Monday, April 30, 2007
Here's the updated electronic instruments.
For newcomers, I just keep various watch lists for stocks or sectors to keep on the radar. I was interested in this group (as well as coal in the previous post). I create a watch list with 100 shares to track how well they have done since inception and to look at relative performance among players.
I think that part of being a better investor is ferreting out your biases and take them out to the woodshed one by one and shoot them. Biases cloud the lens of reason.
Sunday, April 29, 2007
I own HERO as you know, and I decided to look at the short interest in it given that they report tomorrow. I found this 4-fold increase in short interest and a 5 fold increase in volume interesting:
Tomorrow they report. So if there is a positive earnings surprise, there will be some extraordinary fuel for the fire. Given the fundamentals, had I looked at this short interest sooner, I don't think that I would have been dissuaded from buying. I'll post tomorrow. My position is up 8% , and I have previously closed positions that I've made fine money on. So I'm not feeling vulnerable, even if the news is bad. But if it goes down 20% then I might have a different idea about that!
As you know, I have an amateur interest in technical analysis. I'm not facile with it my any means, but I am becoming more competent in recognizing opportunities as well as trouble spots. My point is that it would seem to me that there ought to be a dimension to technical analysis--automatic, not one that you had to do by hand--that would register changes in short interest from month to month as you were looking at chart readings. What would be interesting to see in the volume chart is some metric that would register either the absolute amount of short interest, or a percentage of short interest.
Why would this matter? Well, I'm no expert as I say ad nauseum. But if the price action is affected by short covering due to high short ratios, in my view that is a 'false tell' relative to the long term health of the stock. Sure, the fundamentals may have improved which caused the initial price increase. However, the subsequent surge due to exposed shorts is likely to push the price further beyond 'ordinary' reaction. Accordingly, the price overshoots what one would expect to be a more balanced price owing to underlying fundamentals. My conclusion, then, is that if one buys into one of these surges without understanding the short position, you risk falling into the 'reversion to the mean'.
Perhaps I'm overthinking it, but I don't think so. I'd welcome your comments.
I am re-reading my delightful little book, and I urge you to add this to your investing library.
Saturday, April 28, 2007
Today, I elected to have yet a second process having found a recipe or two that called for soaking the meat in milk/yogurt. In case you wonder about that oddity, the acid in both helps tenderize the meat. Having no yogurt, I used some sour cream and milk.
After about 4 hours (none of this is scientific), I poured off the liquid. For xmas, my SIL gave me about 6 tins of pre-mixed spices with romantic sounding names. I used the Mexican spice mix and mixed it with flour. I dredged the meat in the spiced flour and then browned it in a cast iron pan. I then added beef broth, covered it and put it in the oven until I could get back and assemble the balance of the ingredients.
Balance of ingredients: celery, carrots and onions and garlic--sauted in a large enamel pot. I added the potatoes and then poured onto it the braised venison. Back into the oven (covered of course) for the potatoes and stuff to cook. At the end, I added a can of peas, and I made dumplings (from Bisquick).
I served it with shaved Parmgeano Reggiano and a 1998 St Emillion Bordeaux. It was exquisite in every sense of the word (not to brag).
I have this great respect for cooking. When you look at the basics of cooking, it is all about survival. It is about eeking out every last nutrient from every bone and scrap. Where do you think stocks and broths come from? In early times, your survival depended on your skills of a hunter and gardener. The cook had to transform this work into food with extraordinary economy.
A cook is the ultimate alchemist.
Here are the Chapters:
I The Speculative Cycle
II Inverted Reasoning and its Consequences
IV Confusing the Present with the Future-Discounting
V Confusing the Personal with the General
VI The Panic and the Boom
VII The Impulsive vs. the Phlegmatic Operator
VII The Mental Attitude of the Individual
I was particularly struck by III-They. Why? Because I think that I've worked myself into a froth at times due to the constant references to the "They" in current times--to see this portrayed almost identically in this book--only with the admonishment to truly ask who are "They" rather than feeding the fear of it--was quite instructive.
The content that I think that I have the most to gain from (rather than constant fear of the proverbial "They") is from pp. 87-8:
". . . the trader must be a reasoning optimist.. . . In the market you are nothing but a chip on the tide of events. Optimism, then, must consist in believing not that the tide will continually flow your way, but that you will succeed in floating with the tide. Your optimism must be , in a sense, of the intellect, not of the will. An optimism based on determination would, in this case, amount to stubbornness.----------------------
Another quality that makes for success in nearly every line of business is enthusiasm. For this you have absolutely no use in the stock market. The moment you permit yourself to become enthusiastic, you are subordinating your reasoning powers to your believes or desires.
. . . You wish to keep your mind clear, cool and unruffled as the surface of a mountain lake on a calm day. Any emotion-enthusiasm, fear, anger, depression--will only cloud the intellect."
A slim but pithy volume.
Angela reminds of the wonderful site by CXO. They, too, were on my long list of bookmarks until my ^$#!#^&^ computer crash. I'll add them to the info mosaic.
First: My Fantasy Portfolio is $68 shy of $1,300,000. I still have a single holding IIVI. My rank is 20,627. Not a bad showing I think. It would have been nice to have had an AAPL or an AMZN in there for earnings surprise. I would be happy to have a top 10,000 finish, but I recognize that I've not put so much thought into my investments this past week given some maneuvering in my real portfolio.
Second: MarkM kindly suggests that I should not be too hard on myself for my bearish stance. I agree with him. The self-flagellation that I should be engaged in is my lack of patience with the unfolding.
Third: FMD: My dithering and then deciding managed to have a successful outcome. Sadly, I have to admit to being a bit of an ambulance chaser. What is hard is knowing when the stock is just bouncing a bit (and let's face it, a bounce of 5% or so is not a bad pop) on it's way down further or whether or not you are seeing a bona fide investor panic for no compelling reason. If it is the former, then your becoming enamored with your purchase can be deadly. If it is the latter, then you have a terrific opportunity. Due diligence--quick due diligence--is key; for if you are right, there will be a quick recovery. But we all know that the extent of recoveries is most accurately judged using a rear view mirror. So you have that dithering period between when you bought it/the subsequent recovery (you're trying to figure out if you have a dead feline on your hands) and the stock's catching its breath to either go north or south. I admit, this is the time where my firm conviction at purchase begins to wane, and I doubt myself. I felt that FMD fit the bill of an overdone investor panicked sell-off. So I have Sep40's bought with my gains on buying and flipping the stock. If the calls expire worthless, I'm more than even money on the entire transaction. I also did this with HERO. But I bought earlier dated calls, so I had to flip them quickly. But it was a profitable transaction. I subsequently re-entered my HERO position for a longer term holding (stock, not calls). They have earnings on Monday. I'm okay with weathering any downturn on that.
Now I don't recommend this strategy to any prudent investor. But I'm not comfortable being long this market, so this allows me to make some money (so long as it is successful) while waiting for the end of the world. This strategy has allowed me to make up for my least successful strategy which is to make a bet than "x" is going to happen (through puts) and "x" happens, just not in the time frame I expected. This has been a critical lesson for me to learn--but sadly, I'm a hard headed student and my lesson was more expensive than it should have been.
Look to your own activities where you may have been a hard headed student and see if you cannot get your tuition more cheaply! The point of this is not to suggest any strategies to you (never take any advice from me!), but rather stress the importance of knowing your own weaknesses and strengths, and ensuring that you do not make investment decisions that do not play to those strengths.
Fourth: My Notebook: I enjoy the Barron's interviews done by Sandra Ward. For one's that I particularly like, I print them out. I was leafing through my notebook (after 3-hole punching my "Market Boom" paper) and found a July 24, 2006 interview with Dean LeBaron. Here are some of the points from that interview he states that he
- likes bargains--no matter where they are-- he likes multiples of 2-3 x earnings or 3 x's cash; but admits that those are hard to find.
- makes a map of the GDP of all of the countries to find opportunities.
- is concerned that the USD is losing value and too many portfolios are in dollar denominated assets (Note that this was in July, where you weren't hearing a preponderance of this discussion).
- is concerned that there is too much debt in potentially weak hands. Further, debt used to be based on repayment fundamentals, now much of it is based on refinancing fundamentals--therefore, debt may not be repaid.
- thinks there are too many investment people and that "anything that is likely to be interesting is likely to be covered and well-covered, and not necessarily by intelligent people who are correctly motivated.
- is mostly in cash/cash equivalents.
- admits to being a gold bug; but he hopes that gold is the wrong investment, for if it is the right investment that means bad things for most other investments.
Friday, April 27, 2007
The Macroeconomic and Policy Environments
of 20th Century Booms
Michael D. Bordo
David C. Wheelock
Working Paper 2006-051A
Given today's GDP report, I believe that this is a timely look. It's always a good thing to start with the abstract, which I provide here:
"This paper studies the macroeconomic conditions and policy environments underThe goal of my post is to share some things that I found of particular interest, rather than provide any insights that are beyond my capabilities. All direct material is in italics. Any text emphasis, unless noted otherwise, is solely my own.
which stock market booms occurred among ten developed countries during the 20th Century. We find that booms tended to occur during periods of above-average growth of real output, and below-average and falling inflation. We also find that booms often ended within a few months of an increase in inflation and monetary policy tightening. The evidence suggests that booms reflect both real macroeconomic phenomena and monetary policy, as well as the extant regulatory environment."
The study design was interesting in that the authors looked across several countries: Australia, Canada, France, Germany, Italy, Japan, Netherlands, Sweden, United Kingdom and the United States. Part of this look was to isolate variables that contributed to the booms and find correlations. As you can imagine, due to rather significant changes in the regulatory environments, to include foreign exchange policies, in addition to availability of essential data, the authors amended their study design accordingly. Here was their goal in that design: "Our multi-country historical approach enables us to explore the association between stock market booms and key macroeconomic and monetary policy variables across a variety of policy regimes and regulatory environments." (p. 3)
What the authors find is that booms are procyclical (no surprise there!)-- "booms generally occurred during periods of above-average economic growth and below-average inflation, and that booms typically ended when monetary policy tightened in response to rising inflation" (p. 4) Yet, they also note that the market is not just affected by the economy but rather were sensitive to "changes in regulation and other events, such as oil price shocks and political upheaval."(p. 2).
For those of you who've been reading for a while, you know that I'm intrigued my the notion that stock market crashes are causal to economic downturns AS OPPOSED TO forecasting economic downturns. Therefore, you will understand, then, why I found the following of interest:
"Bordo (2003) finds that many, but by no means all U.S. and British stock market
crashes of the 19th and 20th Centuries were followed by recessions. A serious decline in
economic activity was more likely, he concludes, if a crash was accompanied or followed by
a banking panic. Mishkin and White (2003) come to a similar conclusion in their review of
U.S. stock market crashes in the 20th Century. They find that a severe economic downturn
was more likely to follow a crash if the crash was accompanied by a widening of interest rate credit spreads. The key lesson for policy, Mishkin and White (2003) argue, is that
policymakers should focus on the financial instability that can arise in the wake of crashes,
rather than on crashes per se." (p. 3)
Given with my (unhealthy?) preoccupation with systemic risk coupled with my belief in the words of the more conservative opinion makers that risk is NOT priced into the market and that leverage is at unprecedented levels, I found the widening of interest rate credit spreads language interesting. Why? Because the credit spreads have been narrow. Granted, the credit spreads for the mortgage loans have widened lately, but the corporate bond spreads have not. (I'll admit that my comment is a bit general).
Through this historical, multi-national look, the authors find "considerable coincidence in the occurrence of stock market booms across sample countries" (p. 6). Today, as we look across the many markets, including our own, that are at all time highs, we can posit that we are yet another empirical data point that substantiates the authors' conclusion (their study stops at the 2000 boom).
There are a few aspects of the study design that I'd like to share. With regards to a "boom", "there is. . . no precise empirical definition of an asset boom" (p. 4). The authors "identify the maximum and minimum observations of the real stock price within rolling, 25-month windows. We require that market peaks and troughs alternate, and so eliminate all but the highest maximum that occurred before a subsequent trough, and all but the lowest minimum that occurred before a subsequent peak. We classify as booms all periods of at least three years from trough to peak with an average annual rate of increase in the real stock price index of at least 10 percent. We also classify as booms a few episodes of exceptional real stock price appreciation that were shorter than three years."(p. 5) Note the emphasis on real rather than nominal stock price. Using real prices, that is prices that are adjusted for inflation, takes the inflation noise out. I couldn't help but wonder how this study would be affected if all of the prices (among all countries) were stated in a constant unit of measure--for example the price of gold, or the price of oil. If so, perhaps some of these countries with weakened currencies (our own?) would not be classified as having a boon.
Some other discrete points:
- "Real GDP growth exceeded its long-run average during a majority of stock market
booms. . .Thus, the typical boom arose when output growth was above average and rising, and ended when output growth stopped increasing. (p. 10) [US growth is currently slowing];
- In a look at the 1929 crash, the authors note, "Other authors, such as Galbraith (1955), emphasize the rapid growth of investment trusts and commercial bank securities affiliates in the 1920s, and their role in enticing unsophisticated investors to the market." p. 13 [I found this interesting give our ETF and investment trust boon in contemporary times.];
- Relative to the post 1929 bust, the authors note: "Currency devaluation and/or the imposition of restrictions on gold convertibility was a precursor to economic recovery in many countries (Eichengreen, 1992)." (p. 15) [Note that contemporary commentators point to devaluation as making American goods look cheaper, but we don't manufacture very much anymore. Additionally, the strengthening of the economy during this time is not something that you hear too many gold-centric people talk about.];
- "Booms tended to occur during periods of above average output growth and below average inflation." (p. 16);
- "Almost all booms were followed by real declines of at least 10 percent within 12 months. Not all booms ended with a spectacular crash, however, and the lengths and sizes of market declines after booms varied widely." (p. 6).
As we look at contributing factors to both booms and busts, what are we to surmise relevant to current times? I've often been flummoxed by the amount of disagreement among experts as to where we are in any economic cycle. So regardless of agreement or not on causal factors, seemingly simple questions regarding the economy (actual GDP without all of the qualifiiers and revisions) often have answers that draw sharp disagreement among expert. The authors conclude that
- "stock market booms were an element of the business cycle, with booms typically arising during cyclical recoveries and other periods of rapid economic growth and ending when GDP growth slowed."(p. 25);
- "Many stock market booms were followed by large declines in real stock prices, if not outright market crashes, and a slowing of economic activity." (p. 25)
- "Booms typically arose when inflation was low and declining, and ended within a few months of an increase in the rate of inflation. Rising inflation tended to bring tighter monetary conditions, reflected in higher real interest rates, declining term spreads, and reduced moneystock growth." (p. 25)
- "We speculate that financial deregulation and globalization weakened the links between domestic economic growth and stock markets in the 1980s-90s." (p. 26)
I certainly do not know how to weight the import of one factor over another, but I found the article to be very helpful in developing my understand of market booms and busts, most particularly in the contributing factors.
I hope you gleaned a useful point or two from this.
Thursday, April 26, 2007
After checking on a few things this a.m. in the market, I elected to go through my freezer(s) and take inventory and prisoners if need be. I have two side by side refrigerators--one in my kitchen and one in the garage. The one in the garage seems to have more beer in it than food. I ditched my old chest freezer since it is a pain. I pulled everything out and washed everything down. It's gleaming. I also found some deer meat.
I'm not a hunter, though my son and some friends are. If you are going to kill something, you need to eat it. So unwrapped this right front shoulder, defrosted it, cut all of the meat off for stew and then chopped the leg joint giving one to Macy and one to Greta. I felt like Hannibal Lechter. I'm fixing stew with the meat. I marinated it in vinegar/water and garlic. The vinegar pulls the blood out. I'm going to honor this deer's death by having it nourish our family.
My point...well after lack of sleep and all of this activity, I had a nap. Now I don't nap during the day very often, but I did find that after my nap, my FMD had made a nice recovery. And the nap, and no doubt some sublimation of worry, gave clarity to my decision making: (1) I sold all of my 1500 shares of FMD for a reasonable gain; and (2) I bought 10 Sep 40 calls. My gain more than paid for the calls.
See my conundrum was whether or not expectations were so low that anything would seem fine; and the stock would go up. (I could only pray for an Amazon, and I never pray about stock outcomes!). But I felt there was equal chance for a 10% loss. I felt that buying the calls with the gain at worst would be break even. It's currently at $34.55 in the after market on Mom/Pop orders, for there is no real volume to speak of. That would have been an 8% loss, if it were to stick. So, I think that I made the right decision.
AMZN had the most amazing day. Seamus on BC's site noted that Market Peculator had a 'short after noontime' suggestion. Well, that would have been a wee bit nasty for someone, as it looked like someone put acetylcholine on the fire!
Now MarkM poses some points in the comments about fixed income v. real stock market gains. If you do not already go the GMO site, though you must register, but please do so, for it is worth it. I promise--and read Jeremy Grantham's letters as well as their outlook.
I'm not quite prepared to write about it. I'm also reading a Fed working paper. I'll distill that along with JG's letter and write up a few amateur observations.
Wednesday, April 25, 2007
FMD did well coming off it's lows, and it opened strongly today, only to creep downward. I could be wrong, but it looked like a shakeout to me. There was strong buying interest around 3 p.m. I hung on. I'll admit that I'm a bit nervous holding through earnings. But the expectations around this stock have to be low going into earnings. Probably more upside than downside risk given that it has already coughed up 25% of its value on investors' fears regarding the Sallie Mae deal. Tom Brown had a pretty decent write that I just read that assuaged my concerns a bit.
I bought some IIVI on its' demise yesterday. I flipped it today for a decent gain. I'm not familiar with their business. It's been interesting to see the earnings action--fairly turbulent +/- swings depending on the news. Ryland and Pulte had earnings after they bell. It wasn't pretty. Ryland will not give any further guidance.
MarkM comments in another post about the liquidity pump. There will be nothing good to come of the housing slowdown, but those risks have been soft-pedaled.
RTH was up ~1.25% though 80% of its composition stocks were up less than .5%. What's up with that? Needless to say, my puts suffered for this buoyancy. I still think April numbers will disappoint; and Target's warning seems like a lost daydream to the market. Asian markets are higher as I write--success begets success.
Party Hat time:
For you city dwellers, you are probably not familiar with the wood thrush. It is a reclusive bird, but its song is beautiful. I hope that you will take a moment to listen to the audio file at the link.
In VA, the wood thrush arrives this late third/early fourth week in April. On Monday, we heard the first warbling. They are a bit intermittent in their song, as they are busy building nests. They'll settle into a rhythm that one can count upon.
What is interesting, is that the song is a bit different each year. In fact, the one's that we hear, are different than is what on the audio file. I suppose it's a dialect thing. I mention this bird's beautiful song because it is one of the earliest risers, beginning its melodious song before the sun rises. Between 8-9 p.m. it is particularly active, and we enjoy sitting on the deck and listening to them answering each other's calls. After a summer's worth of listening to this, when they leave--and it is pretty suddenly, though you'll hear a lone straggler calling out without any answer--the conspicuous absence of their singing is quite sad. If I were to lose my hearing, the one sound that I would miss most (I know that I should say my children's or husband's voices), it would be the song of the wood thrush.
I'm sure that you've read the same stuff as I have about how the Asian markets have a cultivated a consumer base that can step in when American consumers' knees buckle under the weight of their debt. Well, I don't buy it. The American consumer has a decades long addiction to debt (which we can only hope that our Asian neighbors do not follow us into that chasm), and is a much practiced consumer in buying the latest and greatest.
Perhaps I have it wrong, but we are a culture of consumption and appearances. Though Asian societies have a new wealth, to have a real change in consumption practices you have to have a cultural shift. I don't pretend that these observations are well thought our or even well-researched. But there are two things that make the Asian markets vulnerable. First, there is the extraordinary expansion in their markets (they have mastered speculation as have we). Second, THEY perceived the linkage of their economies to ours. So when we have weakness due to (a) weak dollar that makes their exports to us seem expensive and (b) a consumer that may be on the verge of exhaustion, their markets get nervous.
My point is that I think that there is a probability of our waking up to a market gapping down horribly. No one knows, and I know less than anyone. But we've seen that happen with Shanghai. Yes, everyone is giddy with the subsequent recovery and the prospect of Dow hitting 13,000. But with these dizzying heights people get nervous. And a big gap down will cause the futures to plunge, and I'm not sure that our portfolios can be shielded by selling at acceptable stop losses. It's something to think about.
Tuesday, April 24, 2007
"The Chocolate Manufacturers Association, whose members include Hershey, Nestle SA and Archer Daniels Midland Co., has a petition before the U.S. Food and Drug Administration to redefine what constitutes chocolate. They want to make it without the required ingredients of cocoa butter and cocoa solids, using instead artificial sweeteners, milk substitutes and vegetable fats such as hydrogenated and trans fats."It's blasphemous to want to call a synthetic food, which is what they describe above, 'chocolate'. Apparently, because cocoa butter has increased in price, the never ending search to save costs provides us with this proposed bastardization of chocolate.
Here are the major asset classes
- Real estate
“So, we can say that, yes, the Dow has been in a bull market since October 2002 in dollar terms. But it has been in a bear market in gold terms. This is an important point to understand. In case we should experience continuous monetary inflation, which could lift, over time, all asset prices such as stocks, real estate, and commodities, some asset classes will increase more in value than others. This means that some asset classes while rising in value could deflate against other asset classes, such as happened with the Dow against gold since year 2000. I have pointed out in earlier reports that since 2002, all asset prices rose in value. But recently, some diverging performances emerged. Bonds started to decline and seem to be on the verge of a significant long term break down. I have also mentioned in earlier reports that, in times of monetary and credit inflation, such as we have now in the US, bonds are the worst possible long term investment."I forget where I read it recently, but PIMCO manager sold is CA house and is renting because he believes that prices are going to crash, and he didn't want to hold onto that asset in that area. If you've followed any of my posts on the MBS's, you will find this Bloomberg article confirming some of the items discussed there. None of this is a surprise to me. I've been writing about the bond holders for more than 60 days. Now the mainstream media is starting to write more about these issues. (As an aside, it is worth noting that in Spain yesterday their banks and bonds were hit. Richard Suttmeier has been writing about this for more than nine months. It's a reality in Spain now. Can the US be far behind?). Here is a case where two asset classes--bonds and real estate have been coupled together. MBS Bonds are double-whammied--one from interest rate environment and second from the credit risk environment.
So it makes sense for you to look at your total wealth portfolio and asset classes. If the dollar is losing purchasing power against other currencies, then your USD denominated stock (bond) performance will be discounted. I'm not trying to give any advice, but I do want to create awareness. It has certainly helped me to think about asset classes relative to each other as opposed to looking at absolute performance discrete to a particular asset class.
(1) If you are not a frequent listener, you are missing out on some terrific market commentary. His comments are published in print form, but I don't think there is an archive. Therefore, you should print out (or copy and save into a word file) his commentary.
Monday, April 23, 2007
Why? Chocolate is like wine. Now, I'm not a chocolate connoisseur nor am I a wine connoisseur. I'm not a snob in any sense of that word. But...I know what I like. And I've been without fine chocolate for some time now. Most importantly, I miss being able to make decadent delicacies that render my dinner guests speechless and cause their eyes to roll back in their heads. (Sounds like a power trip!).
So now, I'll be able to make the most exquisite chocolate dessert known to humankind: Cuban Opera cake. See the recipe below from Epicurious.com. Imagine, if you will, 4 layers of cake. Just look at the sumptuous ingredients for the cake. You could stop there and be done.
Now, imagine a silky, luscious layer of milk chocolate buttercream. I promise you, you've not had anything like it! Stack on layer two. Slather on a divinely inspired chocolate, coffee mousse filling that on it's own would cause one to lose consciousness. Then it is layer 3 of cake, layer 2 of milk chocolate buttercream and layer 4 of cake.
The whole divine cake is then wrapped in a chocolate ganache. I will never make a finer dessert than this. And now I have all of the ingredients. With this much chocolate, chocolate is the center stage. When chocolate is the center stage, you need to good stuff.
If you were a guest at my home for an extra special dinner, I would serve you this cake. To me, making a dessert such as this is a person-to-person act. Like my UPS driver, Tommy. I'll remember his good service. You will remember my dinner--especially the dessert.
Food, friends and family. Hopefully the markets are just a diversion from the things that are really important.
4 ounces bittersweet (not unsweetened) or semisweet chocolate, chopped
2 cups all purpose flour
2 teaspoons baking soda
1/2 teaspoon salt
2 cups (packed) golden brown sugar
1/2 cup (1 stick) unsalted butter, room temperature
3 1/2 teaspoons vanilla extract
4 large eggs
1 cup sour cream
1/2 cup crème de cacao (I use Kahlua as it is handy!)
1/2 cup freshly brewed coffee, lukewarm
8 ounces imported milk chocolate, chopped
1/2 cup sugar
4 large egg yolks
2 tablespoons water
2 tablespoons light corn syrup
3/4 cup (1 1/2 sticks) unsalted butter, room temperature
1/2 cup half and half
4 tablespoons sugar
1 tablespoon instant espresso powder or coffee powder
4 large egg yolks
1 teaspoon unflavored gelatin softened in 1 tablespoon water 10 minutes
1 cup chilled whipping cream
1 teaspoon vanilla extract
1 1/2 cups sugar
1 cup water
1/2 cup unsweetened cocoa powder
12 ounces bittersweet (not unsweetened) or semisweet chocolate, chopped
Preheat oven to 325°F. Butter two 9-inch-diameter cake pans with 2-inch-high sides; line bottoms with parchment paper rounds. Dust pans with flour; tap out excess. Melt chocolate in top of double boiler over simmering water, stirring until melted and smooth. Remove from over water. Cool to lukewarm. Whisk flour, baking soda, and salt in medium bowl. Using electric mixer, beat sugar, butter, and vanilla in large bowl to blend. Add eggs 1 at a time, beating well after each addition and stopping occasionally to scrape down sides of bowl. Gradually beat in lukewarm melted chocolate. Beat in dry ingredients in 3 additions alternately with sour cream in 2 additions, beginning and ending with dry ingredients. Gradually beat in crème de cacao and coffee. Divide batter evenly between prepared pans; smooth tops.
Bake cakes until toothpick inserted into centers comes out clean, about 35 minutes. Cool cakes in pans on racks 10 minutes. Invert cakes onto 9-inch cardboard rounds or removable tart pan bottoms; cool cakes completely on racks.
Melt milk chocolate in top of double boiler over simmering water, stirring until smooth. Remove from over water. Whisk sugar, egg yolks, 2 tablespoons water, and corn syrup in medium metal bowl to blend. Add 1/4 cup butter. Set bowl over saucepan of simmering water; whisk constantly until mixture reaches 170°F, about 4 minutes. Remove bowl from over water. Using electric mixer, beat until completely cool and thick, about 6 minutes. Gradually beat in 1/2 cup butter, about 1 tablespoon at a time, fully incorporating each addition and stopping occasionally to scrape down sides of bowl. Beat in lukewarm melted chocolate.
For coffee mousse:
Bring half and half, 2 tablespoons sugar, and espresso powder to simmer in small saucepan over medium-high heat. Whisk egg yolks and remaining 2 tablespoons sugar in medium bowl to blend. Gradually whisk hot half and half mixture into yolk mixture. Return mixture to saucepan and stir constantly over medium heat until thermometer registers 160°F, about 2 minutes. Pour into large bowl. Add softened gelatin; stir until dissolved. Using electric mixer, beat until cool, about 10 minutes. Using clean dry beaters, beat cream and vanilla in medium bowl until stiff peaks form. Fold whipped cream into coffee mixture.
Cut each cake layer horizontally in half. Place 1 cake layer in bottom of 9-inch-diameter springform pan. Cover with 3/4 cup buttercream. Place second cake layer atop buttercream; cover with mousse. Top with third cake layer. Refrigerate 1 hour to allow mousse to set. Spread 3/4 cup buttercream over third cake layer. Top with fourth cake layer (cake will rise above rim of pan). Cover and refrigerate at least 4 hours or overnight.
For chocolate glaze:
Stir sugar and 1 cup water in medium saucepan over medium heat until sugar dissolves. Increase heat to high; bring to boil. Whisk in cocoa; remove from heat. Add chocolate; whisk until smooth. Let stand until cool but still pourable, about 2 hours.
Run knife around pan sides to loosen cake. Release pan sides. Scrape excess mousse from sides of cake. Transfer cake on springform pan bottom to rack set over baking sheet. Pour glaze over cake, allowing glaze to drip down edges onto baking sheet (use spatula to spread glaze over any uncovered spots). Refrigerate at least 2 hours to allow glaze to set. (Can be made 1 day ahead. Keep refrigerated. Let stand at room temperature 1 hour before serving.)
Bon Appétit, September 2003
Mondrian, Los Angeles, CA
For those of you who are interested in credit derivatives, there is an interesting article in The Economist which you can find here. I think you will find it very accessible and will reinforce/ alert you to some of the issues.
I would also encourage you to listen to Doug Noland's interview on Financial Sense Online. What I found particularly interesting about this interview was Doug's clear discussion about the enormity of financial arbitrage and the wealth that it is creating--divorced from goods/services production--'ether'- value (my term) if you will. I'm not levying any judgment. But because of the enormity of these transactions, any change in sentiment regarding macro/micro factors will bring instantaneous reaction in fairly large magnitude and with immediate consequences (for good or naught).
Saturday, April 21, 2007
My son spent the night at a friend's house. I put the top down on T-bird and turned the stereo up. It was a lovely drive with the dogwoods in full bloom.
I also pulled my camera out. These aren't great pictures, but I thought I would post them anyway. If you like the photos, do click on them to make them larger. There is some pretty detail that you might enjoy.
I visited my neighbor's son who is home from Tech. Three of the young women were in his classes; so he is feeling the loss pretty acutely. There will be no exams in his classes; and it is student's choice to keep current grade or come back to school and do work for extra credit to bolster the grade. That seems to be a fair way to handle it. I had to leave after Macy decided it would be fun to chase the baby goats.
I hope that you enjoy your day and do something that helps refresh your mind and renew your spirit.
Friday, April 20, 2007
This is a group that spews forth hate messages in the name of God. Here is their news release:
Their message is quite simple--God hates fags......and the victims of this massacre are deserving of their fate because they go to an educational institution that doesn't denigrate others based on beliefs or lifestyle that are personal, if anything, in nature. Other targets are our service(wo)men killed in battle because they serve a nation that tolerates homosexuals. I think that anyone unwilling to stone to death a homosexual would be fair game for this group.
Hate-mongering is contemptible behavior. Pat Robertson has espoused similar messages in insinuating that God is punishing the homosexuals in Florida by unleashing powerful hurricanes. I believe that hate is born of fear and ignorance. Further, that fear and ignorance can be packaged in many wrappers that attract surprisingly crowds eager to identify with the message.
However packaged they are a dangerous combination, against which we should all be vigilant. Knowledge supported by critical thinking and practiced compassion are armament against our succumbing to fear and ignorance that too easily can creep into our lives under subtle (and not so subtle) guises.
Thursday, April 19, 2007
I'm still not sure that I understand CSX's strength yesterday. The 'grab' headline is that they had pricing power, but their volumes were low. Based on my understanding of business, when your volume is low, pricing power doesn't have much steam. Seems to be a transient 'good' news item. But, what do I know?
What I've noticed during this cycle (I have to say I've not noticed previous cycles having been otherwise engaged), that castigations abound for those with a hand wringing bent (like me). Somehow if you've failed to drink the proverbial this-is-the-greatest-bull-market-ever kool aid, then you are pegged as a contra-weirdo. So be it.
I do regret that I have in my CNBC portfolio China Life. That will likely get hit hard. And I also regret that in my E-trade account I was not able to unload my CBAK (bought with cash, not margin). I think that I have enough short exposure to cover any losses.
1:03 p.m......well look at the market: Strong Like Bull.
Wednesday, April 18, 2007
Liviu Librescu was from Romania. He was a world renown expert in aeroelasticity and composite structures. When the shooting began, he remained calm and guarded the door while his students went out the window.
He had survived first a German concentration camp, and then later lived under the Romanian regime of Nicolae Ceausecu. Eventually he was able to immigrate to Israel, and later came to Tech in 1985.
My neighbor's son is home. I'll visit with him tomorrow to see how he is doing. He knew one of the young women who was killed. He's a very sensitive young man, who is greatly interested in the plight of socioeconomically disadvantaged people. He's spent time in Africa and Costa Rica. He will spend his life helping others.
Sometimes we are overwhelmed with a sense that we need to accomplish something big. But if we were to help just one person shoulder his or her load in this life, that is a wonderful thing. And here we have a quiet, resolute man-- Nicolae Ceausecu--who has experienced most of life's indignities, carry himself with grace and courage amid mahem.
So rather than find the next big thing to do, I'm going to concentrate on the next small thing to do.
Tuesday, April 17, 2007
For whatever reason, I have a strong pull for buying into these horrific drops. I know the admonishment that you shouldn't catch a falling knife, but when I believe that (1) fundamentals trump emotions (and technicians would throw darts at my saying that) and (2) when the stock price reflects emotions RATHER than fundamentals, you have an opportunity. Oh, it is not an opportunity without risk, though. (And this is exposition, not advice. Never take advice from me!).
So I bought some FMD (First Marblehead Bank) on investor's concerns that their student loan business would suffer on the Salli Mae deal. It may very well suffer, but that's a longer term issue. That sort of action attracts me like a bug to the light. And in keeping with that metaphor, one could also experience a ZAP! The sound of capital evaporating.
Remember my mentioning BAMM and the stupid increase in their shares due to a pukey report that clearly investors had not read or understood? Well, I shorted that stock. And let me tell you with a basis of $17.58, I was mighty uncomfortable when it went as high as $19.45 yesterday. My sphinctometer (no, it is not a word, but we coined it at my last, highly stressful cannot sleep at night job) was pegged. There are still a few shorts in that position, and it is clear that they are getting milked.
But today, I was greeted with that stock opening down. It was a time to act, not think. I guess the shorts out-lasted the whomevers. I closed with a profit--$650--not worth the capital that I had at risk, but given that I was down as much as $1600, it seemed like a fortune. Though I fully expect that stock to drop further, for I feel that the price is STILL foundationed on ether (which is not part of the universe) I do not have the visceral fortitude to see that through. That Damoclean sword is gone. As Joey points out, that New Moon was favorable.
Over the weekend I printed out all of the Yahoo profiles on Chinese stocks. Please see the composition of that list on my Halter Index that I published here. This a.m. , I printed off all the charts. I looked at the charts in relation to the opening action, and I made a buy of CBAK at $3.378 because the chart looked good (to my amateur eye--you will only see my posting charts for very specific things, but never for techinical analysis. Go to Tim Knight's excellent site, listed on the right, if you want good technical analysis.)
CBAK is up a ridiculous amount today (9.78% and I caught 6.3%). I bought it through an E-trade account that does not have margin. So, I'm feeling mildly regretful that I did not buy it through my Fidelity account, so that I could just flip it. My E-trade account was leftover from my last job. They used E-trade to manage their stock options and ESOP. What a great way to offload administration and what a boon for folks like E-trade to attract (or keep like me) customers! Well, my options evaporated when I walked away, but I had a little money in there. I decided to keep the account, for there are some research reports and data views that they have that Fidelity does not. So I kept it. I never have more than 1 or 2 positions. And, I think that keeps me very focused.
Now that my nose is not in systemic risk readings and translations, I've dusted off my Behavioral Finance book. I'll bore you with my distillations for the selfish reason of that makes ME comprehend the material better. Jeffrey Saut at Raymond James (DO visit his daily audio commentary--see info mosaic--for it is worth your time. You will find him, Hussman and Ritholtz--I'll throw in Cara as well- to be similar in their market bents.)
So in Saute-esqe style, I'll say, "That's it for me".
Thanks for stopping by.
Monday, April 16, 2007
Above is Burruss Hall at VA Tech. Isn't it beautiful? I fell in love with the campus when I visited it. Majestic, gothic building, replete with gargoles, nestled in the mountains of Blacksburg. I attended VA Tech in 1978 - 1980 until a softball thrown to far afield landed against my head. A tripod fracture to the right zygoma required an operation and recovery. Coupled with my not getting on-campus housing and being engaged (to my current and only husband), I elected to transfer to another school. I still remember my first day on an urban campus. I cried. When I walked to class at Tech, I didn't smell exhaust or hear the honking of traffic. It was a very difficult transition.
Today, it suffered the ignomy of being the location of the largest massacre in the US. I cannot imagine what the student body (>25K) must be feeling. I remember in 'my day' there was a campus rapist. During the week of the rapes and prior to his apprehension (a non-student) we were wary--even fearful. How this community must be feeling is beyond my comprehension--I don't know what the combination of grief and fear feels like. I'm fortunate to have lived so long with such naivety.
My neighbor's son, whom I've known since his birth attends VA Tech. He is safe. And the community of young people in New Kent quickly, through their instant messaging, My Space's and phone calls, ensured that 'their own' were safe. But that small consolation did not prevent their thoughts turning immediately to those who were not safe. Naturally, the phone lines were jammed, so many parents are left in that netherworld of not knowing. It's a bona fide tragedy.
I have the fondest memories of Tech. My husband claims it is the coldest place on earth. I still remember waking up to go to my 8:00 a.m. lab class and having to stop over the steam grates to get warm. My favorite memories are those of the football games at Lane Stadium. There were many die-hard fans. I particularly remember the older men (>60) festooned in their orange/burgundy, shirts/pants beaming with pride and love for this beautiful land-grant school nestled in the mountains.
Remember how when you reached a certain age your Mom and Dad sort of embarrasssed for being seemingly backward? Well, the colors of orange and burgundy along with a mascot that was a turkey no less, was a bit embarrassing. However, today I feel especially privileged for being part of that community. I know those burgundy and orange festooned men, part of the founding student body in those early decades, now have a tear in their eye and a glass in their hand mourning the tragedy that unfolded in that community in front of our nation today.
Events such as today remind us how important the small things are. My SIL's birthday was on Friday. I forgot. I remembered on Saturday. They came over last night for dinner. I fixed homemade chicken enchiladas (and they are wonderful!), refried beans (semi-homemade), and rice (out of a box). For dessert, I fixed a beautiful, homemade Mexican flan. If I could invest as well as I cooked I'd be a gazillionaire! But cooking has brought me great wealth. I adore feeding people things that (1) they would not make themselves; (2) they may not be exposed to.
My point of this post? Make sure that you reach out to the people who matter in your life. Broken fences in your life? You can mend those.
I purchased CSIQ at $10.05. Above is today's chart. The little turbo boost you see was due to an innocuous news story that came out to explain why all the solar plays were going zonkers. I sold it around 2 p.m.
Why? I'm going to refrain from calling myself a name. Seriously, though, I think that this market is too frothy for the fundamentals. But I say that recognizing that I have a distinctive bias. An interesting question to ask yourself when you are steeped in your own bias is what would you have to believe to be true to change your current mindset. I'll make a stab at that. I would have to believe that...
- jobless claims would not increase. I think that they will increase due to the effects of the slowdown in builders and all of the other supporting industries to that critical sector.
- interest rates would be stable or decline. I don't see stability in interest rates. I see upward pressure due to USD and inflationary pressures. Also, that commodities are increasing is troubling to me for I think that puts pressure on the consumer.
- the consumer would have to remain strong. Income growth is not keeping up with the price of things: housing, gasoline, food and healthcare--the things that we mere mortals have to buy to keep our families fed and sheltered with some measure of safety.
- corporate spending would have to backfill for the consumer (presuming of course that the consumer falters). So far, corporations have been tightfisted except for buying back stock and compensating the heck out of their CEO's.
- all of the things that I think are going to be an issue really will be an issue, but much later, and there is still some juice to goose. Okay....I'll give this one a tepid thumbs up.
So this is the backdrop in which a stock run up of 20+% (and then later go on to be up 38% in a matter of an hour later) just a few days makes me nervous. If I felt more positive about the overall market, I would have stood steadfast. And understand, if I cannot feel comfortable with holding these types of gains, I'll never hit the proverbial home-run stock.
I also did another hard thing. I picked up some FMD on the debacle. It looked like a genius thing to do at one point during the day; then its IQ regressed. We'll see in a couple of days. I've generally had good luck stepping into the fray.
So I write this to share my quandries--and by sharing my quandries, you'll be sure to always remember that none of this is ever investment advice, but rather an exposition.
While my expectation is that interest rate resets will continue to be at issue, it is likely not a problem that will reverberate through the investment community until the "if" or "when" unemployment begins to rise.
Saturday, April 14, 2007
Friday, April 13, 2007
Over last weekend I spent a fair amount of time looking up the coal stocks. This is one of the few times that I was able to "get in" to the action. I never chase action--I still regret not chasing AKAM when it went from 18 to 25--(I'm pretty sure that is a pre-split price too). But, you cannot get them all.
I also picked upped some CSIQ @10.05 this week. I closed at $10.84. I found it on the "Halter Index". I'll make a watch list this weekend.
I know that anecdotal information is passingly worthless--but like good gossip, far be it for me to let that stop me.
Local carpet contractor says that business is slower than he's ever seen it (he's been in the business for many, many years). Neighbor who works in transportation--no body is shipping anything.
So, from my small corner of the world some passing tidbits.
Today's market strength is a bit of a surprise. It is worrisome that energy stocks and gold are so strong. Partly due to a weak dollar and partly due to inflation worries.
Thursday, April 12, 2007
I don't really count aftermarket activity on stocks such as this, because after market is a netherworld. You can see that MTG tanked down to $53, but quickly regained. I do not know what will happen with this stock. I don't think that there is much upside, and we may very well see it drift down.
My sold puts would have gained just a bit. What's interesting is that when the stock is all in a muddle in the a.m. like this one is, you cannot get a bid/ask on options. I don't know the reason for that
Anyway, the promised followup. Not much insight. I think that they are having their conference call now. I may listen and see how the stock reacts.
"Limited partnerships increased by $363 or 84% during 2006. HIMCO believes investing in limited partnerships provides an opportunity to diversify its portfolio and earn above average returns over the long-term. However, significant price volatility can exist quarter to quarter. Prior to investing, HIMCO performs an extensive due diligence process which attempts to identify funds that have above average return potential and managers with proven track records for results, many of which utilize sophisticated risk management techniques. Due to capital requirements, HIMCO closely monitors the impact of these investments in relationship to the overall investment portfolio and the consolidated balance sheet. HIMCO does not expect investments in limited partnerships to exceed 3% of the fair value of Life’s investment portfolio excluding trading securities.
| || || || || || || || || || || || || || || || || |
|Composition of Limited Partnerships|| |
| || ||2006|| || ||2005|| |
| || ||Amount|| || ||Percent|| || ||Amount|| || ||Percent|| |
Hedge funds 
| ||$||427|| || || ||53.8||%|| ||$||127|| || || ||29.5||%|
Private equity funds 
| || ||211|| || || ||26.6||%|| || ||179|| || || ||41.5||%|
Mortgage and real estate funds 
| || ||46|| || || ||5.8||%|| || ||6|| || || ||1.4||%|
Mezzanine debt funds 
| || ||110|| || || ||13.8||%|| || ||119|| || || ||27.6||%|
| ||$||794|| || || ||100.0||%|| ||$||431|| || || ||100.0||%|
||| ||Hedge funds include investments in funds of funds as well as direct funds. The hedge funds of funds invest in approximately 40 to 90 different hedge funds within a variety of investment styles. Examples of hedge fund strategies include long/short equity or credit, event driven strategies and structured credit.|
||| ||Private equity funds consist of investments in funds whose assets typically consist of a diversified pool of investments in small non-public businesses with high growth potential.|
||| ||Mortgage and real estate funds consist of investments in funds whose assets consist of mortgage loans, participations in mortgage loans, mezzanine loans or other notes which may be below investment grade credit quality as well as equity real estate.|
The point of the paper is that it is particularly this inter-relatedness that poses risk. Rather than try to paraphrase the authors, I'm going to include their Current Outlook lifted directly from pages 81, 83)
The Current Outlook
A definitive assessment of the systemic risks posed by hedge funds requires certain data that
is currently unavailable, and is unlikely to become available in the near future, i.e., counter-
party credit exposures, the net degree of leverage of hedge-fund managers and investors,
the gross amount of structured products involving hedge funds, etc. Therefore, we cannot
determine the magnitude of current systemic risk exposures with any degree of accuracy.
However, based on the analytics developed in this study, there are a few tentative inferences
that we can draw.
1. The hedge-fund industry has grown tremendously over the last few years, fueled by the
demand for higher returns in the face of stock-market declines and mounting pension-
fund liabilities. These massive fund inflows have had a material impact on hedge-fund
returns and risks in recent years, as evidenced by changes in correlations, reduced
performance, and increased illiquidity as measured by the weighted autocorrelation.
2. Mean and median liquidation probabilities for hedge funds have increased in 2004,
based on logit estimates that link several factors to the liquidation probability of a
given hedge fund, including past performance, assets under management, fund
ows, and age. In particular, our estimates imply that the average liquidation probability for funds in 2004 is over 11%, which is higher than the historical unconditional attrition
rate of 8.8%. A higher attrition rate is not surprising for a rapidly growing industry, but
it may foreshadow potential instabilities that can be triggered by seemingly innocuous
3. The banking sector is exposed to hedge-fund risks, especially smaller institutions, but
the largest banks are also exposed through proprietary trading activities, credit arrangements and structured products, and prime brokerage services.
4. The risks facing hedge funds are nonlinear and more complex than those facing traditional asset classes. Because of the dynamic nature of hedge-fund investment strategies, and the impact of fund inflows on leverage and performance, hedge-fund risk models require more sophisticated analytics, and more sophisticated users.
5. The sum of our regime-switching models' high-volatility or low-mean state probabilities is one proxy for the aggregate level of distress in the hedge-fund sector. Recent measurements suggest that we may be entering a challenging period. This, coupled with the recent uptrend in the weighted autocorrelation , and the increased mean and median liquidation probabilities for hedge funds in 2004 from our logit model implies that systemic risk is increasing.
We hasten to qualify our tentative conclusions by emphasizing the speculative nature of
these inferences, and hope that our analysis spurs additional research and data collection to
refine both the analytics and the empirical measurement of systemic risk in the hedge-fund
industry. As with all risk management challenges, we should hope for the best, and prepare
for the worst.
I hope that my objective of creating awareness without insanity has been met. Keep your eyes and ears open for exposures, particularly if you have a DNA quirk that has you nosing around 10-K's of financial institutions. Keep in mind the example of HIG.
Thank you for reading this and your comments (both public and private) on the material. Because I wrote (regurgitated) this information, it forced me to wrestle with concepts that were both foreign and complex. Nevertheless, I understand the risk--so if we ever have a meltdown, you can say, "Yes, I've read about those auto-correlations and this event is not a surprise to me."