many years be euphoric.

In the meantime stocks are in a rush-hour-like grid-lock. Speculators won’t sell because its against the whole foolish buy-and-hold mentality they live with. Investors won’t sell a) because they haven’t been buying in ages, b) they already would have, or c) they are the new bulls, ready to step in as soon as things get bloody. Short sellers are out of part of the game altogether.

How do I know all this? Simple: Silver. I owned it from 21 all the way down to 10.50. Does it hurt? Well that depends. If you are out of a job with your life savings invested then probably. If you are a working man, putting more and more of your life’s toil into hard assets, it will mpay off immensely over the long run, so why worry?

The Dow right now should be priced at about 8,000 if it were looking 5 years out. But it isn’t. The market is looking at the next few days. Yes bailout or no bailout. As soon as that’s confirmed, hopefully that there will be a bailout and that the economy will only experience a bad recession at worst, then the next issue is for the Mice and the Buffalo.

The Mice are the risk-takers. The ones who thought they have their cheese and eat it too. They put too much money into too short-term of a gamble and lost. They will sell not because they want to but because they have to.

Buffalo travel in herds. Buy-and-hold today, run for the hills tomorrow. These folk would be better off owning gold. Its just as stupid as they are. They make when everyone makes more and lose more when the smart money takes losses.

It’s Caveat Emptor as they say in Latin, or Buyer Beware. Maybe they should say Seller Beware.

You can’t always change lanes while driving even though the other lane is better ,so too with investing. Sometimes you have to swallow losses. But don’t sell because others are. That’s juts plain foolish. And we are, or at least would love to think we are, Intelligent Investors.

The Moment of Truth

I deem the next 30 days as integral to my credence as an investment analyst. I guess its my conscious mind reminding my rational mind that everyone has their biases. How does one rationalize reality? Even if his orientation has been correct in the past, on what basis may he ensure that the analysis he has based his prediction upon, as well as the ramifications by which they transpired, will endure?

Nevertheless, sound analysis may only be inferred by the events of the past. Any future development may only be predicted by the laws and facts of yesterday, and not by the theories and speculations of tomorrow. With this in mind we have set out on our investment strategies, in attempt to discover not if our ideas are plausible, but rather if the preconceived notions by which we base our logic are adequate for further study, or if they have been compromised by invalid calculations and must be corrected before research may be continued.

Our primary choice of investment is currently in the precious metals sector. Much of the reasoning on the matter has been explained at length in previous articles.

Because we relate to the investor who continues to accumulate holdings by means of dollar-cost averaging, it is therefore important to regard as to when buying should discontinue. Just as in a stock the value-oriented investor may stop buying as his margin of safety, so too with regard to commodities must the investor slow or even halt his purchases in the event he feels his downside has increased substantially.

With this prelude, we feel that September is an important time frame in the precious metals sector, not in the sense of increased speculation, but rather with the intent of a buying deadline. This is due to the fact that the month has shown to be a fundamentally strong buying season.

[While this may seem similar to the crazed “January Effect” that has long withered due to public attention, it should be considered that public interest remains minimal and should not conflict with the intense buying spree occurring from South Asian countries this time of year.]

Additionally, it seems that many investing interests have subsided since the large decline in July of 2006. Since then much has transpired, as mines have commenced large de-hedging operations, central banks have sold off additional reserves, and the common investor has lost interest during the long and essentially boring consolidation stage. While many analysts have called for $1000 gold, this has not yet occurred and instead many technical funds have stood to profit from the period of increased market volatility.

Many potential buyers, have eyed September as a catalyst for a massive buying explosion. The rally will most likely emulate a standard trend, taking place in 3 stages: Denial, Migration and Euphoria.

Denial: As value investors continue to increase their holdings, buying will increase to resistance of $715 (we refer to gold), many analysts will doubt the rally has any real significance.

Migration: As a breakout occurs, institutions and growth investors will run with it, extending the sector to its largest gains, probably well past $1000.

Euphoria: As gold dazzles the masses, the speculators will arrive, this will culminate as the media too begins to applaud the rally’s strength, presumably sometime in June 2008.

The fundamentals remain in check, and reasons for the rally only continue to build. It should also be considered that stocks by contrast have historically had some tough sailing through the fall months. Gold may also emerge triumphant if the cycle turns “deflationary” and gold holds its value while stocks take a hit, on what’s inversely often the weakest months for equities.

The question of whether or not gold will rise or fall in such a scenario remains in the territory of the U.S. Dollar.

Time will tell, and that time is upon us.

Inverted Economics II – Hedging

In Part I, we discussed the ramifications of being long or short in today’s markets. Today I wish to reflect on Hedging.

A Hedge is when a company, fund or individual will buy or sell one asset to offset a possible loss in another. This occurs often in the futures market, when one will transfer liability to a second party. The second party may be a speculator (who accepts the risk of the trade) or it may be another party who has reason to accept the contract. These contacts are signed months and sometimes years in advance, so it is understood both why these agreements are made, as well as the risks involved.

The more commonly known Hedge Fund, is an investment fund designated to such vehicles. However, although it would seem inherently safe to invest in, the rules and regulations regarding them are quite strict. For instance, to invest in such a fund one must have either a net worth exceeding $2 Million (excluding main residence) or receive an income greater than $250,000 per annum.

Why? What risks can possibly lie beneath the apparent?

In truth though, these funds are highly risky and the reason being is two-fold. Firstly, many times a hedge fund may place their bets improperly. If, for instance, a bet is made by selling a perceivably overvalued asset and buying an undervalued one, the spread between the two assets may further increase. In addition, the entire basis for valuation may be ill-advised and could cost a fund millions.

However, such risk are the risks investors and speculators alike take on daily. What enables these funds to amass (and in many cases forfeit) their fortunes is Leverage. In a high-net-worth system the markets have established a derivatives market. This market is far more speculative even then the stock markets of old, inasmuch many of the trades involved are both unregulated and highly leveraged.

This means that the trader may gain or lose many times his initial investment, and in relatively short amounts of time.

An example from Minyanville

At the notional levels we are talking about, tenfold the notional value of cash markets, there is no such thing as benign derivatives. Interest rate swaps, the most benign of all derivatives because of past low volatility, are huge. Counter-party A enters a swap with counter-party B to hedge a rise in fixed rates. Now that A is hedged it allows them to take on more of some risk. B sells futures to hedge their price exposure. Fine. But the problem is both A and B only require only a small amount of collateral posted to do this trade. If the volatility in interest rates picks up and B defaults to A, A is not hedged and the risk they took because they thought they were hedged must be unwound. This multiplies to other counter-parties.

It’s as complicated as it sounds and it’s for no reason that the famed investor Warren Buffett labeled these derivatives as “financial weapons of mass destruction”.

The derivatives market involves north of $400 Trillion worth of speculative trades. Like a good game of poker the amount limited on the table is the amount the cumulative party will bet. But when the cards go down, so do the hopes of many.

Furthermore, imagine that you are in a casino with many tables each enjoying their own game, with horse-shoes lending as much as players will accept and the pit bosses smiling from the “eyes in the sky”.

But as anyone knows the game does end. And those who don’t recognize this, go home only with their head in their laps… and a bill for the drinks.

Has the system gone mad? Have we lost it? Indeed we have, but its nothing new. We do this every 25 years or so. We pile in and we load up with a greed for fortunes, when we break-even – we thirst for more, but when we win – we double our bets.

But the chips are few, the night is no longer young and the casino is closing. Drunk men came to wager their life fortunes . Even the simpleton came to bargain with his children’s college money or take collateral against his prime residence. He also wants in, he too wants to be one of the rich boys. But he’s come too late. All that’s left by the tables are the lenders waiting for their money back.

Back to Normal

Many financial gurus took a swing on the market’s volatility this week.

Because many of these institutions are highly leveraged, the difference between “model” and “market” could deliver a huge whack to shareholders’ equity.
– Warren Buffett

When subprime issues first surfaced this spring, many major institutions said they had none, but recent quarterly write-offs show they did. They weren’t lying; they just didn’t know what they had.
Wilbur Ross

We are unmistakably experiencing volatility in our financial markets… that provides a solid base for financial markets to continue to adjust.
– Secretary of Treasury, Hank Paulson

The markets will eventually normalize.
– John Mack, CEO of Morgan Stanley

These sorts of things are what’s known to the academics as “endogenous to the system” – that is to say, they’re normal.
– Bill Miller

Any overreactions will be areas for people to look for bargains ultimately. But I don’t think we’re anywhere close to that yet.
– Jim Chanos

The selling might accelerate. On the other hand the markets could easily rally. But in the end risk will be repriced. Whether it’s now or in 18 months, risk premiums will be more normal.
– Jeremy Grantham

With all this “marking-to-market” it seems that investors are beginning to realize what “normal” really means; stock prices don’t always rise, earnings don’t always increase, P/E ratios do fall, and that over-performance most definitely ought to be followed by under-performance.

When we say normalize, we don’t say it as a matter of personal opinion (the 200-day average), rather one of historical certainty (the 200-year average).

Logic will dictate that stock prices can only rise as fast as earnings. This equates to an estimated 6% per annum. But fast is the analyst to correct you and shout how equity prices have surged over 11% over the past few years! While this may be true, one must be prune in understanding how stocks prices operate.

“In the short-term the market is a voting machine, but in the long-term it is a weighing machine”. Any speculator has the right to “vote” as to what prices equities may sell for in the future. However, these prices will be determined solely by the economic forces that govern them. If the consumer spends less (due to a credit crunch let’s say), earnings will slow (as they have begun to) and stocks prices will factor this in (enough said). This is why stock prices have always fallen prior to recession.

People keep asking me how much further share prices may fall. My answer: I don’t know (and neither does Warren Buffett!). Sure you can have a guess, but its just as good as anyone else’s. We buy at value and sell at prime, it’s that simple. If we don’t know, we don’t buy. That is the mindset of safety and it will take some time for the market to understand that.

Portfolio Assessment
The following is a quick look at the various asset classes. My personal recommendation in the short-term is to be “long” safety – gold, commodities – and “short” risk – anything derivative with an abbreviated name that you can’t understand (like CDO).

Precious Metals
Gold has fallen is recent days (silver more so) and I am not surprised. I knew my downside and had ample cash on the sidelines for future buying opportunities. This seems like a short-term buying opportunity and nothing we haven’t seen in the past. Funds have been selling all sorts of assets to cover their losses in equity related investments and margin calls. In addition, Friday’s COT report showed an increase in the total short position (850 contracts for the Commercials). This paints an even more bullish picture for the long-term investor.

Stocks may continue to come under serious pressure especially if the retail investor begins to panic. Many small investors I have spoken with who initially felt we were due to see an immediate rebound, are beginning to realize that the decline may be deeper. This, albeit contrary to successful investing philosophy, may lead to further short-term selling.

If you do own stocks on a long-term basis, review your portfolio and be wary of anything that may be debt-related or vulnerable to speculation. As for buying, I believe we’re getting there but not there yet. Until we see a handful of companies with P/E ratios under 10 and higher dividends per share, we have time.

Fixed-income investments have generally been the alternative for the conservative investor, however they are currently vulnerable, as they are a) subject to ratings downgrades by agencies such as S&P and Moody’s, and b) they are Dollar related.

The Dollar
The Dollar finds itself under enormous pressure as prices for goods rise, but interest rates hold steady or may even lower in order to cushion the decline in housing prices. Also, is the worry of recent threats from China to dump reserves if Congress proceeds with its trade sanctions.

My speculation is that the Dollar is now in a counter-rally and should continue to around 83, after which it should once again test its all-time lows of 79.

Other Currencies
This week the carry-trade began to unwind once more. This is important as it exemplifies a) the fleeing from speculative trades, and b) how fast these scenarios can unravel (the Yen surged 7% in a bit over 5 hours). The safest currency in my opinion is the Swiss Franc (currently 1.20 to the US Dollar).

Energy prices have declined somewhat, but are still speculative as Hurricane Dean gathers strength off the shores of Texas. Grains have remained stable, and should continue to do so to meet adequate demand.

Remember, Risk is defined as the differential between perception and reality.

The Contrarian Philosopher

They say good traders happen to be philosophers, and necessarily so. A good analyst must understand what everyone else knows. If a good play has been diluted with public interests, it’s not ought to be that promising. In June we wrote

Contrarians aren’t always right. Many times contrarians are dead wrong – consider shorting the market in 1998. Divergent thinking comes in handy only once fundamental analysis is strongly in play. A stock can be a good value, but if everyone is ranting about it, there may be something you don’t know.

As I read through some of the articles the bulls (as well as those who don’t want to write anything bearish) are writing, it seems that the spectrum has radically changed. One analyst writes that at times when short-interest is at record highs and shorting from floor Specialists are at lows, a bear market has never commenced. This fits with the chanting of all the short-term analysts who, along with all the technical technical analysis (yes), claim that markets remain stable and healthy. The problem with such thinking is that we find ourselves in an information age where the time difference between a headline, the trader wanting to make a trade and the trade being executed, is literally instantaneous. A short ratio can be cleared in a day or two through awfully volatile trading. The predicament may change during after-hour trading and may not even give the investor a chance to position him or herself properly. I mention this to bring up the dynamic concept of contrarian sentiment. Now, the average analyst, upon hearing this will probably roll his eyes. But in essence it is the core mindset; one indispensable to the long-term investor and his decisions. The idea is quite simple: Any great idea may cease to be a great idea if everyone knows it’s a great idea. An example is the “January Effect”. For years it was one of Wall Street’s biggest secrets: “Throw away the bad stocks toward year end as tax write offs and buy them back in January”. Naturally, year after year stocks rallied during this month, however over time as the average investor became aware, returns declined gradually to mediocrity. In the long run the crowd is always wrong. Yes, they may group together and seem equally successful over a period of time, but this will end badly, as did every bubble in history. This said, it becomes similiarly apparent that as the crowd begins to question the crowd itself, you are left with an inverse logic. This is what I believe is occurring in the markets as we speak; an increase in overall volatility as well as a wide spread of critical thoughts from both camps, (calls for both Dow 26,000 and 5,000). When people try thinking like contrarians, they flounder. They will often begin with a biased mindset, moving with ideas congruent with their desired outcome. This may be exemplified by the current logic of the bulls in two ways. Firstly, the “Stocks are long term vehicles and this is only short-term noise” group, remains dominantly strong. As a matter of fact I strongly believe that many astute investors haven’t sold a single share since markets have turned volatile. This will change and the longer it takes to do so the stronger and more crucial the downturn will be. Secondly, some analyst have attempted to claim themselves “counter-bearish” advocating how with so much worry in the air stocks will surely rise. When I look at the stock market I try time and again to see a rationale behind the presented logic. Just two weeks ago the Dow hit an all-time high. Unemployment stands at historically low levels, the economy seems stable and many have just been observant of the subprime mess. The Dollar hasn’t made any major adjustments, the Federal Reserve hasn’t touched interest rates (as they did in 87 and 91), many investors remain calm expecting the action to subside, the Dow hasn’t even reached what is considered an adequate Correction (10% decline), there is still the inventory problem in housing, there is still much speculation in the derivatives market as there are still many bond portfolios that have not yet been re-rated or marked-to-market. How could anyone say that the danger has passed? The contrarian knows to “buy when others are fearful”. When there are no more eager sellers, eager buyers are usually nearby. But where does one see frantic selling? Recent down days by no means represent liquidation, especially when a significant number of those days have been of strong rallies. It seems that now too, many who attempt to beat the market are indeed falling under their own weight. It has long been shown that the average investor wrongfully cuts his gains and extends his losses. In the event of a hard sell-off we may see again, as we have in recent days (and today), surging short-covering rallies. It is quite interesting to note that after every major crash in history a strong rally has followed. It happened in 1929. After October stocks began to climb again. Many investors eager to recuperate their losses, as well as throngs of people previously on the sidelines saw it as a buying opportunity. The market came back strong. Then along came the Crash of 1930 and wiped out investors a second time. This occurred time after time until 89% of investors money was history. Those “long-term” traders waited 24 years to see a positive return on their capital. “Be greedy when others are fearful and fearful when others are greedy” we are taught. And it sure as hell doesn’t seem like investors are running around in panic, desperate to sell shares for pennies on the dollar, at multiples of 10 times earnings, as they have in the past. We wait.

Questions for Mr. Market

Is this the beginning of a multi-year Bear Market?

If No… (Bull-continuum)

Are we going to see a continued trend with further highs (consider it) or sideways motions (forget it)?

If continued trend, will this be a sacrifice on the dollar (get out) or a genuine rally (buying op)?

If its a genuine rally will the rally be in line with previous profits (strong economy) or will it be primarily speculative (hopeful economy)?

If it remains healthy, will we have the opportunity to buy at better valuations?

If it becomes speculative, will we increase our short positions in preparation for a larger decline?

If Yes… (Bear-reversal)

Will there be a bounce this week before heading lower (cover shorts) or will this week see continued selling (hold shorts)?

If the markets head lower, will their fall be relative to the dollar (wait to buy gold) or will it be beneficial for the dollar (buy)?

If the fall is relative to the dollar, will it break key support or not?

If the economy heads into recession by year end, will this put downward pressure on the commodities (deflation) or will we see a panic into physical goods (inflation)?

If the dollar breaks below 80 and the economy freezes, will the Fed lower interest rates (inflation)?

If the Fed does lower, will this have a negative impact on the future in the event the economy continues to worsen?

If the dollar breaks below 80 and the economy heads into recession and interest rates don’t fall, could gold still outperform the dollar?

If gold does not outperform due to lack of investor interest, may silver nevertheless outperform gold?

Good Investment Advise?

Many in the financial community would say stay the course. But that brings into serious question whether or not that may lead to an “Iraqi War Portfolio”. If it does, the average Joe- down-the-street is going to have more to talk about than just the Government’s balance sheet.

I like asking the opinions of those who are expected to be asked the same questions by those who don’t know any better. Yesterday, I spoke to an investment analyst. She said as follows

Last week’s market performance is only significant for a short term trader. For those invested in long term strategy, market corrections are normal. An aggressive investor typically enjoys a higher rate of return because they can emotionally endure the fluctuations of the market.

I respect the woman so I wouldn’t go ahead and vehemently disagree in person. But the ideas are what warrant critical questioning.

Last week’s market performance is only significant for a short term trader.”

Ok, how short term? How are you sure how long it will take before your investments break even. What I see is need for caution, not complacency. Many who invested at market tops have needed years and sometime decades to cover their losses. Investors in 1929 waited 24 years until they saw black!

“For those invested in long term strategy, market corrections are normal.”

This type of thinking may also be a direct derivative of the 19 year bull market we completed just 7 years ago. After the Crash of 87, we bounced back. After the slump of 1991, stocks came back strong. And every time the market fell during the Tech Boom it was usually making new highs again within days. We had a sell off in May last year and then again in February, both of which were greeted with all-time highs soon enough. But do investors really know what it means when value investors lost 60% of their fortunes in the 70s (not including inflation)?

An aggressive investor typically enjoys a higher rate of return because they can emotionally endure the fluctuations of the market.”

This is only if they hold a significant cash position and invest it as the market declines. However, in order to raise cash one must be prepared. If so when would you sell?

The theory that successful investors never sell their holdings is BS. Warren Buffett sold much of his portfolio in 1969 and later admitted that he should have sold it again in 1999.

Ben Graham warned in 1965 “When challenged to accept either the path of risk or that of safety, always choose safety.” Many of these financial advisers weren’t even around the last time the Dow sold for a price-to-earnings ratio of 8.

But what do I care. On the contrary, if everyone was worried I would have to start getting bullish and I’m not ready to do that yet and the market seems to agree with me.

Caveat Emptor we say. “Let the Buyer Beware”

What Would Joe Boxer Do?

I came across a fascinating thread on Fark Business containing over 300 comments. I wasn’t much surprised to hear hundreds of standard thinking “investors” take the stand as to what the future holds in store.

The thread was mostly from Thursday. The Friday thread had only about 20 comments. I guess a few more percentage points is what it takes to get some people to start thinking with their heads and not just with their wallets

Almost every single comment by those boasting any profit whatsoever, owned either Apple or Emerging Markets. That’s gotta make you think. Needless to say, came Friday and the Apple shareholders probably weren’t cheering on with so much enthusiasm.

Some comments…

  • “Not my stock.. I own Apple :)”
  • “It’s only 3%, No need for Panic”
  • “Ha ha ha. Freefall my ass. Stock market is up at all time high, and now people are taking Countrywide’s statements as an opportunity to take profit. We’ll be climbing again by Monday.”
  • “This isn’t a “freefall”; it’s a buying opportunity.”
  • “ehh whatever. hopefully it’ll go up by the end of the week :P”
  • “It’s down further than usual but it’s still not to bad.”
  • “God, I wish I could sell my house.”


“Everyone’s gonna run from risky assets until they figure out that whether Goldman’s on the hook for KKR’s bank loans has squat to do with whether people in the real economy keep flying to Disneyland and buying clothes for their families.”

Unfortunately, bank loans have plenty to do with Disneyland. Credit Crunches aren’t pretty, but how should he remember; It’s been almost 40 years.

“I’m putting my entire IRA into stamps.”

Stamps? As one commentator mentioned he’d be better off investing in Government Bonds. (some silver Sir?)

“This is a full-on bull-market correction. Look for 10% or more down from the peak, or another 800 or so points on the Dow.”

I do pity this man if he goes ahead and invests everything he’s got after a mere 10% correction. 45% may be more probable. (Once again they ain’t pretty).
“Subby yearns for American failure.”

“…get into Developing Foreign Markets, especially China and India. Growth is HUGE there, and there are mass construction/infrastructure projects that are just begging for money with serious return potential.”

This one sounds like a child who just saw candy for the first time. Yes, the growth is huge, but every last speculator on the freakin planet already knows that.

“The rest of us – those who buy and hold, investing for the long-term – ignore these market movements. In fact, we actually really like it when the market tanks short-term, because it allows our investing dollars to go even further.”

Ah, yes… The Buy-and-Hold mantra. The only ones who truly prosper in bear markets are those who have cash received as dividends from stocks bought with reinvested dividends.

“I’m just pissed Kraft plummeted today on news Warren had a official stake in the company … WTF its supposed to go up on that news :-(“

This is why we don’t speculate on Warren-Buffett-investments. And here’s the greatest joke of all. You are trying to beat Warren on a value play and he gets the bargain!

“Some people took profit. It happens.”

Just profits? People may end up taking a lot less than “profits”.

“Time to short them stocks.”

Sorry bud, but the time to short was at Dow 14,000. Now you might as well wait for the rally and short then.

The 1970’s Mantra: “HA! HA! I DON’T OWN ANY STOCKS!”

Another 70s Mantra: “Ahhhh…the beauty of living pay check to pay check.”

Give Credit where it be deserved…

  • Buy GOLD!
  • It’s not a free fall. It’s a very expensive fall.
  • Some people just don’t understand the concept of “inflation-adjusted”.
  • I bought gold coins and silver coin… I’m gonna own everyone when the crash comes. Also bought guns and 2 years of food.

Remember the last time…

Remember The Last Time

Caller: there is something wrong with my account.
401k Firm: what’s going on?
Caller: my balance went down. did someone take my money?
401k Firm: uhhh…

Today I spoke to a friend of mine regarding the market. The reason why I share his thoughts is because I feel that he represents a fair example of those currently in the market.

He is a 36 year old consultant, a reasonable businessman and someone who has a decent knowledge regarding stocks in general.

“One of the stocks in my portfolio,” he says “was one of the top 10 gainers in Australia for the week. It returned minus 1%. The key is to do better than the market”.

So I asked him if he had sold anything and if he was planning on selling, at what price.

He replied that he had two shares that were recently bought out by Private Equity groups and he was waiting for the check. Once they came he would look for the dogs in his portfolio and sell them to offset any tax gains.

“I wouldn’t get worried just yet. However, if this turns into a full fledge bear market I might sell more.”

Then I asked how far would prices have to drop in order for you to sell. “Well,” he said “I have many dogs in my portfolio and I would see it as a good chance to sell them off and use them as tax write offs”

What I have learned:

1. People aren’t worried yet. They are becoming more observant of the situation at hand but few have acted upon their interests.
2. Investors will begin selling when they realize that this market won’t bounce back as it did in February, or 2003… or even 1987. It’s been a long time since we’ve seen a true Bear Market.
3. Investors call themselves long-term holders, however once they begin to see consistent selling they will be inclined to sell just to prevent further losses. This will be quite similar to buying in the 90s as equity prices rose.
4. If this is it, the Bear Market that will lead to a U.S. recession and a global sell-off, then there are few investors who are aware of what the implications are.
5. The average person will instinctively gamble in the red instead of cutting his losses early.

As Todd Harrison says “Don’t let your bad trades turn into investments”

Gold Getting Charged

While analysts from Kitco to Australian dealers expecting a breakout and rally in late September it is interesting to see this developing.

Remember, although all the fundamentals may be at play and even getting stronger over time, price appreciation doesn’t not move in a direct line. Thus, at this point what many speculators are looking at is the technical analysis and information from the COMEX.

Again the Commercials have covered many of their shorts, which has always preceded the rally. Long contracts are also lower giving much room for additional buying.

The HUI Gold Index is showing strength breaking out above its downtrend and rising 14% over the last month, while gold is still struggling below 680. The real test will be at 720, its 25 year high and then its intraday high of 888.

Essential market history and human psychology has shown that the third rally of each trend is often the strongest.

Although the Precious Metals continue to show strength we believe that silver will again test its support level of 12.50 and gold at 625 before bursting onwards.

This may be psychological or even technical but it has done this on the past and may do this in the future. A good strategy would be to sell into the strength. If the course reverses sell everything and await a bottom.
If these levels are met it will be most definitely welcome as the end of the consolidation stage with 1250 gold and 30 silver in order.

Once again, these are mere speculations based on my experiences in this market. This has nothing whatsoever to do with investing or securing your wealth with precious commodities of material value.

As the Motely Fool Value Investor’s mantra goes: “Down Baby Down!”

On Speculative Losses

“Bear Stearns didn’t have a clue how much money it had lost. Nor would you if you had sunk all your money – or rather, all your clients’ money – in CDOs built upon CDSs reckoned against MBSs based on mortgage loans made to people with no hope of making their monthly repayments.
Adrian Ash

Yesterday, July 16, Bear Sterns was supposed to announce how much it suffered from the recent bust of two of its highly-leveraged hedge funds that were invested heavily in CDOs and other hazardous subprime-credit material. Still no word from Sterns.


On Day Trading with Fundamentals

“If you are looking for a rational basis for the day to day movements of markets, if you seek to find a degree of serenity by understanding why markets do what they do short term (A/K/A noise), well then you are going to drive yourself insane.”
Barry Ritholtz

13 Reasons to be Terrified of OTC Derivatives

As simple as Warren Buffett lets himself seem, he is a man of high intelligence with an intricate knowledge of the financial instruments. If he says that many of these are incomprehensible, I’d imagine that the average investor buying them doesn’t have a clue.

Without further a due, Jim Sinclair presents to us 13 reasons to be terrified of over-the-counter derivatives.

1) They have no regulation.

2) They have no standards.

3) Without standards there can be no viable market.

4) They are unlisted.

5) They are traded by private treaty negotiation.

6) They are valued by “mark to model,” which is a total cartoon.

7) They have no financial guarantee such as a clearing house.

8) They are unfunded special performance contracts floating in cyberspace. All funds in OTC derivatives are taken out as spreads and commissions.

9) More than 50 percent of the earnings of major international investment banks come from granting in the private treaty negotiation of these instruments of mass financial destruction.

10) Financial performance of OTC derivatives depends on the financial capacity of the loser in the transaction.

11) Control has been loose in interest-sensitive OTC derivatives because of multiple dealings outside of the initiating two parties until no one knows who has what.

12) The replacement value of these instruments is in the multi-trillions of dollars.

13) The massive expansion of these instruments has come in interest-sensitive and debt-guarantee instruments. Those are the most vulnerable.

The way the rich get richer, is by buying easy things they understand and working from there. Everyone understands commodities, many understand stocks, but very few understand the contracts being traded by the investment banks that offer them.

The advise is simple: Buy what you know.

Remember The Smartest


It’s always hard to relate to hunger when you’ve just downed a great five-course. But that’s the way our cognitive mind operates. It understands only the greed of our present, not the fear of the future. “That stock you were going to buy 6 months ago is soaring.” our conscious says.

But then we rationalize and tell ourselves to wait and see what becomes of the investments we own yet to soar. The only thing worse than being stuck in traffic, is getting into another lane as the lane you just came from begins to move. Our objectives remain within the margins of safety. We don’t gamble for no good reason. “Remember Enron” we tell ourselves. After recently watching “Enron: The Smartest Guys in the Room“, it comes to light how truly brilliant they were, almost fooling us in our faces with a motto like “Ask Why”.

Remember how so many were fooled by so few. How much good money was speculated on a company that embraced risk for the sake of greed, convincing us they knew how to make green stuff appear out of thin air (pun intended). Profits in the Billions, no balance sheets, no questions.

Remember the pension funds lost as executives retired with millions. Remember how much trust the public had in the seventh largest corporate body in the world of international finance. And then recall how fast so much money evaporated into the same unknown it originated from.

Remember how the masses speculated so blindly that the greatest cannot fail nor falter. And how stupefied the populace felt thereafter.

Remember the reporters who were so easily intimidated by corporate executives who personally flew down to their oppressors to express in person their magical schemes.

Remember how the leaders of such a celebrated organization, Lay and Skilling, were able to seamlessly encouraged employees to invest their life savings into this faulty enterprise while they, in discretion, unloaded their accounts.

Remember the secret funds of LJM1 and LJM2 hiding the company’s debts. Remember California, the government deregulation, the fraudulent marked-to-market accounting methods and the firms that had it overlooked.

Remember well, for Enron was not the first and will not be the last. Notice that what we know today is merely from the tapes, documents and testimonies that were not destroyed, shredded or manipulated.

Remember, for tomorrow shall be no different, and those who act foolishly will pay a heavy price while those who act based on logical judgment can at least stand confidently with the odds in their favor.

Ask why. Challenge the conventional thinking of humankind for it is so frequently proved to be erroneous. And remember that even the greatest can fall. Ask why.

On Musical Chairs

“When the music stops, in terms of liquidity, things will be complicated. But as long as the music is playing, you’ve got to get up and dance. We’re still dancing.”
Chuck Prince of Citigroup.

So by credit today before the prices on money rise. And then have yourself a seat for there probably won’t be enough to go around. Oh, I’m not being pessimistic at all, just revisiting the laws of physics that for every action there is indeed a corresponding reaction.