Thursday, May 31, 2007


In college (1980), I was taking a marketing course that required forming groups of 4 and competing in a game called "Tempamatics". Essentially, the group was the company and the collective groups in the class were the industry--competitors.

It was a simulated game where you made routine decisions about your product to include production volume, sales price, stock buybacks, debt assumed etc. Based on your decisions, (entered on key punch cards I might add--ancient technology), and in relation to the decisions of all others, your group was ranked against all others--in your class in and in all classes. The ranking was based on your score earned on about 5 factors. I don't recall them all but debt to equity, return on assets, return on equity were three of the 5. Not all of them had the same weighting.

The marketing professor was not too keen on accounting students. In fact he warned that the worst group that he ever had was composed of all accounting majors. Our group had 2 accounting majors (including me) and a marketing major and a personnel major. He did allow us to keep our weighting of 50% accounting majors, and we did not feel intimidated.

The very first exercise elicited a lecture from the professor about what variable costs were. Apparently more than one group had elected to sell their product for less than it cost them to produce. Naturally, those of us who had a facile grasp (read: accounting majors) of this concept were left with no sales, lots of inventory and red on the income statement.

After the first blow up, our team determined that we would systematically exploit the ranking system by making decisions that would cause a better outcome for more heavily weighted factors. Return on equity was one such factor. Accordingly, among other things, we bought back stock--including borrowing money to do so as debt factors were not weighted so heavily. We consistently climbed higher and higher in the rankings by maintaining a ruthless commitment to maximizing our scores and testing our decisions that would get us there.

To give you an idea how successful our team was, we finished with a score 97. The second place team had a negative number of like -25. (This was among all classes, not just our class, and I don't recall how these numbers were generated). Our lament, though, was that we were NOT making good long-term decisions, but rather short-term, highly rewarded decisions. This M. O. stood in stark contrast to the Japanese style of business decision making (much discussed at the time).

Businesses have to survive for the long term, and they cannot do it with short term thinking--such as unsustainable debt, declining sales or margins, runaway administrative expenses. So as you look at your investment candidates, make sure that they have a management team and product line that positions them for long term success. It's also a good perspective to apply to your personal finances.

Wednesday, May 30, 2007


Hey, if you are looking for something interesting go here.

You can click on the China map and find all sorts of interesting things. Cocktail party this weekend? (I don't have any, but surely you do). Arm yourself with titillating information.

Short Interest

I mentioned some time ago that I had a major "duh" moment. Specifically, that when the market (or stock) advances more than I would expect it to, look at the short interest. JOYG had a terrific day today. Their short increase had also increased rather markedly from APR - May.

I'm wondering if the juice for the market today was real exuberance or the fact that short interest overall has been increasing across the board by people in the 'money know'. The FOMC minutes were not comforting with respect to the drag of housing on the economy. Now, as you might imagine, I was not surprised by that statement; I doubt that any of you were either. So I did garner some comfort that my thinking was not so out of line in that respect; but was discomfited that there was not a more forthcoming worry earlier.

Thunderstorms and Such

Around 8:30 p.m. Monday evening we had a violent thunderstorm--blinding rain, powerful winds and chip-sized hail, lightening ground strikes. Greta, my orange belton bird dog, is deathly afraid of storms. She shivers like perennially jiggled jello. I put her in the utility room and turned the dry on to mute the thunder. She also does not like flash cameras--she knows that a flash is the precedent of thunder.

That trick worked until we lost power. Luckily our dinner, courtesy of my son, was on the table (yeah, we eat late!). He grilled bratwurst and onions. So we ate by candlelight and with the wonder of when power would be restored. My neighbor said that the power company said by 11:30 p.m. With that information, we elected not to go down to the woodshed to get the generator.

Tuesday a.m.. Still no power. So yesterday I was sans internet, though I could connect through my Open Wave through Verizon to see what the market was doing. Good, bad, then good it seemed! Power/cable was restored around 5:00 p.m.
It looks like today there may be a market thunderstorm with the Chinese govt's tripling of the stamp duty. You can read the story here on Bloomberg. One half of the Shanhai's stocks dropped the daily drop limit of 10%. Naturally, analysts are not concerned. I'm not suggesting that they need to be, for I truly do not know. But we can always be assured that no matter how dire the news, MOST analysts will not be concerned. I at least believe that it is a correction. Whether a healthy one or not remains to be seen. Watch FXI today. It will open at least $2 down.

SRS is the 2x inverse of IYR. IYR was up about 3% due to buyout news and speculation. SRS was down 6%. I'm sure that there were many investors in SRS thinking that REITS had rolled over and more was to come. It was a beautiful H&S pattern--THAT FAILED. At least so far. I had exited my position in SRS profitably (because I watched the technical pattern in IYR), and I was glad not be exposed yesterday. Buyouts must release some trader pheromones--they get a whiff of it and go into a buying frenzy for all stocks in a group. I imagine that frenzy will buoy the REITS for a little while--at least through a merger Monday. But the double ETF's can double your pleasure or pain.

I know that some of you dismiss technical indicators, and there are certainly arguments for that. But there are technical indicators that I believe that are separate from the seeming voodoo chart patterns that have increased my transaction success. Most particularly, overbought/oversold as well as RSI have been useful to me. I also watch the Aroon up/down indicators. That has helped me understand whether a price is trending, changing trend or consolidating. Given that I've not wanted to be long this market (call me chicken), I have found that these tools have helped me find some attractive short-term positions, so that I'm earning some return without feeling too exposed on the long side. Stated another way, I feel like I'm making an 'informed gamble'.

May your portfolios persevere today.

Sunday, May 27, 2007


Yes, this is a bird-dog post! I wanted to introduce you to the following study which I believe has interesting implications for those of you who are regular readers of research reports. I found this paper, "Buys, Holds, and Sells: The Distribution of Investment Banks' Stock Ratings and the Implications for the Profitability of Analysts' Recommendations" (September 2005), at Brad Barber's research page.

Here's a citation for the work. If you are interested in this subject, I would recommend your reading the paper.

Barber, Brad M., Lehavy, Reuven, McNichols, Maureen F. and Trueman, Brett, "Buys, Holds, and Sells: The Distribution of Investment Banks' Stock Ratings and the Implications for the Profitability of Analysts' Recommendations" (September 2005). Available at SSRN:

I've not paid much attention to the % of buy/hold/sell recommendations, but I will now having read this paper. The premise of the paper follows:

"This paper analyzes the distribution of stock ratings at investment banks and brokerage firms and examines whether these distributions can be used to predict the profitability of analysts’ recommendations."

The study has a comprehensive methodology which I'll skip in this post. But the result was this:
"Upgrades to buy issued by brokers with the smallest percentage of buy
recommendations significantly outperformed those of brokers with the greatest percentage of buys, by an average of 50 basis points per month. Further, downgrades to hold or sell coming from brokers issuing the most buy recommendations significantly outperformed those of brokers issuing the fewest, by an average of 46 basis points per month."

The study dovetails with NASD Rule 2711 which required greater disclosure on the part of investment firms relative to the market peak of 2000 (height of bullishness) and the subsequent market decline. Rule 2711 had to be adopted no later than 09.09.02 for member members. It is this regulation that requires each investment research report (among other things) to list the % of buys/sells/holds in its research universe. The authors have many tables, but I constructed this very simple table to show you the differences in the breakdown among all firms over the pre/post adoption period:

The redistribution is remarkable, is it not?

I will also selectively lift some points that I think are interesting (and I really encourage your reading the paper--it is very accessible to lay (that means me) readership:

  • While a literature view conducted by the authors show, "banking activity has not been found to be associated with either less accurate or more optimistic earnings forecasts." (p. 7). They also note some contrasting studies that show that (1) lead underwriter recommendations are more optimistic than that of others; and (2) "the buy recommendations of independent research firms outperform those of investment banks, especially subsequent to equity offerings." (p. 8). That is something to be mindful of when reading a prospectus--and fits with Russell's (and my) prognostication skepticism!
  • During the height of bullishness (pre 2000), "buy recommendations outnumbered their sell recommendations by more than 35-1.(p. 8)
  • Post 2001, the number of companies in the coverage universe dropped due to (1) smaller universe of organizations due to business failure at the time; (2) brokers declining to cover organization's whose prospects are dimly viewed; and (3) cut back in research resources. (p. 11)

The paper provides an interesting historical view useful to a post-2000 investment recommendation view as well as empiricism regarding the value of upgrades and downgrades RELATIVE to the issuing organization's recommendation universe.

Unskilled and Unware--Follow Up

In my former job, I was part of an executive team in a nascent, but fast growing industry. You could consider it the health care equivalent of the dot com era. Each one of us was unskilled but we were fully aware of it. In fact, the entire industry was unskilled--some aware and some unaware. I will tell you that being in such a position produces the highest degree of stress imaginable, because lots of money was on the line and everyone (industry-wide) was flying by the seat of their pants with their hair on fire!

We would actively challenge ourselves by vetting the following about our industry:
  • Unknown and unknowable (these are the things that peg the sphinctometer)
  • Knowable, but currently unknown (because of lack of studies/outcomes)
  • Known
I would suggest that vetting these three items about any risk undertaking is important. It wasn't until reading through the comments section of the last post that I was reminded of these things. And, in being reminded of them, I thought that they have great applicability for investing.

Unfortunately, a multiplicity of venues and points of view exists. For each of these (and there may be more than someone could add) you have to be very specific regarding the 'what' (sales, costs, regulatory, etch) and the 'who' --as in whose point of view (yours, management's, the market's, regulator's, etc). Something that is unknown and unknowable may merely be unknown and unknowable TO YOU but others may know it. But you have to adopt an investor point of view. Bill Cara is fond of saying--"if you are not in the room, you are not in the deal".

Saturday, May 26, 2007

Unskilled and Unware of It

The above quote is taken from the paper that Russell references in the comments section.

Unskilled and Unaware of It: How Difficulties in Recognizing One's Own
Incompetence Lead to Inflated Self-Assessments

Justin Kruger and David Dunning
Cornell University

I will read the paper, but here is the abstract, and a quote from the 1st paragraph which reminded me of an article I read...I'll tell you why after you read the quote.

Abstract: "People tend to hold overly favorable views of their abilities in many social and intellectual domains. The authors suggest that this overestimation occurs, in part, because people who are unskilled in these domains suffer a dual burden: Not only do these people reach erroneous conclusions and make unfortunate choices, but their incompetence robs them of the metacognitive ability to realize it. Across 4 studies, the authors found that participants scoring in the bottom quartile on tests of humor, grammar, and logic grossly overestimated their test performance and ability. Although their test scores put them in the 12th percentile, they estimated themselves to be in the 62nd. Several analyses linked this miscalibration to deficits in metacognitive skill, or the capacity to distinguish accuracy from error. Paradoxically, improving the skills of participants, and thus increasing their metacognitive competence, helped them recognize the limitations of their abilities.

(Now you know that I'm wondering if there is a gender breakdown in this assessment--just from having a a fresh dose of that from our last paper. I seldom break down people/issues into categories--liberal/conservative, male/female etc.).

Quote: ""It is one of the essential features of such incompetence that the person
so afflicted is incapable of knowing that he is incompetent. To have
such knowledge would already be to remedy a good portion of the
offense. (Miller, 1993, p. 4)"

The beginning quote reminded me of an article that I read (I forget where/when) that stated that depressed people had a more accurate view of themselves than non-depressed people. It had to do with a natural filter that people have (which probably protects them from the mentally scarring cognition of their incompetence. What made me think of that was the quote.....There is a double whammy in the above. First, you are incompetent (and who wants to be labeled as incompetent?) and second, you are so afflicted that you do not realize it.

More later. It is early, and no caffeine is coursing through my veins yet.

9:14 a.m post caffeine, post read and post breakfast:

First: The authors note that gender failed to qualify the results.
Second: The phrase "Unconscious Incompetence" kept resonating in my brain.

Here are some of some first impressions of the article. I certainly have no qualifications for any critical assessment (and Russell, I hope that none of this sounds like I'm dissing your paper) and have sufficient metacognition abilities to recognize such. I have to admit that I have a bit of a bias from a previous life in having to understand study biases related to a very small sliver of the world. But I have NO professional competence in this area.

Before jumping in, let's look at the definition of metacognition. This is from Jennifer Livingston's document that you can find here:

"Metacognition" is one of the latest buzz words in educational psychology, but what exactly is metacognition? The length and abstract nature of the word makes it sound intimidating, yet its not as daunting a concept as it might seem. We engage in metacognitive activities everyday. Metacognition enables us to be successful learners, and has been associated with intelligence (e.g., Borkowski, Carr, & Pressley, 1987; Sternberg, 1984, 1986a, 1986b). Metacognition refers to higher order thinking which involves active control over the cognitive processes engaged in learning. Activities such as planning how to approach a given learning task, monitoring comprehension, and evaluating progress toward the completion of a task are metacognitive in nature. Because metacognition plays a critical role in successful learning, it is important to study metacognitive activity and development to determine how students can be taught to better apply their cognitive resources through metacognitive control.

"Metacognition" is often simply defined as "thinking about thinking." In actuality, defining metacognition is not that simple. Although the term has been part of the vocabulary of educational psychologists for the last couple of decades, and the concept for as long as humans have been able to reflect on their cognitive experiences, there is much debate over exactly what metacognition is. One reason for this confusion is the fact that there are several terms currently used to describe the same basic phenomenon (e.g., self-regulation, executive control), or an aspect of that phenomenon (e.g., meta-memory), and these terms are often used interchangeably in the literature. While there are some distinctions between definitions (see Van Zile-Tamsen, 1994, 1996 for a full discussion), all emphasize the role of executive processes in the overseeing and regulation of cognitive processes.

The term "metacognition" is most often associated with John Flavell, (1979). According to Flavell (1979, 1987), metacognition consists of both metacognitive knowledge and metacognitive experiences or regulation. Metacognitive knowledge refers to acquired knowledge about cognitive processes, knowledge that can be used to control cognitive processes. Flavell further divides metacognitive knowledge into three categories: knowledge of person variables, task variables and strategy variables.
In reading the study, a few things struck me (I'm sure that Russell will come to my rescue in my mishandling of these!)

  • Overall, the study design seemed to be a bit flawed. Specifically given how the study groups were designed for each of the studies, there appeared to me a heavy selection bias. For example, if you are designing a study and students are being offered extra credit , the study will have selection bias because among all of the population that could participate, only those motivated by extra credit would participate. While such a bias may not affect conclusions about lower quartiles, it would affect the composition of upper quartiles because the better students would have not opted in. In fact, any study that is opt in suffers from selection bias. I found the study design of "Humor" to be particularly flawed (and to be fair, the authors acknowledge some of the deficiencies in that study).
  • I couldn't help but being left with the impression that there was a bit of chicken/egg going on--meaning that people who score poorly most likely have poor metacognition skills; accordingly, you'd still expect them to exhibit poor metacognition skills even after training. And, they did, but the gap between actual v. estimated performance lessened.
  • Study three sets out to determine if incompetents would re-rate themselves relative to others (incompetents tend to overestimate their performance). Specifically: "We reasoned that if the incompetent cannot recognize competence in others, then they will be unable to make use of this social comparison opportunity.) (p 1126). Now, I'm not quite sure how you would parse out lack of skill v. metacognition. Specifically, if you have no skill yourself, particularly in logical problems, how in the heck would you even be able to grade another's paper and recognize that s/he performed better than you? Because of this, how can ANY OTHER conclusion other than the one drawn materialize?
  • The study and conclusion that training would help the incompetent become more competent (that's fairly obvious). The authors note that it lead to a paradox that by making them more competent they recognized their own incompetence. A logical paradox I think. Now I found some irreconcilable differences. Specifically, the authors conclude that for the bottom quartile, incompetents did better on the tests, but they still lacked the ability to estimate the abilities of others. My quibble is in the study study design to reach this conclusion. The participants only had access to their own tests (before and after). They did not, in so far as I could tell, have the opportunity to look at the tests of others, but rather just made estimates. What I would have preferred to see (hey, and I'm fully incompetent in study design, but I'm just dealing with logic, I think) is that they were both (1) given training and (2) saw his/her test AND the tests of others. It would be interesting to see how replications of this study using a tweaked study design (both in terms of population and test methodology) how differently the ratings would compare.
  • The most interesting point of this entire study to me was the idea that top quartile folks suffered from false consensus-- From Wikipedia: "The false consensus effect refers to the tendency for people to overestimate the degree to which others agree with them. People readily guess their own opinions, beliefs and predilections to be more prevalent in the general public than they really are."

Regardless of my quibbles, I was certainly left with the following admonition:

If we lack skill/knowledge in any undertaking, we need to be vigilant to ensure that we obtain the necessary knowledge and experience to increase our competence (so that we are not unconscious incompetents) and (b) assess our abilities as objectively as possible.

I leave this post with this hope:

That any of us read and discuss such matter provides us with some immunity from being relegated to the bottom quartile of any such study of competence relative to investing!

Russell--thank you so much for this contribution.

Thursday, May 24, 2007

Warning on Market Orders at EOD

If you look at the chart of EEE above (and I encourage you to CTML), you can see that the price rose rather dramatically (by about 50 cents or 7.7%) from 3:39 p.m. through the EOD.

Now you know that I don't have any advice worth following, but I would urge you to be careful if trying to enter a position during this time. I would also urge you to be crafty--if you want to exit a position and there is some buying interest late in the day, you can use that to your advantage.

I remember one time I had a position in GMR. All of a sudden my position of 300 shares was worth $1,000 per share or $300K. I had that brief moment where I thought that I had died and gone to heaven. Some extraordinary news hat catapulted the stock into the stratosphere!! Investing genius!!!

Well, I'm pretty confident somebody wanted 1,000 shares and fumble-fingered their entry. Within a minute (but what a glorified minute that was) the price was back in the trading range.

Investor Behavior: Part II

This is the second installment of Investor Behavior. To remind you of the origin: The purpose of this post is to share with you what I considered some interesting information about individual investors. The paper is from Advances in Behavioral Finance, Vol II, Russell Sage Foundations/Princeton University Press, 2005.

The paper is Chapter 15 of the aforementioned book and is titled, "Individual Investors", its authors, Brad M. Barber and Terrance Odean. If this is a subject that interests you, though the paper is not listed at this following link, several other papers are listed that you might find interesting. In this paper, the authors examine "The Disposition Effect" (explained below) and investors' tendencies to trade to frequently due to overconfidence.

Regarding Investor Overconfidence, you must understand that this is a universal phenomena--it's endemic to our humanness (just like all of the children in Lake Wobegon are above average). Studies by several different folks have shown that "people tend to overestimate the precision of their knowledge" and that this has been found in many professional fields: physicians, nurses, investment bankers, engineers, entrepreneurs, lawyers, negotiators, and managers. How is this tested? Through . . . studies of the calibration of subjective probabilities. (p. 554). Here are some of the additional manifestations (in addition to the miscalibration) of that overconfidence as people tend to :

"(All taken from pp 554-555)
  • overestimate their ability to do well on tasks, and these overestimates increase with the personal importance of the task (Frank 1935);
  • have unrealistically positive self-evaluations;
  • are unrealistically optimistic about future events;
  • expect good things to happen to them more often than to their peers;
  • see themselves better than the average person and see them selves better than others see them;
  • rate their abilities and their prospects higher than those of their peers;
  • overestimate their own contributions to past positive outcomes, recalling information related to their successes more easily than that related to failures;
  • 'misremember thier own prediction so as to exaggerate in hindsight what they knew in foresight.' (Fischhof 1982);"
The authors state that "These beliefs can also lead to biased judgments." Now, if you FAIL to see how any of this applies to you then you have only confirmed everything that the these researchers have found through empirism. However, if you see how this applies to you and have a sting of shame upon your cheeks, then you are well on your way to creating better self awareness!

Naturally since this phenomena shows up in every aspect of our life, it is reasonable to expect that it will show up in its full glory in our investing behavior. The authors make a useful distinction regarding "information" that a trader/investor receives. And their emphasis is on "informed" traders. First, let's look at the authors' premise:
"In a market with transaction costs, we would expect informed traders who trade for the purpose of increasing returns to increase returns, on average, by at least enough to cover transaction costs. That is, over the appropriated horizon, the securities these traders buy will outperform the ones they sell by at least enough to pay the costs of trading." (P. 555)
It's worth noting that transaction cost these days are significantly less than those of when many of these studies were conducted. It will be interesting to see additional, more contemporary studies, that perhaps revisit some of these concepts and see if there if transactions cost reduce, magnify or have no effect on these outcomes. Now let's take a look at "information". Traders can be mistaken (overconfident) in
  • the precision of the information that they have
  • their ability to interpret information
The authors state that overconfidence in the information itself generally does not lead to losses beyond transaction costs. However, if they are overconfident in both the precision of the information and their ability to interpret that information, "they may incur average trading losses beyond transaction costs." (p. 555)

To tie this is with our disposition effect, the authors note "If they unwittingly misinterpret information, they may choose to buy or sell securities that they would not have otherwise bought or sold. They may even buy securities that, on average and before transaction costs, underperform the ones they sell." (p. 555).

I don't know about you, but reading the above gave me substantial pause. What would be helpful to any of us as investors is to know (1) how precise the information is that we know; (2) how uniformly understood is this information--naturally if it is widely understood, then it should already be priced in; and (3) how capable we are to even evaluate such information.

The authors then note that overconfidence leads to overtrading. "Odean (1998b) predicts that the more overconfident investors are, the more they will trade and the more they will thereby lower their expected utilities. . . . we would expect that, on average, those investors who trade most actively will reduce their returns through trading... . we find that this is the case." (p. 559).

Now here is the provocative, gender stuff! "While both men and women exhibit overconfidence, men are generally more overconfident than women". (p. 560). I'm sure that will not surprise any female readers and I say that with apologies to male and female readers alike. This is also an area where the studies are a bit older (1977, 1997), but it appears that it has at least been validated by more contemporary studies. Here are a few of the gender differences that you might find interesting:

"(quoted/paraphrased)from pp 560-561)

  • differences in confidence are highly task dependent and are greatest for tasks perceived to be in the masculine domain
    • per Deaux/Farris (1977) "overall, men claim moreability than do woemen, but htis dfference emerges most strongly on . . . masculine task(s)".
  • men are inclined to feel more competent than women do in financial matters
  • gender differences in self confidence depend on the lack of clear and unambiguous feedback. When feedback is 'unequivocal and immediately available, women do not make lower ability estimates than men. However, when such feedback is absent or ambiguous, women seem to have lower opinions of their abilities and often do underestimate relative to men." (Lenny 1977)
Based on the literature survey in addition to the authors' original research they posit: "We expect men, the more overconfident group, to trade more atviely than women and, in doing so, to detract from their net return performance more." (p. 561) In fact, they note (p. 561) that

  • Men trader 45% more than women
  • Men reduce their returns through trady by 0.94 percentage points more than women
  • Men underperfom their "buy and hold" portfolios by 2.652 percentage points annually; women underperform by 1.716 percentage points.
{you can read more about gender differences in the following: BOYS WILL BE BOYS: GENDER, OVERCONFIDENCE, AND COMMON STOCK INVESTMENT*

Buying V. Selling: The authors make an obvious but important distinction about the differences in behavior in buying v. selling stocks. The obvious point is this: When buying a stock, the universe is pretty large, but when selling a stock you can only sell what you own. The authors note that less than 1% of investors sell short--so their analysis is based only on stocks held long and available to sell.

So given this large universe from which to buy, how do investors do it? The authors note that "investors tend to be net purchasers of attention grabbing stocks, even when it is bad news that catches their attention."

Moreover, the authors note that with the advent of the Internet, and seemingly limitless information, this access to information actually increases investor overconfidence "by providing an illusion of knowledge and an illusion of control" (P. 562) (and let's not forget that systematic bias that some may have in processing that information!!!!). They go on to state supporting studies which distill down to this important point:

"additional information can lead to an illusion of knowledge."

Accordingly, investors think that they have more control and trade to often and more speculatively. (p. 563).

IN conclusion, the authors make this perspicacious observation:

"The investor behaviors discussed in this chapter have the potential to influence asset prices. The tendency to refrain from selling losing investments may, for example, slow the rate at which negative news is translated into price". The obverse is of course that "the tend3ency to buy stocks with recent extreme performance could cause recent winners to overshoot."

I'd like to introduce you to a website that has many of Brad M. Barber's published papers.

I hope that you found this discussion interesting. I would encourage you to study more about investor behavior. People who understand YOUR foibles better than you do can take advantage of that in the marketplace. And shaking our own biases is like trying to change our spots. But at least knowing that we have spots--I call that self-awareness--is a good place to start.

Thank you for taking time to stop by.

Wednesday, May 23, 2007

Martin Pring Article Index

Martin Pring is a well known technician. Have you ever visited his site?

If you are looking for some free, informative information from a master technician--and this also includes some fundamental information regarding market psychology, may I recommend your taking a tour through this index of information.

Tuesday, May 22, 2007

Coal Stocks Update

Here's our watch list from 04.06.07. Pretty good, huh? Do click to make larger.

Fan Benno-Caris

I hope that you will take a moment to read about this incredible woman. You can read her story here.

This woman, now 89, inspired me some years ago (probably 6 or so). I was reading an article in Shape Magazine about this woman who started race-walking in her 70's. In fact, she was so competitive, she acquired a heart rate monitor to juice up her speed. Which it did. I did one of those "notes to self". Essentially, if this woman at her age could be physically fit, then I (at 1/2 of her age) could do so as well. So I began serious training to find my inner athlete (having embraced my inner nerd for so many years). I studied about heart rate training, upgraded my Polar monitor to one that I could download my training information. I had XLS spreadsheets that would compile my data in each zone so that I had a weekly pie chart on my time in zones. I was so proud of myself. Unfortunately, a water skiing accident cut my 2 1/2 year training program short. I sprained my back rather badly, and it all went downhill from there. I found it very difficult to become re-inspired to reach that prior level of fitness.

This a.m., I'm reading about her again (the story you see referenced, from a different paper) at age 89. What an extraordinary woman. So, guess what? This woman is back in my life inspiring me. I've cut out the article, enclosed it in a plastic sleeve, and I'm putting it on my wall board at my desk.

Marc Faber is Interviewed

on Bloomberg today (05.22.07). I highly recommend your listening. I made a few notes which may be cryptic, but I'll share them with you:

  • Bubble in all assets classes
  • Credit bubble in US
  • US stock market is rising largely due to a falling dollar (more later)
  • Though in a bubble, prices could increase more
  • If all bubbles burst, and he thinks that we are in the final stage, it will affect the world economy
    • He thinks the US will be hit more because it's wealth is based on asset appreciation rather than real industrial production (more later)
  • Asian currencies will appreciate with the rembi, and those currencies are undervalued in relative terms. He would not play that, though.
    • Distressed assets in Middle East stock market, down 50-70%--some value there
    • Distressed assets in Detroit real estate.
  • Yen is undervaled--it will strengthen when US stock market decreases
  • Euro v. USD--makes US assets relatively inexpensive (though not cheap)--I'm beginning to believe, though I did not believe it before, that this dynamic may continue to drive our markets higher.
  • Interest rates are below the "natural" (think real interest rates). Thinks the rate is ~10%
  • No real safe place as he feels all assets are correlated.
  • All CB's are willing to print money
  • Hard to know what the catalyst (to a market decline) might be. Cannot really know the "what" or "when" but rather that there generally is one.
  • Thinks that there is illiquidity in the housing market now.
  • He likes Vietname. Does not see many opportunities elsewhere.
  • One asset class that is 'cheap' is farmland. He said, "Perhaps your Bloomberg readers and portfolio managers should learn to drive a tractor." [I thought that was quite funny]. Should consider owning farmland in
    • Argentina
    • Brazil
    • S. Africa (though not as safe as Brazil)
    • N. Zealand
    • Australia (NZ and Aus due to proximity to China).
I'm sure that I left some stuff out. I hope that you will take time to listen.

Monday, May 21, 2007

Why I'm Late

Ugh. I had to take an educational detour into dog training. In an attempt to cure Macy of chasing motorcycles, Reade in I managed to do much ill that resulted in her biting him. He's fine, but the situation with her chasing cars, motorcycles, and barking and stuff has become untenable.

I'm on the right road, but one should never let their frustration show teaching dogs or children (or spouses!).

Investor Behavior: Part I

This purpose of this post is to share with you what I considered some interesting information about individual investors. The paper is from Advances in Behavioral Finance, Vol II, Russell Sage Foundations/Princeton University Press, 2005. This post will be in two parts.

The paper is Chapter 15 of the aforementioned book and is titled, "Individual Investors", its authors, Brad M. Barber and Terrance Odean. If this is a subject that interests you, though the paper is not listed at this following link, several other papers are listed that you might find interesting. In this paper, the authors examine "The Disposition Effect" (explained below) and investors' tendencies to trade to frequently due to overconfidence.

Before getting started with some of the concepts of the paper, there are two investor theories that you should understand. First, there is the Disposition Effect. Simply put, the Disposition Effect describes an investor's tendency to sell his/her winner while hanging onto his/her losers. It's the reason of for the aphorism: sell your losers and let your winners runs. Seems like reasonable enough counsel, but it is counter to the behavior that most investors exhibit. The stain of shame is on my cheek for this behavior as well.

Second, is Prospect Theory (PT): You can find a comprehensive explanation here. Essentially, PT serves as a counter to the rational behavioral models that economists build that assume people are rational. PT is observed behavior that is NOT rational, and describes that that "many people are far more willing to engage in risky behavior to avoid potential losses than they are willing to take risks to improve their positions."(cited from link). Do visit the link and read the information. It is not even a page, and it will flesh out this rater meager morsel of an introduction here.

The Disposition Effect:

The above represents the value function. It relates to an investor's perception of expected gains/losses. "Critical to this value function is the reference point from which gains and losses are measured." (p. 544). Here the reference point could be the purchase price, the current price, or some expectation of value. The authors quote Kahneman and Tversky 1979, p. 287): "there are situation in which gains and losses are coded relative to an expectation or aspiration level that differs from the status quot. . . A person who has not made peace with his losses is likely to accept gambes that would be unacceptable to him otherwise."

To sell a stock that has appreciated, the investor has to lower his/her expectation of the stock's ultimate value. Now the stock has declined. The authors state, "Then its price is in the convex, risk-seeking, part of the value function. [L's note: lower left quad] Here the investor will continue to hold the stock even it its expected return falls lower than would have been necessary for her to justify its original purchase. Thus the investor's belief about expected return must fall further to motivate the sale of a stock that has already declined rather than one that has appreciated." (p. 544). If an investor has a liquidity issue and has two stock's--one depreciated, one appreciated--without any new information regarding either stock, the investor "is more likely to sell the stock that is up." (p. 544).

So if you find yourself doing this recalibration of expectations for a stock, and you have a different standard for expectations of continuing gains for your winners vs. expectations of continuing losses for you losers, then you are in good company. Just remember, your expectations have been empirically proved wrong! The authors then go into the study design which I'll summarize briefly:
  • Data was gathered from 78K households over a 5 year period (1991-1996). It's worth noting that ease of trading and trading expense has changed dramatically since that time period. It would be interesting to see if the author's original test results still stand in the same proportions as noted in the next bullet.
  • Computed Percentage Gain Realized (PGR) on all appreciated stock v. Percentage of Loss Realized (PLR) on all depreciating stock. The authors found that "During this sample period, stocks that hand increased in value were approximately 65 percent more likely to be sold than stocks that had declined in value." (p. 548)The authors point out a number of potential reasons as to why investors were reluctant to sell their losers. They note that other studies fail to denote the distinctions as to why investors sells losers rather than winners. Here's a brief summary:
    • Anticipations of Changes in Tax Law: The authors found no effect.
    • Desire to Rebalance: No difference. When study modified to take this into consideration, they still found that investors prefer to sell winners.
    • Belief that One's Losers Will Bounce Back: Compared to the sold winners, the investors were mistaken.
    • Attempt to Limit Transaction Costs. Nope again.
    • Belief that all Stocks Mean Revert. Given the importance of this, I'm going to quote directly from the paper: "The results. . . are not able to distinguish prospect theory and the mistaken belief that losers will bounce back to outperform current winners. Both prospect theory and a belief in mean-reversion predict that investors will hold their losers too long and sell their winners too soon. Both predict that investors will purchase more additional shares of losers than of winners. However, a belief in mean-reversion should apply to stocks that an investor does not already own as well as those she does, but prospect theory applies only to the stocks she owns. Thus, a belief in mean-reversion implies that investors will tend to buy stocks that had previously declined even if they do not already own these stocks, while prospect theory makes no prediction in this case." P 551-552).
    • I've elected not to include
      • Employee Stock Options
      • Finnish Investors
      • Real Estate
In Part II, I will share the authors' view of Investor Overconfidence. I'm not even closed to qualified to addressing questions, but I know that Russell is well-read on this stuff and I'm confident he will help in this regard.

Sunday, May 20, 2007

Saturday, May 19, 2007

Market Masters Link

I did find the link for the Market Masters.

I stumbled upon this website by looking up Richard Donchian whom Barry Ritholtz has excised some of his "rules". The website has several profiles, and I know that I found it interesting. I'd like to post Donchian's rules here.

Please do visit this website.


Donchian’s Trading Guides

Richard Donchian documented his trading guides in 1934. He reviewed them in 1974, noting the ones he felt were the more important, some 40 years after they were first documented. The more important rules are reproduced in bold type.

General Rules:

  1. Beware of acting immediately on widespread public opinion. Even if it is correct, it will usually delay the move.
  2. From a period of dullness and inactivity, watch for and prepare to follow a move in the direction in which volume decreases.
  3. Limit losses and ride profits, irrespective of all other rules.
  4. Light commitments are advisable when a market position is not certain. Clearly defined moves are signalled frequently enough to make life interesting, and concentration on these moves to the virtual exclusion of others will prevent unprofitable whipsawing.
  5. Seldom take a position in the direction of an immediately proceeding three-day move. Wait for a one-day reversal.
  6. Judicious use of stop orders is a valuable aid to profitable trading. Stops may be used to protect profits, limit losses and take positions from certain formations such as triangular foci. Stop orders are apt to be more valuable and less treacherous if used in proper relation to the chart formation.
  7. In a market where upswings are likely to equal or exceed downswings, a heavier position should be taken for the upswings for percentage reasons; a decline from 50 to 25 will net only 50% profit, whereas an advance from 25 to 50 will net 100%.
  8. In taking a position, price orders are allowable. In closing a position, use “market” orders.
  9. Buy strong-acting, strong-background commodities and sell weak ones subject to all other rules.
  10. Moves in which rails lead or participate strongly are usually worth following more than moves in which rails lag.
  11. A study of the capitalization of a company, the degree of activity of an issue and whether the issue is a lethargic truck horse like Consolidated Edison or a spirited, volatile race horse like Case Threshing Machine is fully as important as a study of statistical reports.

Friday, May 18, 2007

Be Sure to Check back

Over the weekend I will do my promised post on the "Individual Investor", by Brad Barber and Terrance Odean, and taken from my Advances in Behavioral Finance, edited by Richard H. Thayler.

No original thoughts from me. This will be a bird dog post (under Lucy's watchful eye, now in eternal repose under the forest pansy red bud). But, I think that you guys will find it interesting. There will also be some gender differentiations that will cause some provocation, no doubt.

$1 mil consoloation round

Lots fewer folks, but, that notwithstanding, I'm not doing too badly!

Thursday, May 17, 2007

Fire up the Grill!

I'm from the South; accordingly, barbecue is a noun and not a verb. So if someone were to ask me what I did over the weekend, I would never say, "We barbecued". Now, my northern compatriots would say this, and I would look at them in bewilderment. You barbecued what? A dog, a chicken, steaks?

No matter what your longitude/latitude, I'm going to provide a helpful hint on grilling (b'ing) a chicken. First, if your kitchen is devoid a good pair of kitchen shears, then go purchase a pair. It will make your life so much easier. Chicago Cutlery and Kitchen Aid make them. Personally, I prefer the ones that come apart so that you can wash them easily.

The little hens (not the Perdue oven-stuffer roasters) that you can buy at the store make a wonderful grill mate. To save yourself some time do this:

Cut the backbone out of the chicken with your shears. Then turn the chicken over and press on the breast bone to crack it. You could also cut the ribs out--it's easily done, and I think that it works best. It lays flat and you will be so happy with the results.

You can then marinade your chicken in your favorite. I personally love Yoshida's Gourmet Sauce (which you can cut half and half with pineapple juice or orange juice--heck even apricot nectar). Also, if you have an Asian market, seek out the Korean Barbecue sauce.

You needn't marinade very long--even an hour works. Fire up your grill and place the chicken absetn-backside down. Grill until done. If your grill is too hot, you'll burn the skin because the marinades that I mentioned have a fair amount of sugar in them.

If you like chicken and like to grill, I hope that you'll try this technique. You shouldn't have to cook your chicken more than an hour if that. Otherwise you will have a tough bird, which will delight none. And, if you do not have an digital instant thermometer, buy one of those too. It will cut down on over/underdone food.

From the "Can't Cover Shit with Snow" Annals......

The following from Bloomberg:
OceanFirst Shuts Subprime Home Loan Unit, Top Officers Leave

By Rick Green

May 17 (Bloomberg) -- OceanFirst Financial Corp., a New Jersey-based banking company, will shut its subprime mortgage business and said the unit's president resigned after defaults were hidden from top management.

The bank blamed loans it made to borrowers who weren't required to document their income, according to a presentation for investors included in a federal regulatory filing today. The mortgages covered as much as 100 percent of a property's value.

OceanFirst said some of the loans made in 2006 quickly soured, and unnamed officials at the Columbia Home Loans unit ``concealed'' the defaults until February 2007. New subprime loans were halted by the bank in March, and OceanFirst has taken $21.6 million in charges.


Don't think for a minute that you've seen the last of this sort of thing. Here's my prognostication: Subprime will fade from our consciousness and then "WHAM" will be hit with 'surprise' news. Please don't be surprised.

Some Good News for My Portfolio Today

My post yesterday was very cathartic for releasing quite a bit of frustration. No matter what is troubling you, giving voice to it is always helpful. Most of the time, when you give voice to it you make it tangible. And unless you make a problem tangible it will gnaw on your sanity like a mouse on a wafer. As I said privately to an online friend, I thought not once, not twice but three times of yanking the post, but that would have been inauthentic to the purpose of my blog.

I've been patiently waiting for the REITS to break. I was early with some puts (kaputs!). I've elected to stalk my prey via the SRS. In case you are not familiar with the SRS it is the double inverse (short) of the IYR. Mind you, when you're early and the IYR goes up and up, your balance goes down and down. Here's a picture of it for the past 10 days.

For my loser round (2nd chance) on the Million Dollar Porfolio, I have all my money invested in Nighthawk Radiology (NHWK). Here's another picture.
Here's a 6 month picture

You can see the appeal for me. A wee bit beaten down, but clearly definable support. I purchased it for my less than $1M portfolio at $17.47. It appeared to be a broken stock, not a broken company. That is a useful distinction. Jim Cramer, though much can be said of him, has a sound bite or two that I find useful, this being one of them. Plus it is in the healthcare sector which is a good place to be. I also like the "comfort" of having bought it when the 5, 10, 20 day RSI (that's how I tag it on Metastock) were in the ditch. This method is similar to Bill's (Cara) but not exactly Bill's. I truly have had good results (high probability positive outcomes) using this method.

Here's another winner WZEN. Web Zen is from my China-immersion weekend. It was time well spent. I'm up 17%.

I bought CSIQ @10.51 and sold 5 days later at $12.10 (4/16/07) for a 19.6% gain. Not bad for the time. To provide some context for some of the coulda, woulda, shoulda laments, this is what CSIQ's chart currently looks like:

I would have lost money had I held, and I did not want to hold into earnings. You might, though, want to put CSIQ on a watch list.

I used to go back to positions I've entered and exited to do this sort of backward flogging. I don't do it anymore. Hindsight is 20/20 and prescience has no credible track record!

Last night I went to bed with several men (sadly there are few women authors on the subject, at least in this compendium) via my Behavioral Finance book. In fact, I was comforted by their embrace last night given that the paper that I was reading (I admit to skipping over the equations) stated that market participants are not necessarily rational. I think I promised sometime ago to post a thing or two from this book. I was just commenting to my husband that I needed another thing to delve into given that I dived into systemic risk and structured debt obligations which many of you were kind enough to delve into with me. So, I'll bring a thing or two from my Behavioral Finance readings into the blog. Russell will show me up, though, as he is so much better read than I am, but in doing so he will make important points.

I hope that you had a good day, and I appreciate your stopping in.

Wednesday, May 16, 2007

I do not pretend

to understand the market. It consistently confounds me: rising when I think that it should fall and the obverse. I wrote an on-line friend and lamented that I thought I needed a lobotomy.

The absolute hardest thing is to know--and I don't pretend that I know, and if you know, DO TELL--is when the admonitions that the market has higher risk than it should [insert handwringing items #1, #2, and etc here] are something to heed or just background noise.

I'm really beginning to feel that the less one knows the better. I can honestly say that I really cannot discern what's important to the market and what is just noise. If you are sensing frustration in my writing, then you are both sane and conscious, for I'm f'n frustrated (f'n frustrated=perplexed). And maybe the cognitive dissonance that I'm feeling is BECAUSE the environment is dangerous. Or, scarier still, maybe I'm dangerous, and everything that I've ever learned about business and the economy in school and work life is all for naught. (That would really piss me off).

What is really frustrating to me is that I feel no mastery of any of this. I've invested lots of time--and I had the luxury of that and I don't regret a minute of it--but I've not mastered it. That sounds arrogant, and I'm not an arrogant person. Therefore, let me restate: I don't understand it. And for the work (practice, reading, lots of hard knocks), I feel like I have so little to show for it. George Santayana had this aphorism about the definition of a zealot (I'm paraphrasing, and I like my paraphrase better than his original quote): The definition of a zealot is the redoubling of efforts when the aim is lost.

So my dear readers, I'm writing to you to say with great honesty and humility, "I wonder if I've re-doubled my efforts (time, energy) and have lost my aim." I'm quite unused to my results being inversely related to my efforts. Perhaps I approached this whole subject of investing with unintended hubris. If that is so, then I lay prostrate in front of the investing gods asking for forgiveness.

I've never experienced this sort of dissonance between effort and results. It's maddening and frustrating. I also know that feeling this way will ultimately make me a better investor, but for now, I want to blow off a bit of steam; and it fits appropriately with what I wanted to accomplish with my blog, which was to quite simply offer the point of view of an amateur observer of the markets.

Tuesday, May 15, 2007

Market Mythology

At Market Watch, you can find the following articles:

Psych jobs
The 10 myths Wall Street employs in its war on Main Street

Now you have to know that anybody who attended Joseph Campbell's Mystical Meditations would have to say something that resonates with me. Farrell notes:
"The mythic world has fascinated me since taking a Joseph Campbell seminar on 'Mythical Meditation' while at Morgan Stanley back in the 1970s."

But given that I just wrote about mental models that we have to build to make sense of things, mythic representations absolutely represent the most elegant and elevated form of mental models. It's worth clicking on Farrall's links, too.

I suppose, too, that having a representation of the archetypal "They", the aggregated financial community of pickpockets (humongous banks/brokers) wanting to lighten the load of the individual investor, is a useful one. But like most mythologies, we have to be careful about the myth as pedagogy v. myth as absolute truth.

Why the distinction? Whether it is making investment choices or envisioning political, economic or social reform, you have to understand the myth to operate constructively. I think that if we see these myths (which understand have truthful elements) as absolute, it robs us of our perception of being in control of our choices. It robs us of our reason.

Monday, May 14, 2007

Henry C. K. Liu Reference

For those of you who read Henry C. K. Liu that I referenced in a past post, you can find his website and all archived articles here.

Market Close: 14-May-07

I had trouble loading this yesterday.

Trustee Sales

Some of you may have noticed that I've suspended my weekly Trustee sales reporting from my local paper. My expectation was to see an increase, but it appears that it is at stasis. I'll keep looking, and if I see it turn up, I may once again report. I believe the pattern has already emerged (from last October) which was higher numbers (at least 20) and higher $ values.

Sunday, May 13, 2007

M-Day Post Mortem

My luncheon was a wonderful. The menu was perfect, and everyone seemed to enjoy themselves. And though I was working my potookus off on my Mother's Day, it ended up being quite a special day. My kids were particularly helpful without my having to resort to any elevated vocal commands (a/k/a yelling).

I rarely get away from any of these events without hurting myself in some way. Today was no different. When we upgraded from the original Congoleum floor that we put down in the kitchen to ceramic, I made the misguided decision of choosing form over function. I looked extensively, and I settled on the lovely 12x12 white "2 corner gone" (a square with 2 diagonal corners clipped) with a 3x3 square (set so that it looks like a diamond) black tile. Here's a picture

Do not be fooled by the simple elegance of this floor. It's a pain in the a$$ to keep clean. This is the floor that I was cleaning this (do not click to enlarge) and was finishing it off with a towel (which I was laughing with my kids that this could be the next workout, as I was comically shuffling with my feet on the towel traveling the square footage of the floor). I had moved the stainless steel prep table (which I paid only $100 some years ago from Sam's, and I represent as a testament to what you can buy cheaply from China), that protected one from this pot rack (another wonderful stainless product)

The largest pan on the front, far right is what I managed to hit with my head (normally impossible as the stainless steel table is underneath), as I was stupidly shuffling along atop the towel with my new aerobic workout with my kids laughing, me laughing until.... I hit that pan, knocked it off the hook and it beaned my head before hitting the floor and cracking the tile. If it were any further a drop, my last post would have been just that. The Perplexed Investor would have morphed into the Permanently Beaned from this Plane of Existence Investor, for my head would have been split wide open. Thankfully, I only was bruised, and none of my faculties were impaired, so that lunch could proceed as planned. Whenever something happens that motivates your 16 year old son to come bounding over and embrace you is a dramatic event.

I had a very lovely Mother's Day. I hope you honored the mothers and/or the memory of the mothers in your life. My mother is deceased. But I always use this lovely Mikasa dessert plate that she gave me to honor her memory with every special meal that I cook.

Another week is ahead of us! Asian markets are already higher.

Saturday, May 12, 2007

Fantasy Portfolio-Final

I could have done worse! I ended up top 3%--rank 40,538 out 900K+. So much for my goal of a 10K or better finish.

Friday, May 11, 2007

Mother's Day

Service note: There will be a service outage on Blogger at 4 p.m. PDT.

On Sunday, I've invited my step mom and MIL over (plus father and FIL, SIL, BIL) for a Mother's day lunch. It was spur of the moment. It makes for a lot of work for me, cooking and cleaning, on a day that I ought to luxuriating in the attention of my family (Hah!). But, MIL's health is not good, and I'm trying to ensure that I capitalize on times that we can all be together. This Sunday is certainly one of those opportunities.

Since we are not eating until 1 p.m., I will have a heavier lunch than I would have planned otherwise. I think that we'll have lamb chops or lamb roast, lemon-parsley new potatoes, fresh asparagus (grilled, I think), and some luscious, lemony dessert. I have 4 recipes for desserts that I'm considering. My hope is that I can find some wonderful fresh berries. Peach iced tea for beverage. No wine--I'll be napping for the balance of the day.

I hope that you each have wonderful Mother's Day.

Market Close 11-May_07

Well, I would have like to have enjoyed continuing gains (my stocks were still green) on SSL, OCR, but no one knows what the next day will bring. Nona, you are probably glad, today at least, that you hung tight.

One of BC's posters noted FXI. I thought I would post a 2 day chart. (CTML). Notice the extraordinary volume this a.m.

Thursday, May 10, 2007

Market Close10-May_07


Strange title, huh? Bear with me.

Though I've been an amateur observer and perpetual head scratcher in watching the economy and the markets' (yes, possessive plural) reactions to this or that news item, I have only received clarity this a.m. for what has been troubling me. It's not that I haven't been writing and talking about it, it is that I hadn't really built a mental model for it. Reading a couple of things in the space of a couple of days has both reinforced and clarified my discomfort. First, if you read nothing else for the balance of the year, read this article, Liquidity boom and looming crisis, in the "Asia Times" by Henry C K Liu.

We all have to build models to make sense of things. Every sales pitch that you have ever heard is a mental model that someone has carefully crafted to convince you that the pedaled product has all of the benefits you want and none of the detriments (that cannot be facilely explained away) you fear.

So what is my great break-through thinking? Understand first, that this is just a personal epiphany, and each of you are probably way ahead of me. My epiphany is reduced to a single word: incongruence. Incongruence? Sure. All of life's mysteries are solved by looking at the incongruent space between things that are supposed to line up to make something true: Incongruences are used by

  • Scientists to realign their theories
  • Spouses of cheating wives/husbands to sniff out deceit (Okay, I needed a little drama!)
  • Parents to keep their kids on the straight and narrow path.
You get the idea. So if you wish to avoid incongruency, what do you do? You avoid that space. You always go back to your main points--in music the analogy would be you would just hit the major chords and forget about the harmony. After a while that tactic becomes, well, discordant.

Isn't it precisely this type of "thing" that is going on now when we hear about how robust the economy is, how strong the consumer is, and how housing will rebound? Therefore, if you struggle to put this mosaic of pieces together into something that is recognizable without resorting to Rorschach impressionism, then you have to look for incongruence.

So, I want to list some of the things that don't quite line up with the rosy picture that we are given. The backdrop, of course, is that the world is awash in liquidity.
  • Ceding of risk to parties unknown. While I've written about this with respect to mortgage backed securities, the issue is larger. I give the Economist (April 21/27) credit for cementing this concept for me. Because investors were hungry for yield and sanguine about risk, they provided an eager funding source for lenders. However, due to the sophistication of financial instruments, meaning derivatives, you can presumably hedge any risk you wish. If mortgage lenders were off-loading risks to bond holders, they really had no incentive to keep underwriting standards high. Expand the venue to any corporate debt instrument that can be hedged, and you have the same environment for underwriting laxity.The Economist notes:
"If lenders know they can sell risk on quickly, they have less incentive to worry about repayment than when loans stayed on their books. When watching credit risk becomes no one's responsibility, the consequeneces can be painful, as the subprime-mortgage mess shows. A few weeks ago, it seemed that this lesson had been learned. Perhaps it is about to be dished out again." (The Economist, April 21/27, p. 14)
So long as the music is blaring and everyone is partying and exchanging scraps of paper all is well. But when the music stops--that's what an economic slowdown or a turn of the liquidity tap will do--people, whomever the hell they are, are going to be holding slips of paper that are going to cause their hands to tremble and their wishing they were a little more sober at the party.
  • Housing/Job numbers. Barry Ritholtz has been writing about the nuttiness in job numbers for a long time, and you can read about it here. But with residential construction slowing remarkably, you'd expect some different numbers coming out of these employment reports. The glib answer is that commercial construction has taken over. Well residential and commercial contractors are not so interchangeable: framers, roofers, electricians to name a few are doing very different work.
In addition to the jobs portion, new residential construction has been a significant contributor to our economic recovery. That investment is falling off the cliff. Again, I point to the glib answer of commercial construction, but I also understand that commercial construction peaks after residential construction in economic slowdowns. I've not seen any quoted facts about the amount of concurrent res/comm construction and the amount of NEW commercial construction. So I have to ask, HOW CAN THIS NOT COME TO PASS? (Again, I'll restate my bias having had to navigate the awful 1990-1992 recession--NO ONE will tell you that you are in a recession until the fat elephant ass of the economy sits on our collective heads. [Potential shock is that the reality of this impact--both employment and investment--finally steeps into the psyche of the market.]
  • Consumer spending: Salary growth is still small in percentage terms. Interest rates have gone up (think about home equity lines which are little talked about which carry variable rates in many instances) and mortgage equity withdrawals are shrinking. BUT, consumers are now tapping into short term credit. How long before the consumer just drops in his/her tracks? [Potential shock is that consumer spending will decline. April is already known to be bad--watch the price component in spending though for it has inflated other spending numbers. So if the price component is stripped out and consumer spending continues to dwindle, then this will affect Asian markets considerably].
  • Short term borrowing to finance long term assets (Financial arbitrage): When you run a business you line up appropriate maturities with your financing with your asset. You buy long lived assets with longer term money. You want your working capital to be just that, working capital to finance your inventory, receivables as well as any losses you may incur due to seasonality factors of your business. Now explode the venue to the worldwide sphere of activity.
Due to the large differences in currency values/interest rates, people are arbitraging currency.s-t money rates to buy longer term assets such as bonds/stocks of other countries/companies (that's the s-t/l-t maturity mish-mash I'm speaking to). In many cases, the small amount of arbitrage opportunity is augmented by goosing up the leverage. What happens when the underlying arbitrage dynamics change? Well that is the "Great Unwinding". [As an aside, i have to wonder with some amusement as to what "name" They will give this portended event". ] I don't think that it is a question of if, but when--and perhaps the current stasis is sustainable for some time. How long is really THE question.
So what will happen with the Great Unwinding? I surmise that assets (stocks/bonds) will be sold and that prices will tumble. I'm not sure that I see that bonds would be any safer than stocks. It is important to understand that this is just my amateur noodling on this stuff--but I don't think I'm terribly far off the mark--and you are welcome to, indeed I encourage you, to tell me that I'm wrong. [Potential shock is the yen strengthening through currency/rates.]
  • Inflation: I went to the store yesterday--a warehouse club, for I rarely go to the grocery store except to get "accoutrements". Everything is markedly more expensive. I'm not talking about 10-15%, more like 20-30%. I particularly noticed it with milk and meats. Gas , food, healthcare are the mainstay expenditures for most families--and these expenses have gone up considerably. I think that price of gold is telling us that too. With housing where it is I certainly understand the Fed's precarious position with respect to interest rates. [Potential shock: inflation fails to curb and the Fed raises rates. I think that the housing issue will temper this risk considerably, but that will lead to USD devaluation.]
  • USD/Trade: With all of the chatter about trade practices and rates, I wouldn't be a bit surprised if the shock to the world financial stasis comes from an over-zealous Congress looking to curb currency "inequities". [Potential shock: I hate to think about it--Bond prices go up--taxes go up, since you have to finance your deficit with either taxes or debt--USD goes down].

That is my meager attempt to describe what I consider significant incongruencies that do not add up to the rosy picture that some would have us believe. Feel free to fill in the blanks or clarify/correct my view.

So long as we are at stasis, then I fully acknowledge, that liquidity is functioning as the great lubricant for the economic euphoria. But if there is a shock, then the lubricant will dry up and the "ride" will be far less comfortable.

Tuesday, May 08, 2007

Spontaneously Combusting News

I've seen a couple of news stories appear and then immediately disappear.

Last week, The Financial Times wrote a piece about the Sallie Mae deal might be compromised because the Democrats may reduce subsidies. I'm interested in it because I bought into the First Marblehead debacle on the SLM news. I'm keenly interested. When I went back, not 5 minutes later, it is gone. A search yielded nothing.

Today, there was a headline on Fidelity (under "Market News") that the WSJ editors knew about the Murdoch offer. Then it disappeared. Very odd.

I've been patiently waiting for SCS to break down. It may now be happening since the company stopped buying back stock on April 30. The stock is finding little support. This is also a stock whose comps are going to be very difficult this year with the waning in the office furniture orders + international sales are ramping up and were nil last year + their effective tax rate was 14% and will return to 35+% this year. I have July $20 puts. I need to pay for my total and complete loss on my April puts, because I was so 'sure' that their stock would go down after earnings like Herman Miller. So much for being sure! Never underestimate a monster buyback.

Market Close 08-May_07

Taking Stock

Taking stock. It's an interesting term don't you think? I'm in the process of poking around in my bookcases, my closets and even my pantry. I'm literally taking stock to see what is in these places, consider if it still has a use, whether to use, read, wear or eat! If I can find no use it must find another home--through donation or trash bin. I think that this outward focus of activity is a natural precursor to some some inward focus of activity. But I'll wait until I've worn this laser look a bit before focusing inward.

Though I would have ardently argued to the contrary, the evidential matter that has been occupying my time--meaning STUFF!--is clearing proving that I'm an accumulator. (As is my husband). Fortunately, I also possesses an annihilator animus. My staff and colleagues (when I had a staff and colleagues) used to always know--and dread--when I had transitioned from accumulator to annihilator. Whatever was incubating on my turf ended up, appropriately, on theirs. So I don't bemoan my accumulator persona, but I should invoke the annihilator persona more often.

I admire people who know exactly what to do with something, be it a piece of paper, a problem, an opportunity, as soon as it crosses their consciousness. I'm a deliberator. I take comfort that dispatching a problem is not the same as solving it--so I'll take some comfort that this tendency of incubating and deliberating helps build clarity.

So as I cull through shelves of books, stocks of goods, clothes, and other sundry items, they will likely provide some fodder for future non-market posts. There is a particular book that I want to find to share some real gems... but I have to find the @#$&%$@$# book first.

Saturday, May 05, 2007

NASCAR + Rain = Unhappy Guys in My Garage

Today is the NASCAR race at Richmond. It is raining, dampening the hopes of 10's of thousands, including the 4 guys in my garage who had high hopes for seeing the race this p.m. They are getting weather reports from another member of their group on the opposite side of town, but he is so gunho, that his report is likely to be biased!

I went to my one and only NASCAR race in Las Vegas at the inaugural race. I don't like doing anything well enough to do it amongst 70+ thousand people. Okay, if I were a singer or a movie star, I might recant that! Anytime you have to wait in long lines to take care of basic necessities (eating, drinking and eliminating) requires that you have an ardor for the main event that I'll never have. Accordingly, THAT live NASCAR race became a one and only.

But the trip was terrific (though I had to work every single morning to negotiate a contract, and my marriage was in great peril!). The weather was perfect, and the roads were nicely laid out, so that even I with directionally challenged DNA imbuing every fiber of my being drove confidently--indeed cockily!

We were staying at a time share outside of Las Vegas at the furthest edge of civilization. The condo was beautiful with the mountains close by. And with Smith's and Target nearby, there was no shortage of food and sundries when needed. It was a very memorable vacation.

So I'm going to join a friend (whose husband is in my garage anticipating the weather, though I don't see any weather talismans) for a low key night out watching Helen Mirren in The Queen.

I'm taking a weekend off from any sort of market research--clearing my desk of all the past research and putting it in files. I have an unpublished post on Tobias Adrian's Fed paper, but frankly, I've not been able to make sense enough out of it to write something coherent.

Friday, May 04, 2007

Some Levity

Here's a little political humor if you lean more left than right.

This is from The Freedom Toast. Here's a link with other videos. I've only watched the one that I'm referencing.

Market Psychology - 1

I'm still enamored with my little book: Psychology of the Stock Market by G. C. Selden. I've read it twice, and I have lots of things highlighted. I'll share a few from time to time. It was written in 1912, but you would think that it was a more contemporary book.

One of the first things that he notes is this:

"The broad movements of the market, covering periods of months or even years, are always the result of general financial conditions; but the smaller intermediate fluctuations represent changes in the state of the public mind, which may or may not coincide with alterations in basic factors."

The author then moves to a conversation between two traders. Essentially Trader 1 has covered his Steel short because 'everybody seems to be short.' Trader 2 responds that he thinks that everyone thinks just at Trader 1 and have also covered their shorts, but 'still the market doesn't rally much.. . I don't believe there's much short interest left, and if that's the case we shall get another break." Trader 1 then says, 'YEs, that's what they all say--and they've all sold short again because they think everybody else has covered. I believe that there's just as much short interest now as there was before." (p. 8)

I don't know about you, but I was laughing at this point. The author notes, 'It is evident that this series of inversions might be continued indefinitely. These alert mental acrobats are doing a succession of flip-flops, each one of which leads up logically to the next, without ever arriving at a final stopping place."

Now here is the real gem, and we would all do well to heed it:

"The main point of their argument is that the state of mind of a man short of the market is radically different from the state of mind of one who is long. Their whole study, in such a conversation, is the mental attitude of those interested in the market. If a majority of the volatile class of in-and-out traders are long, many of them will hsasten to sell on any sighn of weakness and a decline will result. If the majority are short, they will buy on any development of strenght and an advance may be expected." (p. 9)
I'll close this post with a couple of key points, that I'll take verbatim rather than trying to paraphrase:

"The psychological aspects of speculation may be considered from two points of view, equally important. One question is, What effect do varying mental attitudes of the public have upon the course of prices? How is the character of the market influenced by psychological conditions?

A second consideration is, How does the mental attitude of the individual trader affect his chances of success? To what extent, and how, can he overcome the obstacles placed in his pathway by his own hopes and fears, his timidities and his obstinacies?" (p. 9) (emphasis added).

I know that these statements are common sense. But seeing them plainly gave them so much power for me. Now, understanding how this colors the market and the opinions that are tendered daily is more art than science.

While I'm in the camp that the economic fundamentals are not as great as some say, over the last month, I've consciously tried to find some sectors that I think will still work regardless. So I put a lot of energy: specifically the drillers and coal plays. I'll say that seeing some success in this has meant quite a bit to my mental attitude. These are cheap areas--so even if there is a market downturn (which I'm still waiting for), (1) these are inexpensive stocks whose value in this energy environment will increase; and (2) because they are cheap, they have less far to fall.

Thursday, May 03, 2007

A Historic Moment

Alas, I regret that with all the %!#$!^!^! coverage of the Dow and the S&P making new highs, why is there not ONE utterance on CNBC about our country's historic 400 year (1607 - 2007) anniversary--okay, it's in another week, but let's see if we see some coverage!

I hope that you will take a moment to visit the Jamestown website "thank you" page. If you click on the people wearing tee shirts, you will have some interesting tidbits. This would be an instructive activity with your children. You can find it here.

This weekend, The Queen of England is here to visit--which means she passed within 2 miles (as the crow flies) of my home. I live in a rural county (though one of the top 100 fastest growing counties) in the US, New Kent. We border James City County with houses Williamsburg. Williamsburg is about 40 minutes from my home. They closed 64, which required my poor husband to find an alternate route home. Let me just say, that getting there to here without the aid of an interstate is nothing short of tortuous. we reflect on our 400 hundred years in this once-foreign land, let us remember the people--the natives and the voyagers--who sacrificed much for our current lives.

Market Masters Intro

I tried to combine this content with the post below. This is the Intro to the post below~

As I reflected on what a good bit of my blog postings are--my finding things from other places to share with you for comment and opinion (largely because I don't know anything, which is the point of my blog)--I am electing to use the picture above for items that I have "bird-dogged". For newer folks to the blog, this is my beloved, though deceased dog, Lucy. She would have been 14 this week. She passed on January 6. So I hope that you will indulge me. As I find thinks that are interesting to me that I want to share here, I will label them as Bird Doggin! - Title and will have the Lucy bird dog emblem.

So this is the first installment of Bird Doggin! topic of the day is the web-site "Market Masters"? I pulled verbatim the very first article. But I hope that you'll visit the web-site and read the balance of these articles, because I think that they are very good. The website also had profiles of market masters at one time, but I didn't see it. But that might be lack-of-caffeine induced blindness.

Why did I choose this? As I reflect on my past year and a half of my journey, I wished I had understood earlier the concept of Unconscious Incompetence. I do think that I've graduated to Conscious Incompetence, but I recognize that I have a long way to go.

Bird Doggin-Market Masters

All of this posted is copyrighted material

“Copyright © 2000, 2003, by N.A. & C.J. Costa, Market Masters Pty Ltd. All rights reserved.; Email:”

"The Development of a Market Master - Part 1"


In educational terms, becoming a professional trader, be it a part-time or full-time professional trader, requires planning, preparation, knowledge and experience. This, of course, is consistent with becoming a true professional in any field.

Understanding the path ahead can allow a budding market master to plan his or her development path in a more realistic manner, while at the same time helping to reduce the risk of the trader developing unrealistic expectations.

There are many metaphors made about trading. 'Trading is war' is a common one, and traders who believe this constantly liken aspects of trading to the corresponding aspects of warfare.

  1. Unconscious Incompetence;
  2. Conscious Incompetence;
  3. Conscious Competence; and
  4. Unconscious Competence.

Having assisted in the development of literally thousands of traders, I believe that Hopkins' four stages are every bit as applicable to the development of a market master as they are to the development of his 'champion' sales people.

1. Unconscious Incompetence

Unconscious incompetents are people who do not know what they do not know.

This is the stage of a raw beginner. In trading terms, this represents a trader who wants to trade successfully, but does not have a proven trading system. People at this stage do not know the difference between fundamental analysis and technical analysis; or intra-day and position trading. They are at a stage where they believe that a trading software package containing 200 indicators must make them at least twice as profitable as a trading software package containing only 100 indicators.

Budding traders who are unconscious incompetents and who have a highly developed ego, will not accept how little they know. If they are also incapable of taking responsibility of their own actions, they are a real danger to themselves.

2. Conscious Incompetence

Conscious incompetents know that they do not know. According to Hopkins, this is where they think to themselves "this is nothing like I thought it would be".

This is arguably the most frustrating stage in the life of a trader. It is also one of the most important.

In the conscious incompetent stage, traders realise that there is more to trading than 'buy low, sell high', or following a series of 'hot tips'. Traders who put hard-earned money on the line will by now be feeling inadequate and withdrawn. They sense that trading can be very profitable, but experience frustration because they are not consistently profitable. In fact, those who are not following a proven trading system in a disciplined manner, the majority of traders in this stage, could well have paid dearly for their research and development activities (also know as unjustifiable losses).

3. Conscious Competence

Conscious competents know what to do, as long as they think. They trade strictly according to the rules of their system, and their profitability would normally closely mirror the profitability of their proven system. Most successful traders follow mechanical systems, and are conscious competents.

4. Unconscious Competence

Unconscious competents are highly trained and highly skilled traders. In trading terms they no longer need to follow, consciously, a mechanical trading system, but patiently wait for a setup, then automatically take the trade. No setup; no trade.

Some of the most successful traders, or market masters, are unconscious competents. They appear to trade using their so-called 'intuition', but are, in fact, applying their vast knowledge and skill to recognize low-risk, high-profit-potential, trades.

It's A Numbers Game

Another similarity between selling and trading is that both endeavors are numbers games. Just as a good salesperson knows how many sales he or she should make per 100 prospects approached, so does a professional trader know how many winning trades to expect, statistically, from 100 trades taken. If a market master wants to make more money, extra trades need to be taken - possibly in additional markets.

This 'numbers game' approach also benefits the champion salesperson and the market master psychologically. Just as too many 'knock backs' can result in a champion salesperson feeling depressed and rejected, so can a string of losses result in a market master feeling much the same way. By looking at selling and trading as numbers games, champion salespeople and market masters know that a certain percentage of knock backs and losses, respectively, are realities of the professions they have chosen. They know that a key to success in their endeavor is not to take the knock back or loss personally, but instead to look at it as the price of doing business. Accept it, and move on to the next sale or trade.


Hopkins, T., Management Video Tapes, Tom Hopkins International, Scotsdale, Arizona, 1994.

[This article is based on an article published in the Australian Technical Analysts' Association Journal, January 1999.]

"For more information on how you can maximize your trading profits while strictly controlling your risk, click here..."

Neil A Costa

“Copyright © 2000, 2003, by N.A. & C.J. Costa, Market Masters Pty Ltd. All rights reserved.; Email:”