An Entry on Bill Cara's site

Non investing post, but somewhat relevant in a chaotic way.

Today I found Cara Cara oranges at Costco!
I also found $12.99 beef tenderloins that you used to be able to find every week for $9.99 per pound. I'm not sure if I'm levying an allegation price gauging (or indeed inflation), but c'mon--that's a 30% increase! I elected to get a rib roast at $8.29 (bone in) per lb.

My habit the last few years is to have a formal dinner (where we dress informally) for New Year's. My greatest pleasure in life (besides being a perfect mother and wife (HAH!)) is to feed people--to feed people interesting things that they might not otherwise find on their own. I think that is Bill's passion as well. He feeds us stuff that we might not otherwise have the skill or imagination to prepare for ourselves. For that I am grateful. This banquet has been a glorious one.

Within the last two weeks, my beloved cat, Theo, has gone missing as has our revered Tradesman. I don't think that Theo will show up--we live among hostile things (well, Theo was pretty hostile, too, if you were small, furry and scurried). Perhaps our sage Tradesman will utter a peep for us and assuage our concern; otherwise his absence is a chasm not easily filled.

The New Year is always a cathartic event: wipe the board and clap the erasers--just don't choke on the chalk cloud! Just think how much more progressive we would be if we treated each day as if it were the start of a New Year. Perhaps that will be my sole resolution--a powerful one I think.

Though I cannot invite you to my home, I can invite you to my virtual meal: Standing Rib Roast with Rosemary Thyme--find it here: http://www.epicurious.com/recipes/recipe_views/views/15824
Shrimp on Boston Bibb Lettuce with green apple and garlic sauce; Zinfandel roasted shallots; Pear and Pomengrant Salad (http://www.bittersweetbistro.com/pearpom.html) with Walnut Vinaigrette and Balsamic Glaze. I'm not sure that I'll find merchantable poms, but I'll substitute dried cherries or currants; Potatoes Dauphonise; chocolate almond torte. We're having a Red Zinfandel with dinner--a little digression from the Bordeaux's and Cab's that I generally serve. With the appetizer course, I'm serving a Larus Viognier/Rousanne. Champagne of midnight (nothing expensive) if we can keep our eyes open long enough.

My son says that when we have these parties (and they are small, no more than 10 people including us) he's never heard people laugh so loudly. Laughing is life's elixir, though it is amazing how few imbibe it.

Of course being from the South, NY day is black eye peas--and you cannot have black eyed peas without a beautifully cured Virginia ham and some some collard or kale greens. Oh the pleasures of being in a place where barbecue is a noun and not a verb!

I appreciate all of the generosities enjoyed here from Bill and respondents. For those of you lurking, I encourage you to make a resolution to make ONE COMMENT to this blog in the New Year.

So may every day be the start of a New Year for each of you, and may you drink frequently from the cup of laughter. Happy New Year to all!

Two Rules: 20 minutes and 30 minutes

Here are a couple of "rules" that I have found indispensable in keeping me from over reacting (or over reaching) in price moves that may either dismay or excite me.

Rule 1: Never transact business in the first 30 minutes of the trading day. (And I suppose that most of you know never to buy or sell after hours unless you really know what you are doing!). I cannot give attribution, for I cannot remember. I do recall seeing Tim Knight reiterate it, but I was familiar with it before then.

Rule 2: Allow twenty minutes for a daily price trend to develop (from the Logical Trader). Clearly this is for someone who has a shorter time frame, but even if you have a long time frame and you are looking to add or diminish a position, this rule will provide you with a solid surface to lean on.

A Watch List

[Click to enlarge.] I wanted to share this watch list with you. You can see that I prepared it as of 12.01. That Saturday (12.02) I went through all of my stock research--notes on stocks I was watching and had done research on--maybe even owned in the past. I created this watch list to keep an eye on a few items.

When I create my watch lists, I "pretend" I buy 100 shares of each so that I can freeze the price and watch the progress. If you don't keep a stock notebook, I really suggest that you do. I personally like Levenger's circa products. You can get their compact product which is just perfect for noting each stock position that you have or are contemplating. As you close positions, you can move the sheets to the back. In fact, it was my stock journal that I went to and pulled these items out. I had notes about why I did or did not buy or why I closed a position. {If you are not familiar with Levenger's you can visit their website here (no, I don't get anything for sending you there!) http://www.levenger.com/PAGETEMPLATES/NAVIGATION/Products.asp?Params=category=326|level=2|pageid=1749

And for any of you guys always writing on scraps and bits of stuff and putting it in your pockets, do yourself a favor and get their pocket notes. You have to be able to write things down--it's a sign of great genius, and you'll amaze yourself by what you wrote down that you can not currently recall.}

I'm not saying that the results above speak for themselves. Those stocks could have all gone down. But I think it is fair to say that these were stocks that had a good enough value proposition to be worthy of a further look. And since I had already done quite a bit of homework, not revisiting them would have been a waste of lots of past time. I know that you are not supposed to have regrets, but I had meant to start a position in HIG, and missed the move. I did pick up MIND by doing this very same thing, and I closed my position with a nice profit--you can see that watch list here. http://theperplexedinvestor.blogspot.com/2006/10/watch-list-review.html

I have another notebook that I always have with me when I'm reading on line or off line. I find it useful to go back through my notes to see how things have played out or not. It's quite a useful perspective in building one's personal mosaic of understanding. Everyone's personal organization system is just that--personal. Each of us thinks and processes information differently. I'm a global learner--so if you are going to feed me bits an pieces and expect me to understand it, I will not. I need the big picture first, then the details make sense to me. It's important to be respectful of how people learn, how they process information, and how they relate to others. Make sure that you understand how you learn and process and formulate your successful life strategies (not just investing!) around that.

I don't wish for any of this to sound strident or preachy, but I it is something that I feel is important at least for me. It's New Year's, you know, and we must be on the look out for things to improve!

Intuition

Russell's comment reminded me of something that happened. I'm one of those highly intuitive individuals (I'm an ENTP if you follow Meyers Briggs at all). Here's my story--no names given so that all will remain innocent.

We had a high-level presentation to do at a prospective client. Interestingly, we were being web-cammed into their mother ship. After our presentation (and our having left the premises), I shook my head incredulously and looked at my boss (our president) and said (to the effect of), "Something doesn't make sense to me. They were too nice to us and overly solicitous." Apparently, I was the only one of my team that thought this behavior odd, but it bothered me the whole exhausting trip home.

We travelled back all day Friday. When I came into the office on Monday, the first thing one of my staff members said to me was, "Have you heard the news?". The "news" was that our prospective client's parent had purchased our parent. That of course explained what I considered odd behavior. I happen to be very sensitive to people's body language and vocalizations, so nothing strange in my intuition there.

I've had some other odd flashes--I'll just tell a couple with the "nee, nee, nee, nee" Twilight Zone music in the background. My son walks up the steps (he's probably 8 or so at the time) and I have this flash that he is going to have gum in his hair. Within 5 minutes he is calling from the bathroom that he has gum in his hair.

I walk to get the mail and walking down the driveway I have this flash that my son's playpen (this is the second child, who was about 2 or so at the time, in the same playpen in the same location as the first child some years before, and he's been in that location for quite a few months) is too close to my china cabinet, and he might be able to reach in and cause some damage. Damn if I did not walk in the door and see shards of glass where my mother's crystal and china and been flung out. Now having the thought is not odd...it was purely logical. But having the thought within less than 5 minutes of it happening (when the opportunity for it to have happened sooner was always there) strikes me as a bit odd.

Our subconscious is very powerful. I know that I value mine to crank through difficult problems. Invariably I'll be doing something mindless (showering, blow drying hair) and then BOOM the answer pops in your head. I need that processing time. I really admire (and am jealous) of folks who do not need that incubation time.

Leisa

On Intuition (Major Axiom VII)

The Seventh Major Axiom: A hunch can be trusted if it can be explained

Minor Axiom XI: Never confuse a hunch with a hope.

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I have a companion book for this and that is Malcolm Gladwell's Blink. It's a fascinating read on how we make judgments seemingly based on intuition, but in fact our brain is processing in a way that is occulted from our consciousness.

Gladwell's Tipping Point is also a favorite of mine. I read it at a time when it was very meaningful in the business in which I was in--I came away with a couple of very solid ideas that I was able to implement within the company that I worked.

I think that Gladwelll as a very accessible and engaging style. His work certainly put the phrase "Tipping Point" into the vernacular!

Spread Trading

http://www.financialsense.com/editorials/kleinman/2006/1226.html

The above article is a good introduction to spreads. While this is not something that I have any competence or confidence in using (heck I'm still working on shorting successfully), this is something that is worthwhile understanding. Why? Because it forces you to think about how the market might move and what trading/investing vehicles are available for you to capitalize on those moves. And if you are thinking about how the market it going to move (either with you or against you), then you will do a better job of gauging risk--and that is always a good thing when it comes to protecting your precious capital.

I visit FSO often. They have alot of articles from different contributors. I understand most of them! There does seem to be a preponderance of precious metal bias. Sometimes it sounds like Henny Penny, and that is an investment mantra of some. Any bias that you hold really requires you to wrestle it to the ground and thump it hard a few times. That's easier said than done. I have a few biases that I have to exorcise still. As I'm not a full time trader, these impede me but they are not lethal. For a full time trader, I would imagine that being hard headed about anything will have you out on the street pretty quickly.

Perhaps a good New Year's resolution would be for you to look at some of the biases that you might hold and see how they might be remediated to improve your investment performance. I'll ruminate on this for myself and post a few of mine.

The Man Who Planted Trees

http://video.google.com/videoplay?docid=5718335807564310432&q=the+man+who+planted+trees&hl=en

If you don't mind seeing a URL that says "popefucker" (apologies to all), take time to watch this video. A beautiful story--and relevant to investing.

Position Management

I do quite a good job in finding various candidates to go long and to even short. I do quite a lousy job in managing my positions. Nona noted that in one of her comments to the "On Mobility" post. Position management is so critical to good results. As a beginning investor, this is a key skill to master. I have a tendency to sell to soon as Nona notes for herself.

I know that stop losses are critical. But on some of the stocks that I have owned, I have noted that my stop loss has been hit deliberately. It happened to me twice. If I cannot manage a position (s-t horizon), I'll put a stop loss on it. Otherwise, I'll baby sit it. (Perhaps I suffer from paranoia).

I recently identified USAP as a short candidate. I shorted it at $34.56 today it closed at $32.88--but not before going up to $37 and scaring the bejeebers out of me. The price action made me doubt my thesis, but to be fair $37 was the jumping off point. But the stock's RSI was turning down, and I should have used that technical indicator to help me gauge risk.

I'm trying to develop my confidence in shorting because I truly believe that if you can make a reasonable short/long case for a stock that gives you all the better insight into managing the risk of your position. And if one case does not emerge stronger than the other, then there is no discernible advantage to either, and you should move on. Barry Ritholtz in his Apprenticed Investor Series notes that you should learn to short.

As Nona points out, any position that you take, you should be clear about your parameters. If you are consistent, you will roll with the odds. It's like Black Jack. If you sometimes take a hit on 16 and sometimes do not, you screw up your long term odds. So consistently do or do not take a hit on 16. So if $37 was my jumping off point (and it was), then I did the right thing and should not be second guessing. But I do think that my parameter should have been better packaged--$37 and improving RSI, rather than $37 and declining RSI.

There is a book that I like alot. It's called the Logical Trader. Fisher has a terrific system (I think anyway) in helping you identify the trend. If you have not added this book to your investing/trading library, I would highly recommend it. I actually created an excel spreadsheet to put the principles to work. Unfortunately, my hard drive crashed. I'll have to develop it again. You can find the book here.

http://www.amazon.com/Logical-Trader-Mark-B-Fisher/dp/0471215511

Kookmin continues to act well. I also started a position in BFT (Balley's Total Fitness). I did a little research on them through Bill Cara. I thought they were a dog of a company, and they indeed crashed. They are a likely buy out candidate, and I can hardly imagine that the news would get worse.

My gold stock KRY perked up some today. With all the Iranian saber rattling, that is bound to happen. It is a very volatile stock.

--a little stock talk given that I've been prattling about other unrelated items.

Call me Alpha

Well, I'm now on book three on my reading odyssey to develop my understanding of dog behavior. I just finished "Leader of the Pack" by Nancy Baer and Steve Duno. If you have a dog and you have never read a book about dogs, I highly recommend this book.

One of the critical elements of establishing pecking order, is that the master sleeps in the best place. When you share your bed with your dog, you give the dog the impression that they are on equal footing. Banishing the Chumenator from the bed has been difficult. The first night, it was pitiful. My husband and I were too tired to fight it. We had better luck the second night. The third night, she was back in bed with us. We have successfully banned her from the furniture. We've not given up on the bed thing, and I know that we are giving mixed signals. But you can only change so many behaviors and once. We have successfully banned her from the furniture. We say "off" and drag her off. Then say "good, off" and praise her lavishly. This technique has worked terrifically. When we see her contemplating mounting the furniture, we say "off", and praise her when she walks away. This took only two days. Also, all the books say you should never strike a dog. Never. Ever. Dogs respond to positive reinforcement, not negative reinforcement.

I also learned this critical tidbit that I want to share. For any of you even considering a puppy, heed this. Do not get a puppy less than 8 weeks old. Between the 6th and 8th weeks, the puppy learns how to integrate with other dogs (with its litter mates). Failing to learn this, the dog generally has anxieties about other, unfamiliar dogs. We have seen this behavior in Macy. I only wish I had read these books years ago.

So here are a few additional things that I wished I had known earlier in my dog-ownership lifetime, and that I'm going to practice consistently (exception being the bed thing at which I've temporarily failed.)

1. You go through doors first.
2. You greet your visitors first.
3. You eat first.
4. The dog always must give way to you (meaning you don't let your dog sit in the traffic area for you to step over).
5. You make the dog come to you. You do not go to the dog.
6. You must provide your dog with calm, confident leadership to include being fair in meting out punishment and praise. If you do not feel the leadership void, your dog will--and ambiguity in any of that causes your dog anxiety.
   

I also have the book, "How to Speak Doggish" (author Stanley Coren)....Buy this book for the appendix alone. It shows various body language and behaviors that are common among dogs that possibly could save your life--at the least, it will make you more adept at recognizing the dog's state of mind and how to react appropriately.

I'm done with my dog research. I feel like I've read three books that have provided both insight and practical advice. I will seek out a dog obedience class in the New Year. That's one resolution out of the way.

Day Lily seed pod

An Unfortunate Fella

This is a tomato horn worm. If any of you are gardeners, you know this guy. He can strip a tomato plant quickly--you'll think that you've had a deer attack, but you'll need to look more carefully. Their color is a perfect camouflage, but if you are diligent you will find them. And find them you must if you want to enjoy your tomatoes.

But they pay their dues. They serve as hosts to wasp larvae. This poor fella was such a medium. The wasp took care of this pest before we did. The insect world is cruel and hard.

Odd bits

I'm copying photos to my portable hard drive. I'm uploading a few here, with no rhyme nor reason other than I like them. Unfortunately, my sleep schedule is a bit awry so I find myself "Sleepless in Va". So I'm doing something relatively mindless (copying photos) and sharing a few tidbits along the way.

Here's a lovely appetizer. This is a prosciutto roll. In the middle you have blue cheese, currants and watercress, though this is "lamb's ear" as no watercress was available.

May I introduce you to a grape varietal/wine that you may not have tried? A Viognier. (It's the wine in the picture. One of the best descriptions of wine was like this....a Sauvignon Blanc is like Jamie Lee Curtis. A Chardonnay is like Marilyn Monroe. Viognier is like Catherine Deneuve. It's a lush white wine with a floral nose. It's terrific with appetizer courses. The Wine Bible describes Viognier as follows..."one of the finest but rarest French white grapes. . . Viognier's appeal is its exotic, hone-suckle, musky fruit, its round body and--most of all--its mesmerizingly lanolish textures."

If you enjoy wine, but have not ventured off the well-traveled roads, I'd suggest this delightful detour.

Christmas Day--17:30

After noon-time, it ceases to be Christmas to me. So much preparation goes into to the launch, that after the magical morning time, it winds down quickly--or maybe that is me. I write this after having a pleasant afternoon reading my Les Halles cookbook (A. Bordain) and visiting winkie-land for a needed rest. Over the last three days, I've made untold dozens of cookies to give to family/neighbors and prepared for Christmas breakfast.

Normally, I do no cooking of Christmas meals. I go to my stepmother's (and previously my mother's) for Christmas Eve dinner, and on Christmas, we go to Mark's parents. However, because my MIL is suffering from osteoporosis, I offered to have Christmas breakfast while she was eating with us on Thanksgiving. I'm glad she agreed, for she's too frail to do Christmas dinner. Therefore, we had a fair amount of cleaning to do as well as prep for our breakfast. It was fabulous! We had Blood Mary's, sausage/grit casserole, homemade pecan rolls (yeast!), fresh orange slices, and pan fried potatoes.

I made the pecan rolls the day before. Yeast rolls need two risings. The initial rise which you punch down and then form your end product and a second rising prior to cooking. If you want fresh rolls in the morning, you have to refrigerate to impede the rising. The rolls were already in the pans and ready to be taken out of the fridge for the second rising. They were incredibly yummy, and I'll make them again. Trust me, everyone loves homemade yeast breads. Every undertaking has one of those..."why did I do that?" moments. Sectioning oranges provided that moment this year. I've never sectioned an orange in my life until last night. I did a whole bag of navel oranges. My fingers were soggy and wrinkled, but I had a bowlful of beautiful sections without a hint of pith or membrane. Effort was not greater than or equal to the reward. Strike that off of any future lists!

My Dad and my stepmother (my mother is deceased) were there along with her grown son who always visits for Christmas. My MIL and FIL came. I also invited a neighbor who was alone. We enjoyed our meal and pleasant conversation. It was a perfect Christmas.

I hope that your celebrations were equally enjoyable.

Friday Trustee Sales

Housing Starts

Here's the privately owned housing starts recently released. Looking at the recent data, once can see the precipitous drop in these starts. As you know there has been much written regarding the linkage in the housing starts and how that data correlate (highly) with recessions. Thankfully, the good folks at the fed highlight our recessions for us which allows some reasonable review of the data performance against the backdrop of the business cycle.

Transforming the data to a % YOY change, yields the chart that you see below.


I found a couple of things surprising about looking at the data in this view.

• I would have expected the annual YOY % increase to be a little spikier given all of the "boom" information that we've heard. Our current increases are dwarfed by the other spikes.
  

• It does appear that we have a bit further to go on the downward side (if one can infer anything reasonable from the data presented) to reach the depths of decline that have presaged other recessions.

At any rate, looking at the data in a different way gave me a different context than I had in looking at just the absolute change in the numbers.

Tidings of Comfort and Joy

With the week rapidly closing, I wanted to express tidings of comfort and joy for the holidays. Finding comfort and joy in the ordinary spaces of our lives erases the contentious boundaries that we sometimes draw around our religious, political or lifestyle choices. I'll express a wish, a hope and gratitude for the coming year.

A Wish: May each of you find comfort and joy in your ordinary spaces.

A Hope: That you will share--with reckless enthusiasm and boundless generosity--your comfort and joy with others.

Gratitude: For visiting my blog, sharing your ideas and offering encouragement as I undertake this new process.

On Mobility (Zurich Axiom VI)

The Sixth Major Axiom

"Avoid putting down roots. They impede motion."

Minor Axiom IX

"Do not become trapped in a souring venture because of sentiments like loyalty and nostalgia."

Minor Axiom X

"Never hesitate to abandon a venture if something more attractive comes into view." (Blogger's note: apply this to investments, not your love life).

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These strategies are very appropos to one's career. I worked for someone for a very long time (about 10 years as employee then as consultant), and I realized that they would never be able to pay me what I knew I was worth. I left for another opportunity that granted an immediate 30% increase in salary. Within 4 years and yet another opportunity later, I had quadrupled my annual pay. Looking back, it seems like a no-brainer. But when you work with people for a very long time and you feel a sense of ownership and loyalty...well, it's easier to stay than leave sometimes (at least for my disposition!).

Rumi Axiom 3

Spring overall. But inside us
there's another unity.

Behind each eye here,
one glowing weather.

Every forest branch moves differently
in the breeze, but as they sway
they connect at the roots.

Rumi
Birdsong, translated by Coleman Barks.
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I've not picked up this Rumi book in years. I had a few poems that I enjoyed, and I've shared a couple here. It's a slim volume. As I opened it this evening (long day of work 12+ hours), the book opened here and my eye was drawn to this. I was surprised that the page was not dog eared.

I share these poems because I think that they have deep meaning. They have nothing to do with investing, but everything to do with being human. Too often we forget our humanity, and it is something worth our remembering.

Pensive Chum

Doesn't this look like those fake backgrounds in the LifeTouch photo's?

Stalwart Chum

The Chum-enator

This is Macy, some month's ago as a sweet puppy. She's 40 lbs now. Another picture to follow. I have this habit of assigning odd nicknames to animals. My mother has this silly dog back when I was in college. Her name was Sheba, a part collie/shepherd mix. For some reason, I called her Chumley. I've resurrected that name in a bastardized variation. I call Macy, Chum-chum. Yeah, it's stupid. Little Chum-chum is part American bull-dog/lab-beagle mix.

I've never NOT had a dog in my life. Not one second has my existence on earth been bereft of a dog. However, after being around dogs for 46 years, I had to buy a dog obedience book. We also have 2 bird dogs (Lucie 13.5, Greta, 10.5) and a poodle, miniature (Chloe, 14) (miniature). No obedience problems there. As an aside, I have three cats.

I found an expensive pair of shoes--chumified. I found a not-so-expensive pair of shoes--chumified. Remember my Montaigne book? Chumified.When your 18 year old daughter brings a puppy home and says, "I'll take care of it. (unspoken--I'm going to school, I have a boyfriend, I work and I'll never be here you sucker)" I want you to remember Chum. Everything that you hold dear in life might be chummified.

These material things are subject to puppy curiosity and worse. That is not why I need a dog obedience book. I was walking my dogs when little Chum thought it okay to bust up into a neighbor's yard to challenge their yellow and black labs. Each was twice as big as she. She ignored my commands. I managed to get her and hauled all 40 lbs of her 50 yards away. I was gasping and wheezing. Had there been an altercation, I would likely be writing about shredded Chum.

Over the holidays I will devour my dog obedience books and learn the ways of the dog whisperer's. I'll show chum who is Alpha! I have read Cesar Milan's book. It helped a bit, but I needed more specific instruction.

On Patterns (Zurich Axiom V)

Major Axiom V

"Chaos is not dangerous until it begins to look orderly. "

Minor Axiom V

"Beware the Historian's Trap."

Gunther states that "The Historian's Trap is a particular kind of orderly illusion. It is based on the age-old but entirely unwarranted belief that history repeats itself.. . . Don't fall into this trap."

Minor Axiom VI

"Beware the chartist's Illusion"

Gunther..."The Chartist's Ilusion is often a graphic extension of the Historian's Trap. "

Minor Axiom VII

"Beware the Correlation and Causality Delusions."

Minor Axiom VIII

"Beware the Gambler's Fallacy."

Gunther: "The Gambler's Fallacy is a peculiar variety of orderly illusion. In this case the perceived order is not in the chaotic work all around, but inside, in the self. . . you are temporarily in a state in which random events will be influenced in your favor."

Gunther's Speculative Strategy: The Axiom warns you not to see order where order does not exist. This doesn't mean you should despair of ever finding an advantageous bet or a promising investment. On the contrary you should study the speculative medium in which you are interested. . . and when you see something that looks good, take your best shot.

"But do not be hypnotized by an illusion of order. Your studying may have improved the odds in your favor, but you still cannot ignore the overwhelmingly large role of chance in a venture."

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I have a confession. I read this Axiom when I was overly enamored with technical analysis. In hindsight, I realize how true this Axiom is. And what's also contemporary about writing this Axiom V this p.m. is that it dovetails with the Fisher admonitions of embedded in the three questions.

The technicians/chartists got things horribly wrong this year. My over reliance on the "magic" of technical analysis and charts was foolish. But as a novice, I really didn't know. It seemed so "fool-proof". Well, I'm the fool that proved it otherwise! A wiser fool.

Color Palette

I spent an obscene amount of time working on some colors for the blog. I hope that you like the new result. I changed the background color to another non-but-almost-black color. I think that it is easier to read.

All of these colors are out of a very specific color palette. Here it is! I find this stuff fascinating.

Anecdotal Shopping Information

Two comments made to me yesterday--December 16th, 8 days before Christmas-- by husbando and 18 year old daughter--shopper extraordinaire.

Husbando (who went to HD to purchase gift certificates): There was no one in Home Depot

Daughter (who has been to every mall in our area): Everwhere we have gone, we've had no trouble parking.

Strikes me as a perplexion in the making. Perhaps there will a blowout for on-line shopping concerns.

Heading into 2007

Calm waters and blue skies!

Fathoming the Unfathomable

Of course we are always receptive to stuff once our noggins get acclimated to something. If you buy a particular make of car, your eye will spot that car easily among the dozens of makes, models and colors. I found it interesting to run across the following items after my post regarding Fisher.

Here's Doug Kass' view of things that might happen in 2007

http://www.thestreet.com/_htmlttt/newsanalysis/investing/10327100.html

Jim Puplova had an interesting article on Rogue Waves. It's a nice summary of some credit mishaps that could potentially develop.

http://www.financialsense.com/stormwatch/2006/1215.html

The Ubiquitous Ken Fisher

Jim Puplova ( http://www.netcastdaily.com/fsnewshour.htm) interviews Ken Fisher in his 2nd hour of December 16 broadcast. I think that listening is worth your time. I have a bias against ubiquitous folks like Fisher (Martha Stewart, Oprah Winfrey etc). But I was quite intrigued by the Fisher interview, and I plan to mend my bias a bit.

His book is "The Three Questions that Count". Here they are:

1. What do I believe that is false? [This is a nuance--what do I believe to be right, but is really false. Not what do I believe to be false.]
   
2. What can I fathom that others find unfathomable? [Perhaps just thinking about #1 and #3 satisfies this!]
   
3. What is my brain doing to blind-side me? [Think emotions/biases/herd thinking]
   

One of the things that he touts are the common investment mythologies, and how they might be wrong. This statement rang very true to me, for I think that the investment community has very much been riveted by lots of mythologies. Now I'm not qualified to comment on those mythologies, but think about everything you've heard this year regarding deficits/savings rates/dollar valuation/yield curve. Fisher had these observations:

1. If most folks agree with you do not look at that as confirmation that you are right, but that you might be wrong;
   
2. If you hear/read about investment ideas in the market, they've probably already been priced in;
   
3. The older any argument is, it loses its power (think Y2K); and
   
4. Whatever category of stock that has been hot for the last 5 years may not be hot for the next years. [You've seen that too in how folks pick mutual funds--the last five years have been great, I'll park my money there].

I have more to say, but it was taking me too long to make a lucid post on the matter. That means that I've not thought it through well,and I have undigested ideas. I'll work on these. The Yield curve and the negative savings rate are two items that have my noggin gears grinding.

DIA/SPY KA-Puts and other Digressions

Well, today is the day that my DIA and SPY puts went kaput. They never recovered any value from my last post presaging their demise. Sniff.

The good news is that my KB has increased 3.47% this week. We'll see how this position develops.

----------------------------------
http://cowles.econ.yale.edu/P/au/PINDEX.htm

The Cowles Foundation has several erudite papers that some of you may find interesting. I picked up James Tobin's, "Consumer Debt and Spending: Some Evidence from Analysis of a Survey". It's a paper that is older than I am, but it had some conclusions that I thought I'd share. I've used HyperSnap to capture the screen shot. I hope that it turns out. I'm too lazy to type.









We've seen this argument given our tapped out 2006 consumer.





Hmmm......







We have a negative savings rate! [L annotation 12.16.06: see my later post on the savings rate, and whether or not that is just a mythology. What item 2 suggests, then, is that absent looking at other sources of liquidity ( home equity, investment accounts).













So sentiment is dislocated from purchasing decisions?

Of course all of this may be old and outdated, but it struck a chord.

Friday's Trustee Sales

Mea Culpa

A reader was kind enough to e-mail me privately to remind me that South Korea (the origins of Kookmin) is not in Hong Kong. Crossed brain wires. I appreciated the heads up. Rather than surreptitiously correcting it, I thought I'd just do a mea culpa.

MIND (Mitcham Industries)

Today I had one of those lovely days when you check your stocks and you see a large jump. My Mitcham Industries (MIND) was trading at $15.5 in AH. My basis was $11.16. My trailing stop loss kicked in and I sold it for an average of $13.78 or a 23% gain. Not bad for a holding of 60 days. The stock closed down $13.02. So it had a pretty wide swing today. The stock had run up before earnings, and the comps at first glance looked terrific. But peeking below the covers, there was a bit of a "whiff".

I'm initiating a position in Kookmin bank. I've owned KB in the past I've done well with it. My thesis is that as a leading Honk Kong bank, it will (1) be a hedge for USD and (2) allow participation in the strengthening Asian economy--too include China, as Hong Kong banks will be beneficiaries.

They were supposed to by Korean Exchange Bank which was bought by Lone Star Funds--all sorts of finger pointing is going on, but Korean officials are stating collusion etc. It will be interesting to see how this plays out as Koomin was to purchase KEB from Lone Star.

N=?

In my last job prior to doing my current second career stint as a Consulting CFO, I had the job of understanding stuff that made my head hurt: biostatistics. There are lots of reasons why being a CFO is the second hardest job in the world--being a CEO is the hardest--but the number one main reason is that you have to understand every %^@$%&%* aspect of your business, even if it is outside your realm of expertise--experience and/or education. But a CFO (a good one anyway) has to know everything that can possible go wrong and advise the president and other executive team members of such looming dangers. It's the executive team's job to mitigate these dangers. I've always believed that the CFO is the key supporting team member who spearheads this effort.

My last "business" was disease management. I hated statistics in college. I had a combination of brilliant-but-unintelligible Asian professors (I'm not being mean, but when you are a doofus student trying to learn statistics, getting concepts from professors where English is their second language is tough--and I admire them that they have a second language and the balls to teach in it) to southern-backwater "there is nothing worse than bringing an unwanted child into this world" teaching me mean, median, mean, confidence intervals and n='s. Trust me, I'm not levying any judgment, but as a 18 year old college student, it was tough to garner any sense of "this is going to help me in business life". So young. So stupid.

Dial forward 23 years. What can I say but, "Wrong. Wrong. Wrong. " Public accounting....statistical sampling--that was just 3 years out, and they gave you a sheet that any 12 year old could fill out. After public accounting, I didn't use it, didn't need it. However, had I worked for some Fortune 500 Company that used Deming models for quality and the like, I'd have to slog through it again. I was in middle market, so no statistical models for me until.....2001. Selection bias and regression to the mean were dancing in my head at night as I (with my team) were negotiating multi-year, multi-million dollar disease management contracts. One of my favorite sayings to staff members and colleagues (just to make sure they understood the magnitude of my question), "If you had to bet the farm, would you state that (fill in the blank)?" These were not just ordinary contracts; these were 100%-fees-at-risk-if- you-were-wrong contracts (and you are a sub of a Fortune 500). Horrific, wake-up-in the middle-of-the-night-heart-thumping stress. When you are making "bet-the-farm" decisions you have to ask the questions of team members in "bet-the-farm" vernacular, just so that there is no misunderstanding regarding the import of the question, OR the responsibility that you are levying on them. Of course, you give those valuable but squirming team members the option of saying "I don't know."

My point is that when we look at the "no-recession-in-history-but....(fill in the blank) had a (fill in the blank)"....you have to understand that the "n"---the number of occurrences-- is so f'in (I was in advertising and the vernacular at the time was such that a sentence without the "f word" was incomprehensible to staffers younger than 30) small that there is no way that these relationships have any statistical validity.

An "n" of 10, or whatever the number (and apologies that I have not done my homework to give you "n") has no statistical significance. The "n" is not large enough to give you a high degree of confidence. It's anecdotal. So while yield curves or my spouting off Zweig observations or any of the stuff that "talking heads" might espouse MIGHT sound weighty and convincing, these things are really not. The "n" is too small to have a high degree of confidence. That doesn't mean that there is not a high correlation, it just means that the "n" is not high enough for you to have certitude.


P.S. I'd happily be taken to task for any utterance above, though please provide a rational explanation that fits within the confines of accepted statistical theory.

Montaigne

It's always a welcome diversion to be reminded of something that sends one to the book stack, and Russell surely provided one (Thank You!) in quoting Montaigne.

One of the best investments that I ever made was when I was 16/17, I subscribed to "The Classics Club". These are the books with sage cloth, red/gold black bindings or the beige vinyl books with the gold and read spines you see in movie props. I think that they came every other month or so. I have about 50 or so, and at one point in my life made good progress in plowing through them. As I reflected on Russell's post and remembered my book, I am reminded by looking at the chapters below of the great wisdom in those tomes. I've got my eye on a couple of chapters. More later.

Here are the chapters in my book:

Book I

• Of Idleness
• Of the Education of Children
• It is Folly to Measure the True and False by our Own Capacity
• Of Friendship
• Of Cannibals
• Of Solitude
• Of Democritus and Heraclitus

Book II

• Of the Inconsistency of Our Actions
• Of Presumption
• Of Giving the Lie

Book III

• Of Repentance
• Of Three Kinds of Association
• Of Vanity
  
• Of Experience

Non Confirmations--Wondering Out Loud

Much has been made this year with the "non-confirmation" of the Dow Transports vs. the Dow. Tim Wood on Financialsense.com offers this

http://www.financialsense.com/Market/wrapup.htm

However, I couldn't help but wonder about the following. Remember the ISM Manufacturing numbers. That is going down. The service sector number this week made some a little brave, and today non-farm payroll number was better than expected.

Here's my wonderment: If we are moving away from a manufacturing base (and we know we are because we make too much damn money here to produce anything that anyone can afford) and if we are more of a service based economy, then is the non-confirmation of the transports that big of a deal?

It's a rhetorical question. I'd like to form some other thoughts on this. But it is something that bears some consideration.

Subscriptions Review

I have this unfortunate habit of diving headlong into things that I find of interest to me. I say unfortunate in that I have difficulty in sustaining an interest those things. This blog may be one of those things...but we'll see.

An interest that has not waned is my interest in continuing my investor education. I have now a solid 15 months under my belt, and I'm still fully engaged and making progress. However, as part of my enamouredness (why isn't this word enamourment?) with my education, I oversubscribed to various information. As the subscriptions come to the end of their term, evaluating their usefulness. I'll list these here.

• The Street.com's Real Money and Jim Cramer's Action Alerts. I've kept the RM subscription and canned the Action Alerts. I kept RM because there is a wealth of commentary that I would miss.
• Stock Chart's.com--charting and John Murphy. John Murphy is a terrific technical analyst, and I've enjoyed his column. This week ended that subscription. His commentary is no longer daily, but rather 3x per week. While I like StockChart, I have MetaStock, so I didn't feel the need to duplicate that.
• Meta Stock End of Day: I would not give up my MetaStock End of Day. The Monthly subscription to Reuter's Data Link is about $25 per month. I adore the charting, the expert commentator's and the grouping of stocks by sectors. It makes it easy to do individual stock scan's within sectors that I'm interested in reviewing.
  
• Hirsch Org (Stock Trader's Almanac--including the monthly subscription): I'm on the fence on this one. They are so well followed that you have to wonder if you are getting a leg up.
  
• PeterDag: No brainer. Keep. George Dagnino is a trusted source, and he has a long history of accuracy. I'd be FAR better off if I had been more of a disciple.

Friday's Trustee Sales

Hitting stasis here.

Conspiracies!

http://www.engdahl.oilgeopolitics.net/Geopolitics___Eurasia/Russian_Giant/russian_giant.html

I found the above article fascinating. I hope that you will take time to read it if you have an interest in understanding better political bedfellows. Utterly, stupendously fascinating (remember my background, though, so it doesn't take much to titillate my imagination). I don't know if it's a conspiracy or not, but boy, does it make you connect the dots. This article helped me understand and appreciate the political landscape a bit more. I think that we are often (okay I'll speak for myself)...I am oblivious to the strong undercurrents at play in the international arena.

I don't know why I'm surprised by the machinations and the types of thinking that go on. Truly, is a political plan any different than a business plan? I'd now argue no. I've spent my corporate life having to devise and execute these plans. Why should the business of running a country be any different. How are you going to get oil? How are you going take care of your deficit? How do you keep an edge on your competitors? These are all necessary things. And when I see these alliances, strange allegiances, covert plans, overt initiatives, I've naively been surprised. I suppose I just live in a bubble world.

My Commentary on Forecasts

First, as I was writing the Axiom IV was struck by the "nobody knows" language. I've not picked up this book in over a year or so, and I remembered my recent post about "No one knows." I wasn't plagiarizing. I suppose that I was moved enough by my recent experience to write about it, and I Gunther's admonitions were long forgotten.

The reason that I wrote Gunther's speculative strategy was this: I thought he was dead wrong. (Brazen ass that I was). I thought that forecasts did make sense and you could look at the horizon and increase your odds. I was dead wrong and poorer for it. But it was a really good, hard lesson to learn quickly and the braying has long abated. I'm just nodding now in agreement.

On Forecasts (Major Axiom IV)

"Human behaviour cannot be predicted. Distrust anyone who claims to know the future, however dimly."

-------------------------------------------------------
Each of Gunther's chapters ends with a speculative strategy. I'd like to detail the one in this chapter. I'll write a separate post as to why I think that this is important.

"The Fourth Axiom tells you not to build your speculative program on a basis of forecasts, because it won't work. Disregard all prognositcations. In the world of money, which is a work shaped by human behaviour, nobody has the foggiest notion of what will happen in the future. Nobody." (Emphasis his). . . The successful speculator bases no moves on what supposedly will happne but reacts instead to what does happen.

"Design your speculative program on the basis of quick reactions to events that you can actually see developing in the present. Naturally, in selecting an investment and committing money to it, you harbor hope that its future will be bright. The hope is presumably based on careful study and hard thinking.....But don' let that harden into an oarcular pronouncement: 'It is bound to succeed because interest rates will come down.' Never lose sight of the possibility that you have made a bad bet.

Rumi Axiom 2

The way of love is not
a subtle argument.

The door there
is devastation.

Birds make great sky-circles
of their freedom.
How do they learn it?

They fall, and falling,
they're given wings.

from Birdsong
translated by Coleman Barks.

Rumi Axiom 1

There is a desert
I long to be walking,
a wide emptiness,

peace beyond any
understanding of it.

from Birdsong
Translated by Coleman Barks

Santayana on Investing

To love decoration is to enjoy synthesis: in other words, it is to have hungry senses and unused powers of attention. This hunger, when it cannot well be fed by recollecting things past, relishes a profusion of things simultaneous. Nothing is so much respected by unintelligent people as elaboration and complexity. They are simply dazed and overawed at seeing at once so much more than they can master. To overwhelm the senses is, for them, the only way of filling the mind. It takes cultivation to appreciate in art, as in philosophy, the consummate value of what is simple and finite, because it has found its pure function and ultimate import in the world. What is just, what is delicately and silently adjusted to its special office, and thereby in truth to all ultimate issues, seems to the vulgar something obvious and poor.

----------------------------------------
I was struck by this paragraph taken from "Reason in Art", and I was reminded by the advice that many give about investing...most recently seeing Gartman's rules which strike at this very simplicity and elegance. (See the Big Picture and/or John Mauldin). For folks using TA, the admonitions to use a few indicators to have a balanced view and to provide more than one tecinical confirmation. So we should cultivate ourselves as investors to appreciate in our investment plans...."the consummate value of what is simple and finite, because it has found its pure function and ultimate import in the world."

ISM Numbers

The ISM number is an important number. According to my "Secrets of Economic Indicators" (1)...."It is the first piece of news on the economy of of the gate every month and the most influential statistic released by the private sector."

Note that there are two of these surveys--one for the manufacturing sector and one for the service sector. According to Bauomohl, the manufacturing survey grabs the most attention.

Look at the table. You can see why readings below 50 are cause for concern. We should watch this data very closely.

Did you know? Federal Reserve Officials are briefed on the data before it is reported.

The Survey is sent out to 400 member companies around the country and represents 20 different industries. Corporate purchasing managers are asked if activity is rising, falling or unchanged in the following:

• New orders
• Production
• Employment
• Supplier deliveries (speed of delivery)
  
• Inventories
• Customers' inventories (they guess and their customer's inventories)
• Commodity prices
• Backlog of orders
• New export orders
• Imports
  

(1) Bernard Baumohl, Wharton School Publishing, 5th edition, copyright 2005,

George Santayana....an odd, meandering post

If you were to look at my profile, you will see that one of my favorites books is the "Life of Reason" by George Santayana. You may not know who he is, and if you are interested, you can read about him here: http://en.wikipedia.org/wiki/George_Santayana. I'm confident you are familiar with the following aphorism: "Those who forget the lessons of history are doomed to repeat it"...bad paraphrase, but it's my "humming a few bars for you".

I stumbled up Santayana in a used book store in Lynchburg (The Little Givens Bookstore) which had a pretty extensive used book section. One of my favorite past times is going to used bookstores and wandering the stacks. I find that books jump out at you at times--a sign, of course, that you are ready for the topic, if you place any stock in "book karma".

When I picked up the book The Life of Reason, a frayed hardback, I could tell that it was a well-loved book. This particular book was a bit of a Reader's Digest version. As I opened the book and read the prose I was astounded about the incredible elegance of the use of language. It was like prose-poetry. Yet, I had never heard of this man. [Santayana was Spanish, and English was his second language. What I would give to have half the command of it as he. For those of you who didn't bother with with the Wikipedia link, he was a philosopher, taught at Harvard, and studied under William James).

So after purchasing the book and reading a bit and becoming even further struck by his extraordinarily deft and musical command of the written word, I asked a few people I knew if they were familiar with his work. I honestly couldn't understand why this man was not more well known. One of my book club members is one of the most erudite people I know. He's a theologian, clinical psychologist and business consultant. All bases covered there! I asked him about Santayana, and his face broke out into a grin. "How funny you should ask," he said. "I did my master's dissertation on him." As it turns out, Santayana was a student of Arthur Schopenhauer's works. Don gave me one of Santayana's works for Christmas--an exceedingly thoughtful gift that I will cherish.

You see, I'm one of those nerdy folks who has read AS's, "The World as Will and Representation". I also have (and have read) his "On the Fourfold Root of the Principle of Sufficient Reason." (I know this should be underlined, but there is no facile way to do this in this Blogger format). What's interesting about AS, is that he was one of the first Western philosopher's to study Eastern religion and incorporate it into his works. He was a curmudgeonly fellow, too. In fact, Ebeneezer Scrooge was likely patterned after AS! So it is indeed serendipitous that I also stumbled upon Santayana who was a disciple of sorts of AS's works. Also of interest, is that AS was such a ferocious note taker on the books that he read that the pencil would sometimes gouge the pages. (I have formed the habit of never reading unless I have pen and paper. I have a pen and paper fetish that I'll speak more about when I'm in a different mood.) Now understand, because I say that I have these incredible works and have read them, by no means suggests that I fully understand them. But I have this one wish that when I die, people will look at the books that I have and say...Wow! (Fluff over stuff, you know!)

But as I pick up GS's book to tell you about it, I'm reminded that it is time to revisit it. Great works by wondrous thinkers have deeper meanings than any of us can fully access on first reading. I remember reading John Adam's biography and his habit of reading Cicero's (?, oh pox on my bad memory) over and over. So tomorrow, I will settle in and read a chapter or two, and marvel again at such mastery over our language. And as I pick up GS, I'm reminded of Ernst Cassirer who wrote "Language and Myth", and who referenced GS's wonderful work "The Sense of Beauty".

And for those of you thinking what the heck does any of this have to do with investing...I leave you with E. O. Wilson. E. O. Wilson is an evolutionary socio-biologist. He wrote "Consilience" where is posits: "that the sciences, humanities, and arts have a common goal: to give a purpose to understanding the details, to lend to all inquirers "a conviction, far deeper than a mere working proposition, that the world is orderly and can be explained by a small number of natural laws." This is the essence of consilience." (From Wikipedia).

And as we think about how psychology, economics, base emotions (fear, greed), etc. politics, finance, mathematics, statistics, all conspire to move the world, then I think that affects investing! These are the great thinkers that introduced new concepts on integrating divergent disciplines into coherence.

And I'll leave you with my favorite GS quote and a suggestion.

Favorite Quote: "The definition of a zealot is when the efforts are redoubled when the aim is lost."

Suggestion: Pick up a book on something that you know little about but on which you'd like to learn more and read it.

Perhaps one of my NY's resolutions will be this. For the balance of my life, I will spend one year devoted to either one person's works or various works on particular subject and read all that I can. String theory, Italo Calvino, William Gass, chaos theory, flowers, training dogs,...whatever. Imagine the depth and richness that you will cultivate in your life.

On Hope (Major Axiom III)

Major Axiom III: When the ship starts to sink, don't pray. Jump

Minor Axiom IV: Accept small losses cheerfully as a fact of life. Expect to experience several while awaiting a large gain.

------------------------------------------
Obstacles: fear of regret, unwillingness to abandon part of an investment, and difficulty in admitting a mistake.

-----------------------------------
L comment: Studies in Behavioral Finance focus on the emotional issues noted in Obstacles. This is one axiom with which I have not quibbles.

On Greed (Zurich Axiom 2)

Major Axiom 2: Always take your profit too soon.

Minor Axiom III: Decide in advance what gain you want from a venture, and when you get it, get out.

Diversification

I happen to think that diversification is important. I agree that over-diversification is dilutive. One strategy that I think makes terrific sense is where you own 2-3 leaders in 4-5 sectors (yeah, I know that gets you to 15 stocks or perhaps more!). As certain sectors outperform, you systematically move money into your lagging sectors (lagging sectors--not sick dog stocks that should be euthanized). As I was beginning my education (which I know will last a lifetime) on understanding investing, I naively thought that once I had mastered the understanding of cycles that all would be clear. Somehow I thought that the sector rotation signal would be like a Zen meditation bell ringing softly and clearly signaling it's time to switch. "Ting" --oh, it's time to move out of commodities and into financials. "Ting" oh it it's time to be in tech. "Ting" oh it's time to stuff everything in a mattress. Hah! Wrong again. The only "Ting" that I've come across is "Ting", Leisa you were a fool to think that it would clear at all. Okay, an initial fool in thinking it would be clear, but a wiser fool in understanding that the fuzziness is in the inflection points that that this sector rotational thing happens in fits and starts in that transition period.

My only certitude is that I do not know what is going to happen, and I'm confident that no one else does either. But like a wise Indian, I'll keep my ear to the ground, and I'll watch carefully for scatological evidence (no tasting though to determine if there are iron deficiencies in the beast that I'm tracking which is the market direction) and make the best decisions based on the empiricism before me. I think that reading quality publications and listening to respected voices (not pundits) and equipping yourself to discern probabilities will put you ahead. I don't wish to sound arrogant because I know (and admit) that I'm a complete dummy about much of this. Nevertheless, I did gain some singular confidence in questioning the moves in the bond market. I weighed the evidence, and while the bond market was betting on cuts as early as Spring of this year, I said that the other data did not support that based on my understanding. So the confidence that I'm talking about is individual investor confidence. And one gains confidence by stubbing his/her toe and scraping a knee or two.

My conclusion, then, is that if you maintain a presence in major sectors, appropriately weighted for your considered view on the economic cycle, then you will be exposed to the move when it happens, and you will shield your portfolio from undue sector risk, but you will expose yourself to the beneficial moves. If any wish to argue that making unduly weighted sector bets are smart rather than hazardous, I'd offer this years HMO and oil/oil service sector routs. One only has to see what happened to the HMO's in April when the buzz was that medical cost ratios would increase--an anathema for HMO's. The rout was swift and severe. Oh, it recovered, but these stocks (AET, WLP, CI, UNH) dropped 15 - 24%--in 2 days. You can keep your good stocks, just reduce your exposure when their sector is not shining.

George Dagnino (of Peter Dag) has great advice--"we move slowly". His model portfolio is comprised of leaders in each sector. As he sees sectors falling out of favor, he slowly reduces portfolio exposure--considered, measured moves. I believe that following this simple but powerful advice gives you appropriate diversification and ample stakes in your investment/econcomic thesis.

Friday's Trustee Sales

Absolute numbers have declined this week.

Flat Lining Sales

I found this on FRED. It will be interesting to watch the plateau in retail/food services sales and see how far it extends.

Note the activity pre-2001

On Risk (Zurich Axiom 1)

Major Axiom 1: Worry is not a sickness but a sign of health. If you are not worried, you are not risking enough.

Minor Axiom 1: Always play for meaningful stakes.

Minor Axiom 2: Resist the allure of diversification (I see your stunned look)

Three flaws regarding diversification:

1. It forces you to violate the precept of Minor Axiom I - that you should always play for meaningful stakes.
2. By diversifying, you create a situation in which gains and losses are likely to cancel each other out.
3. By diversifying, you become a juggler trying to keep too many balls in the air at once.

------------------------------------------------------------------------------------------
As we work through these axioms, we'll see that they will violate much of what you've learned. Understand that my posting these is not an endorsement (and I'm not qualified to endorse anything but a check made payable to me) but rather a chance to explore an interesting view of risk/reward.

Zurich Axioms

Max Gunther wrote "The Zurich Axioms" (published by Harriman House copyright 2004). His book is in 12 chapters. I thought that I would put up his 12 axioms in 12 posts (maximum utility) and some may be moved to discuss.

To provide a road map, I'll give an overview of the Chapters.

1. On Risk
2. On Greed
3. On Hope
4. On Forecasts
5. On Patterns
6. On Mobility
7. On Intuition
8. On Religion and the Occult
9. On Optimism and Pessimism
10. On Consensus
11. On Stubborness
12. On Planning
    

Resilient expecations

Let's see, we had a 8.5% drop in durable goods orders (that is a pretty telling economic indicator), the dollar is stubbing its toe and oil is increasing--and the markets along with it.

Jeffrey Saut stated on Monday, something that I very much believe. That is, the opportunity for investors is where there is a gap between perception and reality in the market. To be sure, it is also a place of great danger, because you can be right, but your timing can be so off, that being "right" eventually only means having your money spirited away currently.

First off, I'm happy to say that my MIND is doing terrifically well, up 11.37%, and that ERF is continuing to perform well, up 8.39%. Both are tied to oil, and oil has been steadily going up. Now, you think that would be bad for the market. I also own some KRY, a gold miner, and that has gone up 30% since my purchase. These successes soften my worthless puts on the DOW and S&P that will expire in DEC.

John Murphy stated recently that commodities peak AFTER the stocks peak, prior to bad things happening. Commodities are definitely on the rise. But this rise is NOT tied to resurging economic activity. Has the market peaked? I wouldn't hazard a guess, but we clearly can see that the market has had renewed vitality and commodities are now better performers with energy gaining almost 2% yesterday. I'm also mindful that in a slowing economy commodities move downward.

Yesterday we had a stronger than expected GDP number, but that also came after another noted investment house (1) recast 4th quarter GDP as zero. How I have made sense of the market that makes no sense is this: Concrete information has outweighed "forecast" information. Concrete information comes in the form of backward looking "confirmed" glorious news: wonderful corporate earnings and confirmed 3rd quarter GDP growth. Plus, we also have great liquidity and lots of folks willing to throw themselves on the rails to board the train that got away while they were buying their put tickets!

As people are imperfect synthesizers of information, they will fall victim to their biases/emotions. You do, I do, we all do. Accordingly, if you have a positive OR negative outlook, your lens will filter for all of the things that support your view, and you'll dismiss ideas contrary to your view. The positive bias has great corporate earnings, some sliver of positive news on home sales increasing (never-you-mind it's at deep discounts), GDP being greater than expected. These are concrete things that stave off uncertain future information like expected decline in corporate earnings or slowing GDP.

I would contend, then, that for those with a positive bias on the market, there is a disequilibrium in the amount of weighting they have placed on positive news v. negative news. Perception does not equal reality. Until that balance changes and a tipping point reached where the positive news gets eroded by negative news, we'll continue to have liquidity and performance anxiety fuel the market's surge. But after year end, performance anxiety takes a break and 4th quarter earnings will become reality (remember lots of folks warned). The earnings and forecasts will be the most telling, and if the numbers are bad there is no performance anxiety propping them up. BUT, for folks like me looking for dour numbers, if the numbers are good, that's a different fuel altogether.

And for any that want to say that the market is a perfect discounter, I would argue that the bond market was wrong about interest rates most of the last 12 months. Ultimately the market gets it right--and market corrections are nothing if not a supreme act of contrition for wallowing in perception rather than walking in reality.

(1) Deutsche Bank has also lowered their forecast:

In light of continued weakness in the economic data, we are cutting our fourth quarter real GDP growth forecast to zero from the +1.0% that we were originally predicting.

Friday Trustee Sales

I wasn't expecting to see many of these. I was wrong. 9 were greater than $200K.

No One Knows

I'm a firm believer in fundamentals--in business, in personal life and in investing. Fundamentals are important because they are foundational; the structure on what everything else stands. When you have strong fundamentals and disciplines, you create a stronger, more accurate decision making environment. I will go to the earlier of my grave or the poorhouse believing that true investment fundamentals includes BOTH fundamental analysis and technical analysis.

While a facile command of fundamental and technical analysis is a laudable goal, that goal must exist within a very critical axiom. In fact every investor should recite as his/her daily investment mantra: "No one knows". I wish I had understood this simple, yet powerful, concept earlier on. It's not only applicable to investing but any topic you choose--including your health. As anyone who has faced difficult decisions regarding procedures/regimens knows, you're going to get divergent views. And when your health/life are on the line, those divergences are frightening. You only antidote to "no one knows" is knowledge and YOUR assessment of the risks involved in making decision x v. decision y.

In financial health decisions, one sees those divergences daily. On Friday, we had a whole new symptom to ponder: the falling dollar (You can read a professional's summary here. http://www.thestreet.com/_dm/markets/commodities/10324098.html.) Now I do not pretend to be qualified to explain to you all that it means; but I am qualified to tell you that you should have a rudimentary understanding of what that means. When asset classes have changing relative relationships with other asset classes, there's a bit of a yin yang dynamic unfolding that you should understand. What's bad for one is good for another (in terms of pricing). If the dollar is getting less valuable (relative to other currencies/asset classes) then something with intrinsic value, such as gold and oil, gains in value. Oil declines when the dollar is strong because it is priced in USD (less $'s to buy oil relative to other currencies.) and oil gains when the dollar declines (more $'s are needed because the dollars are valued less relative to other currencies).

So what does that really mean? For one, inflationary pressures will rise. Commodities will cost more for more USD's are required to buy a barrel of oil. There's another malefic result of a dollar going lower--higher interest rates. Why? Our bonds are USD denominated; therefore, if the dollar is going down relative to other currencies and asset classes, investors (and remember more than 50% of the holders of our bonds are foreigners) will require a greater return for those assets in the form of higher interest rates. Now just to mix it up and keep it interesting, you have some fundamental factors influencing oil: (1) OPEC's threatening to decrease supplies; and (2) increasing inventories.

But there's a beneficial result too....American made goods get cheaper and greater exports mean a reduced trade imbalance. Also, if you have ETF's understand the currency in which the share price is denominated. It will affect your returns. In general, Asian and European currency denominated ETF's will benefit from the dollar's falling. Those ETF's will gain in from the dollar's demise.

My point is not to give you any guidance but rather to coax you into developing an understanding of these dynamics and how they weave themselves into the tapestry of the investing climate. They are really important. I think that the best place to educate yourself on the business cycle and which asset classes do well or poorly is George Dagnino's site: https://peterdag.com/s_files/mLcn829S3eP2.pdf If you do nothing in your investment life do this.... Print out, read, and re-read that pdf. I would also urge you to look at his chart of the month. For fans of Bill Cara's site, you will see that George deploys stochastics to inform of the probabilities of moves in the market.

Remember, everyone has an opinion about what the stock market will do, where we are in the economic cycle, what the dollar, oil, gas, soy beans.....fill in the blank. There are several divergent opinions among great luminaries which means you need to tread carefully and understand YOUR risk environment. How? You must equip yourself to separate the wheat from the chafe. You can reduce your perplexions as a new investor through a basic command of economic cycles and of the asset classes that do better or worse at each stage of the cycle. When you do your head scratching, reach for the investor prayer beads and recite your mantra: "no one knows." No meaningful turn in the market or the economy is ever clear until you look in the rear view mirror. Until then, it's just blind mice trying to make sense of the elephant. Nevertheless, you'll be armed with knowledge to make informed decisions that are right for you.

Covering $hit with Snow--A tribute to my Armenian Grandmother.

My Armenian grandmother came to this country in 1920. She didn't know her real birthday. In spite of that, she claimed Jan 1, 1900 has her date of birth. Such a date! The first date of a new century! As I look at this market with my stupid, amateur gaze, I'm filled with incredulity. I'm reminded of phrase that my immigrant remembers-the-Armenian holocaust-but-we-thought-her-crazy grandmother uttered from time to time: "You cannot cover shit with snow". It's a wonderful aphorism is it not? Appropriate to this market.

So I write this blog post in honor of my simple, uneducated grandmother and the power of words and wisdom that do not require an education in our Western civilization sense, but rather that which is acquired from living life in the raw and on the edge. My grandmother--Alice was her name-- was sold to the Armenian church at the age of 12 (mother died in in child birth, stepmother wanted no part or husband's progeny) and placed, as a slave girl, with a Turkish couple in Constantinople until she reached majority age. Despite her simple roots, she harbored great wisdom garnered from years of living in the raw and on the edge of physical, emotional and monetary survival.

Many of us are so enamored with the educational and cultural trappings of ourselves and our class, that we forget the simple wisdoms of authentic people who struggle with the everyday of task of surviving. As Thanksgiving approaches, let us remember those simple wisdoms from authentic people and contemplate what small kindness we can extend to soften the edges in their lives.

A favorite poem

I've spent most of my day in my office at home cleaning, filing, trashing. I moved my attention to the corkboard and found one of my favorite poems. This was in Aug 9 & 16, 2004 of the New Yorker.


The Kindness of the Blind

A poet is reading to the blind.
He did not suspect it was so hard.
His voice is breaking.
His hands are shaking.
He feels that here each sentence
is put to the test of the dark.
It will have to fend for itself,
without the lights or colors.
A perilous adventure
for the stars in his poems,
for the dawn, the rainbow, the clouds, neon lights, the moon,
for the fish until now silver under water,
and the hawk so silently high in the sky.
He is reading--for it is too late to stop--
of a boy in a jacket yellow in the green meadow,
of red rooftops easy to spot in the valley,
the restless numbers on the players' shirts,
and a nude stranger in the door cracked open.
He would like to passover--though it's not an option--
all those saints on the cathedral's ceiling,
that farewell wave from the train window,
the microscope lens, ray of light in the gem,
video screens, and mirrors, and the album with faces.
Yet great is the kindness of the blind,
great their compassion and generosity.
They listen, smile, and clap.
One of them even approaches
with a book held topsy-turvy
to ask for an invisible autograph.

-----Wislawa Szymborska
(translated, from the Polish, by Justyna Koskowska)

Gary K's 11/17/06 Recommendations

Have you visited Gary K? Gary K has one of the most informative, practicable shows. The link is the side panel.

His shown is downloadable. So you can listen at your convenience, and more importantly, you can skip through the Folicare ads.

Here are some of the stocks that Gary K mentioned in his Friday show.

I may do this from time to time. I offer this from the position of an information distiller.

Eulogy

It is with great sadness that I commit to eternal rest my BAC and AIG put that expired %^#$#!^ worthless today.

My thesis was that Fed rates would hold or even go up and that market would go down. Investment income would be hurt at AIG, but how was I to know that the hurricance season would be well a bust. Both BAC and AIG were experiencing rollover at the time of my purchase, but they did not roll. %#@#!%#% it.

Humorous Lesson: I should have gone out and bought some obscenely expensive wine and taken a bath in it and I would have had the same utility.

Real lesson: Never, ever, ever, buy a put or call option for an amount of money whose worthless expiration amount would make you cry. I didn't with either of these. If you are buying puts or calls, make sure that you understand your risks. I took a measured risk on both of these. I'm not crying. But the ouch factor is real.

Friday Trustee Sales

Rememberances

Nona's post on my home brought a funny memory I wanted to share.

I have two cool things in my home. Now, I write this telling you that I have a modest home--if any of this comes off as arrogance in anyway, it is unintentional. As Mark and I were eating dinner this evening, we talked about the gratitude that we have for everything that we have. Our modest needs are easily fulfilled. But I will tell you, that if we ran with a different crowd, I would feel that we were wanting for something. I'm glad that my social aspirations are modest. Okay...now onto the cool things....


Cool thing #1. I have this baroque mantel made of solid walnut. I found it at an antique dealer and it was covered with antique white, leaded paint. In a word...gaudy. I paid $350 for it in 1985--lots of money for me.

I brought it home--like a cat bringing its master a treat. Rather than gratitude, I suffered scorn..two-fold scorn. One of my former Peat Marwick colleague's husband, Doug, (a banker but former summer plumber's helper helping Mark with the rough-in) AND my husband laughed at me when I brought it home. My husband mocked, "You paid HOW much for THAT?" I can still hear Doug and Mark's cackling. Now you have to understand that nothing is more unpleasant for me than "paying too much" for something. I'm not sure where that gene came from, but it's the honest truth, and it embarrasses me profoundly and has caused many a sleepless night.

Anyway....the next day, my husband is bitchin'(excuse the profanity) to Buck, the cabinet man. You have to know Buck. He is a master craftsman, but a very quiet, deliberate man. In addition to making lovely cabinetry, he restores antique automobiles...pristinely.

Buck listens to Mark's lament of having a wife bringing home such crap at high prices. After the tirade, Buck quietly says to Mark..."Do you want to double your money now?" That statement stops Mark (and gives me a priceless "I told you so moment" that wives must always have in their quiver!)dead. Buck then benevolently offers to take the mantle in his service van to this place risque-ly called "The City Stripper" to have it vat stripped. It cost $100 to have this done. Yes, that is alot of money While there, they receive many offers to buy the mantle for about 6x what I paid for it. Vindication. We built our downstairs fireplace to accomodate this mantel. I also have a fireplace in our bedroom. A very plain, beautiful solid cherry mantel adorns that. We've never used it, but at the time, we felt like a fireplace in a master bedroom would be a good resale value.

When I received the mantle back it required much TLC. Stripping any type of wood raises the grain. Much sanding was needed. It has rope moulding, dental molding, hand carved flowers and carved posts. I did it all and put several tung oil applications in between each sanding. It's beautiful. Likely larcenous as well, as the owner of the place that I bought if from spent some time in jail for stealing things out of older homes. The City Stripper guessed its age as mid 1800's. With its age and all that tung oil, it will likely have spontaneous combustion and burn my home down.

Second neat thing. I have this bronze light fixture from the University of Richmond. Some bright soul sold these "surplus" fixtures for $25 each. They are about 4 feet from stem to stern with white semi-opaque glass. We (Tim/Mark) framed our stairway to handle it. It's monstrously beautiful. After they realized what they had done, they offered some terrific tax credit--I think it was a $3K tax credit. The fixtures cost them $7800 to replace. I think I got a good deal, don't you? The beauty of being poor as we were at the time is that the tax credit did not really mean too much! I now have an SIL who works at University of Richmond. Strange karma indeed.