Monday, August 27, 2007

On the Celebration of a Passing Life

My one of my dearest friends' mother passed recently. She had been gravely ill--the type of illness where death is a welcome release from constant physical and mental anguish. It was a non-market day except for brief posting this a.m. and I did pick up some UNG at $34.03 prior to running out the door for the memorial service.

As I entered the church, I saw my friend's children, but I did not see my friend nor her husband. A guitar and flute began to play from the balcony behind the congregation. A male voice, my friend's husband's which I immediately recognized, began to sing. I turned to see my friend visibly composing herself for her part. My friend and her husband are gifted vocalists. They sing in their church in addition with the Richmond Symphony's Hallelujah presentation each Christmas. They recorded a song that was played at their wedding 20+ years ago. It was so touching to see them honoring their mother/MIL in such a beautiful way. I wept.

It was a beautiful service honoring the memory of a richly lived, family-centered life transitioned. Thoughts of the market and economy were far away. After leaving the service I had to go from friend to gatherer. My husband's b-day is today. We are having crab cakes with spicy avocado sauce and shrimp salad. So we honor my husband's special day. My S&BIL are coming over too.

A wonderful day, really, to be reminded of the important things in life. I hope that you remember someone that you love today.

Saturday, August 25, 2007

Rolling Stones in Russia

My former boss and now friend left corporate America to go to law school at the age of 55 or so. When she left, I assumed responsibilities as acting President in addition to my CFO job. It was an arduous 18 months. The aphorism, "It is lonely at the top" is truer than you can imagine.

My friend is an ardent traveler, most recently returning from Russia where she had the opportunity to see the Rolling Stones. Here are a few pictures taken by holding up a camera and just hoping that something shows up:

Gary K's show

Well he is very optimistic from Friday's action. His guest (Brenda B) also dismissed the idea of a recession showing growth in income. Smart people. Here's the services industry and housing led our last business turnaround and are suffering deeply. So, I'd ask this, "Where is the employment leadership going to come from after the housing/financial services leadership?"

So, a glib answer of growth in income was glib and rear view mirror.

Non Market Musings

Today we are going to have a 100 degree day. No outside plans for me. Daisey is doing very well, but is still on a perennial cat hunt. I pray she never catches either of my cats. She chased Herm up a tree yesterday after he decide to leave the safety of the Thunderbird to take his chances on the chase. I was in the process of apprehending Daisey who was sniffing/stalking around the car.

If you are not familiar with English Setters, and many are not, they are always on the hunt. They stalk their prey like a cat. In fact, they are very cat like--capable of absolute stillness and then slo-mo movements that are just incredible to watch. Then they POUNCE!

Yesterday was the first day that I felt comfortable letting Daisey "loose". I made sure that Herm was in. She stayed on the property. She spent most of her time hunting butterflies and dragonflies in the garden. I have sunflowers out there, so there was a bird or two out there as well.

This a.m. I let her out and she is watching for me and following me. Not closely, but she is watching which is what I need for her to do. Greta and Lucy were this way as well. They traveled ahead, but they kept their eye on me. If I stopped on the trail to sit, they would come and lay down beside me. First movement up, they ascertained direction and fired up again.

Daisey shows no interest in chasing motorcycles or cars (unlike Macy), but she chases cats (unlike Macy). If I could put these two dogs together, I would have the perfect dog!

Daisey is sleeping through the night on her dog bed beside me. Macy still sleeps on the bed, and all is well for the moment.

Tim Wood's Market Wrap

I urge you to read Tim Wood's Market Wrap on FSO.

You can find it here: (August 25 if you read this beyond the weekend).

I really enjoy reading TW's work on FSO and listening to his interviews on Saturday's. Frank Barbera is another technician I enjoy. What I like about these guys is that they come across as unbiased. You will hear them say "statistical probabilities based on my indicators"--opinion supported by the empiricism of their models. Are there models always right? NO. But they say so and move on.

Do visit FSO and read Martin Golberg's work, Frank B. and Tim W's work. You also know that I think that Henry C K Lieu is a wonderful commentator--he's very deep though, but it will cultivate your understanding of the financial/credit markets.

If A, then B, C, D. . ; therefore......

There were several good points made in the comments section. I'll address a couple. My coffee is not yet coursing through my veins, but I'll write anyway.

On Predictions and Time Frames:

I do believe that one can make predictions based on probabilities predicated on evidential matter. Business people HAVE to do it everyday. There has been discussion here that due to randomness and the like that outcomes cannot be predicted. To me the difference is between certitude and probability. And one hires a CEO and his/her team to accurately understand probabilities of success and ensure that they understand ACCURATELY the requirements for ensuring that success. But failures occur. An executive team's responsibility is to maximize outcomes even in the face of being wrong about an influencer of the desired outcome. You are the CEO of your portfolio. Accordingly, you and you alone have the final responsibility for making decisions about with whom and how your portfolio is invested.

Can one make a credible prediction about if/when there will be a recession? Yes--and the factors that throw one into a recession are many. Accordingly one needs a confluence of data supporting the argument for the probability of a recession, an if A, then B, C, D. . . . happens. I wrote an unusually excellent post (only because I quoted someone so much smarter than I!) on recessions. You can read the full text here: But since moving from post to post is disruptive, I'll copy from that post. These are the three elements needed for a recession according to Marty Zweig:
  • Extreme deflation characterized by a PPI index drop of 10% on a 6 month average of annualized m-t-m changes.Take current year m-t-m inc/dec and average it with the last 5 months (sum the mtm change each month for the last six months and divide by 6).If that 6 month average is at least –10% then you have cleared this test; (I've not calculated this. I don't think we are there. I think that with the ISM falling, we will BEGIN to see where that calculation becomes meaningful).
  • Ultra high price/earnings ratios.He labels 10-14 aS normal P/E range. Upper teens and twenties is what he calls high; and (we are in this level now).
  • Inverted yield curve.Zweig used the Moody’s Aaa Corporate Bonds yield as the long term rate and 6 month commercial paper rates as the short term rate. (I've not calculated this). Addendum 11.13.06--Of course we all know that we have an inverted yield curve, and SFO did a wonderful story on that which you can find here.
I'm also intrigued with the notion that upheaval in the financial markets can bring about a recession--they cause the recession rather than predict it. The linkage makes sense in a couple of ways. Way 1: The credit markets drive liquidity and when liquidity dries up (spontaneously combusts as it did last week) that reduces capital available. Way 2: Liquidity fuels asset prices, and when liquidity is removed to de-leveraging, asset prices fall and wealth is reduced. It's simplistic I know, but it's something that you must be aware of. At the very least, you use it as a backdrop to evaluate what you are hearing from experts.

You have to be careful in looking at this stuff. If A happens, then we have always had a recession. (that is what Arvedlund stated about housing downturns of the magnitude that we are witnessing.) V. all recessions are characterized by A (such as in inverted yield curve). Not all inverted yield curves lead to a recession, but all recessions were characterized by such. It's an important distinction. Re-read that line--and make sure that you understand that distinction. I listen to the experts, and I've heard them NOT make this distinction regarding the yield curve. You must develop your personal bullshit filter IF you plan to make decisions based on what you read and hear.

Can one really predict the time frame? That's the hardest thing of all. I would say that A 12 month -maybe 18 to stretch would be reasonable. Anything more is ludicrous and anything less means you are already in one. Let's remember, too, that recessions occur with fair regularity, as they are an important part of the natural business cycle that runs in 48-60 month spans. So one could make a relatively accurate prediction without having any data at all!

Now the tricky thing is predicting the magnitude of a recession. Trust me guys, no one can do this. No one.


A reader leaves this comment: "I guess my real question here is, how long do you hang on to an expert's opinion before you realize that in doing so, you are making a mistake?" Forgive my long-winded answer to this very good question. Keep in mind this premise: You are the CEO of your portfolio and you and you alone are responsible for managing the outcome.

I believe that if you are going to use any expert's advice, you should put yourself in a position to evaluate it, so that you can make a rational decision based on objective assessment of data that you are bombarded with daily. There's a reason why my blog is called The Perplexed Investor. On any given day, you will have 1/2 dozen people who are very smart and very knowledgeable with an opinion different from yours as well as different from each others'. Rather than impugn the predictor, you have to take the weight of the evidence and judge it relative to YOUR risk tolerance and YOUR investment time frame.

Based on the weight of the evidence, then you are in a position to look at the "If A, then B, C, D...." after than come "therefore. . . I will do X". You make the decision and you accept the consequence--for good or naught. I write this blog as my public grappling with how I do the "If A, then". Personally, I think that the market has some deep, deep problems because of the credit markets. I've been expecting this stuff to happen for some time now. My lesson: One can see the cracks in the foundation--and people don't look at foundations, they look at walls--the market will not react until it sees cracks in the plaster. Actually, the market will probably ignore the cracks in the plaster and wait for chunks of it to start falling down!

Because of my deep distrust of this market, I'm mostly cash. I realize there is an opportunity cost, and I'm willing to accept that. I don't want to come in at the tail end of this bull market when I believe there will be a better buying opportunity. Yes, the trend is currently up--but it has been badly injured. I don't trust this market. Not a wit. I haven't trusted it since last year, so I've not built any long term positions. Oh, I lie--I was bearish, because I listened to experts and took some bearish stands that lost money. My current portfolio mantra is to make surgical strikes. I've had some reasonable success in stalking some prey to take advantage of market volatility. I took some short term positions which I believed had high probability odds of success. Having some intermittent success (and realizing there is as much an element of luck as skill) keeps my opportunity cost lower.

My not surprising conclusion is this: Do not use an expert as a hat rack. Use experts as tools. Have a bevy of experts, not just one. I read Bill, Gary K, Rev Shark, George Dagnino Tim Knight, among others. I listen to Jim Puplova's first hour show every Saturday, particularly the technical analysis. If every expert is seeing/saying something different, then those differences are telling you something.

Most importantly, you must understand (1) your own biases and (2) the biases of your chosen experts. I can tell you every week what J. Puplova is going to say about energy and gold. It is a broken record, so I don't consider it on a net, net basis either new or valuable information. Don't get me wrong. I'm not knocking J. Puplova--I listen to his show because he invites terrific guests whom he expertly interviews. Now if Gary K were to say, "Kiddo's get into gold and oil,"I would increase my exposure. Why? Because he's not a broken record. George Dagnino is not a broken record.

We want our gurus/experts to be someone we can unequivocally trust 100% of the time. We have to adjust our expectations to make them reasonable/rationale. To do that you must trust that your expert/guru will be wrong 40% -50% of the time and right 50-60% of the time. Let's revisit the premise--I know that I sound like a broken record, but it's a vital message. You serve as the CEO of your portfolio. And it is YOUR JOB to maximize outcomes with the information that you have available. You have to do the "If A, then B...., therefore, ........ And the "therefore" is your realm of accountability.

Friday, August 24, 2007

Recession Chatter

CFC's chairman, L. Mozillo, was on CNBC yesterday. He uttered the "R" word. That utterance, along with the overall tone of the interview, which I can only describe as glum, effectively dampened the tone of the market.

Of course, CNBC replayed ad nauseum the interview. Now that we are getting more empiricism supporting what was to some only vague fears of the neurotic hand wringers and their perennial predictions of economic doom, the thought of recession is starting to seep into the market's psyche.

I was cleaning off my desk, and I found an article from Barron's (11.13.06) that I had printed out. It was Sandra Ward's interview with Richard Arvedlund (Cyprus Capital Management). The title of the interview was called, "Recession: The Stage is Set". In the interview, he felt that the preconditions for a recession were set because of the state of the housing market. Specifically, he stated that "Whenever housing starts and permits drop by the rates o decline that have been exhibited--10-20%--it has always preceded a recession." He also notes that when housing leads the downturn (which happened in the late 70's and late 80's), it typically tends to last longer than people dream. He states that the average cycle is 3-4 years.

Personally, I'm having a difficult time imagining any scenario where recession is not in our future. I pay attention to the economic numbers--particularly the job growth numbers. The job growth over the last few years has been tied to housing and finance related stuff. So given the cataclysmic upheaval in housing and financial service area, where is the additional job growth going to come from?

The arguments you will hear about why we will not have recession are these:

  • High employment
  • Steady jobless claims (no spikes)
  • Wage growth
  • Consistent albeit slower growth
Well, the first three items are just what you would see at the apogee of the economic cycle--prior to a downturn. Further, they are backward looking. So be careful what you listen to and what you conclude from these arguments. I still must point to the incongruence between the slowdown in housing and the lack of job losses. I still ascribe that incongruity to undocumented workers, and I would point to WMT as being the bellweather for that stat. Not surprising, Arvelund considers WMT his favorite economist.

While I consider WMT a pretty good tell (as does he), I'm finding it particularly perplexing that within the last couple of weeks there has been a parade of TH's on CNBC stating that the WMT shoppers don't matter. Rather, it's the upper income folks that matter as they comprise X% of all consumer purchases. Amazing the shift in perspectives about who matter and who doesn't matter depending on the context.

Anyway, my prediction? Recession. And, I believe that it will be global. Time frame? Within 12 months. My qualifications? Zero. Do I hope to be wrong? Absolutely.

Thursday, August 23, 2007


I do not understand this market action. I consider what has happened in the credit markets to be a complete upheaval. I'm waiting for the casualties to surface. I think that CFC was a casualty. A big one. BAC coming in was not an opportunity but rather the fending off, if not deferral of, disaster.

The market seems to have shrug this off. It's a great buying opportunity. Last year at this time they were touting the same thing. And, it proved to be a buying opportunity. Why should it be any different this time? I think that the difference is that of unknown problem v. known problem. Last year all of the worrying about subprime, economic slowdown, derivatives and the like was merely a recognition of what might happen. All of those worries have now been confirmed. Did the market over-react as some say? I don't think our being down less than 10% as I write to be an over-reaction.

I'm seeing the drum beating of the the "Fed on the market's side". Hasn't the Fed been on the market's side all along? Isn't that why we fell into this mess to begin with because market rates were too low? For the Fed to get on the market's side again means acknowledgment of the Loch Ness monster(s) swimming in the credit market's cold, deep, murky waters. I don't think that the market has priced that monster in the market. Perhaps it is the market waiting with baited breath for the Fed to cut. What happens if they do not cut?

Of course we still have those that are looking for the 4 year low, and we've not hit it yet. Or if we have, it is of a muted magnitude not ever seen before.

If I had to guess--not that I have any special knowledge, but just for the fruitless task of stating an opinion--I guess that the minute that the market hears some bad news it is going to bolt like a skittish colt again. I don't think for a minute that we've seen the worst of this correction. We have only had investor cognition that the problem in the credit markets really is a problem. Further, if the magnitude is bigger than the market's expectations--and frankly, I don't see much quantification of the magnitude--then that skittish colt is going to hit a yellow-jacket's nest.

But, what do I know. I'm mostly positioned neutrally. Mostly cash. I bought some puts on WLT (OCT 25's) an SFD (OCT 30's) because I think that their recent run up was a short squeeze that will reverse.

Household life has been hectic acclimating this dog. On the one hand, I think that it is going better than I could have expected. On the other hand I'm asking myself, "Why did I do this?". Having two active dogs (my other two dogs were old and pretty inactive) has been harder than I could have imagined. The poodle, Chloe, continues to ride under the radar. I'm hoping that my cats do not become Daisey snacks. She is way to interested in them.

Sunday, August 19, 2007

Brief Note

It has been a busy weekend. We are still working on on assimilating Daisey into our lives. Reade calls her Satan, but I think he's engaging in a bit of hyperbole. Daisey has much kinetic energy, but I imagine that has much to do with her transitioning from a confined environment to one of more exposure to the elements. I find that she's startled by ordinary household noises such as pulling out the dishwasher drawer or ripping aluminum foil from a roll.

Daisey has attached herself to me--I cannot get out of her sight. She's hyper at first, jumping and nipping, but she settles down. I was up for about 3 hours last night. Macy and she are working out the disconnect between Daisey having established herself as the dominant dog (which is fine, because Macy has been a minion) but forced to sleep beside the bed rather than on the bed (as Macy does). There is no room in the bed for another dog, and frankly, there really is not enough room for the one dog. This is perhaps a chance to get Macy out of bed.

Yesterday, our family attended a family reunion with my Dad's side of the family. It is so weird to see my cousins as adults in their late 30s - late 40's. I have many memories of them when we were young, but I've not interacted much with them over the years of our adulthood. To see them and their kids (as well as mine) as teenagers/young adults was quite special. The day was perfect: sunny and low humidity. It was a really special day.

Here's a picture of my two kids, Reade and Hannah.

I hope that you had a relaxing weekend--or at least felt like to were able to do a few things to make the week a little easier!

My E-trade portfolio rebounded a bit. I know that in anticipation of the market event many folks were very heavily weighted in gold stocks. But when liquidity is rapidly withdrawn, all asset classes suffer. Certainly there has been a bounce back, but I don't believe that gold will be buoyed any more than any other asset class--perhaps less as inflation is less of a threat (in my mind, anyway).

While stop losses or buy limits are widely touted, and I'm not saying that they shouldn't be, it is important that you are aware in a fast trending market those marks can get quickly blown away. You'll sell (or buy) at a price that is not what you would prefer. Remember that a short covering rally can move a stock quickly. Once the shorts have covered, you may not have much interest and the stock will move down and most likely bought at a better price. And panic selling can cause a stock to drop precipitously. Best to evaluate the reasons for the movement in the stock (either up or down) and then make a considered decision on whether to exit or initiate a position at a better price. I'm not giving advice, but reminding you how stop losses/buy limits can make you unhappy!

It's storming, and if I continue, (1) it will be a brief note no longer (not really brief now!) and (2) I'll lose power.

Thursday, August 16, 2007

Easy Come....Easy Go E-Trade

This account which actually got over $16K (marginally) is now at 12,460. (Ugh!) I took a drubbing today, but the number was actually much worse earlier.

I did trade successfully today, and I've had a terrific month. Very terrific. But it could have been MONSTROUS. Oh well. Coulda ...... we don't go there.

Given the market that we have been in, shorting has been fairly low risk. Though, I must say the short endeavors that I tried before were disastrous. A great example of how the "trend is your friend". Shorting into a strong market unless you've nailed the sector (for there are ALWAYS weak sectors, even in a strong market) is akin to flushing money down the toilet.

I have found, though, that when I focus on the account balance accretion rather than individual trades, I'm less stressed with the actual trade when one goes awry.


Here's an e-mail that I sent to the shelter today.

Here are a few pictures of Daisey. She is settling in well. She is a slobber bunny to be sure. I've never seen a dog drink water using her entire head as a shovel!

I've been exercising her in the yard on a retractable leash. Tell Jack that Daisey is being very mindful of her leash boundaries. I cannot believe how incredibly loving and playful she is. This behaviour is a testament to the care that she has received at your facility. Shy? I'm not sure how she was labeled shy. She is eager to make friends with everyone she comes in contact with. She's so happy that she's been mouthing overly much. It's not a problem that cannot be corrected, and she is conscious of being gentle. She just cannot help herself in her delight.

She's been eagerly (if not unsuccessfully) hunting dragon flies and butterflies today. The bird feeder, outside my office window is intriguing to her. The windows are 6' x 2' so she gets a full view outside.

She lay quietly inside by my chair, like my previous setter, Greta, did. As you can see from the pictures, she's very happy. I appreciate having the opportunity to adopt this beautiful dog.

Wednesday, August 15, 2007

Driving Ms. Daisey

It was a butt-numbing ride--530 or so miles round trip. Daisey slept the whole way. She and Macy met, and it could not have gone better. She's quite bouncy though!

I see I missed another exciting day in the market. My goodness!

I'll post more tomorrow; I'm tired and I'm going to winkie-land.

Tuesday, August 14, 2007

Today's Market Close

Will upload later, Blogger being a booger.


Tomorrow (my birthday!), I head up to the Cecil County ASPCA in Chesapeake MD to adopt Miss Daisey (Daisey, Macy, Lacy--oh my). She's my birthday present to myself. She's 2-3 years old, and apparently shy.

It will be a long drive and a long day. I hope that you are surviving this market turbulence.

Sunday, August 12, 2007


As I make mistakes and do things right (I think more of the latter than the former)--meaning gain more experience--I find that going back to my clatch of investing books is helpful. I'm doing so today, outside on the deck of course, it is superlative weather. Rather than do a comprehensive and cohesive piece, I'd rather not spoil you in that manner. Truthfully, if I were to attempt to do that not a post would get written. So, I'll throw a few wisdom (not mine, others!) your way for you to think about.

However, before I do, I would like to recommend a book: The Stock Market Course by George A. Fontanills. It's written for the novice investor, but it is comprehensive in that it is a survey of all of the things that you need to know and think about. From here the person can move to more comprehensive treatments of some of the topical information such as technical or fundamental analysis.

Nevertheless, I found this statement on page 293 talking about the Vix.
"Wall Street has many axioms or cliches. However, there's one I consistently live by, and it makes the VIX level easy to understand: When the VIX is low (<20), it is time to go. When the VIX is high (>30) it is time to buy." (p. 293)

Here's a chart of the VIX for the last 10 years. I put the 30 and 20 lines in there as highlight.

This book was written in 2001. Since July of 2004, the VIX has steadfastly been lower than 20. You'll remember that many have talked about the unusual complacency in the market. On Friday, the VIX was just north of 28--still not measuring the level of fear in the market at other intervals. Though this reading is higher than what was experienced last year. And if you were out of the market the entire time that it was below 20, then you missed a big move. So perhaps the quote needs to be recalibrated?

I'm not quite sure what to think about the ranges over that period of time, but I have to wonder out loud if the presence of the short and double short ETF's have had the effect of dampening the VIX. I think that it is worth considering. I've not done any research on the matter, and feel free to bring some references forward. You may wish to use the tinyurl so that long references do not get truncated. Note that I have a button on the the right just above the moon phase.

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Home Visit

I'm not sure that I shared with you that I went to the English Setter rescue site, Above and Beyond @ and filled out an application to adopt a dog. I've never adopted a rescue dog before, though we've had plenty of dogs that fortuitously found their way into our lives. I referenced my blog entry on Lucy's death to give the agency a sense of the importance that dogs have in our lives. They thought it was terrific, so I'm glad that I had that maudlin moment and posted about it. I also sent a picture of Greta and Macy that I posted on my blog when Greta passed.

Today I had my home visit. I think it went well. Hopefully we'll be able to welcome an English Setter into our home, soon. There's a piece of me that feels a bit snobbish to only want to accept a rescued Setter. But these are dogs that by their nature need space, and I fortunately have plenty of space.

Macy, my bulldog mix, needs no space--except space in the bed. She'd be fine in a contained yard so long as someone threw a ball for her. But she does need to work off her energy. She's a terrific leash walker/runner. I have a great 26' retractable leash. She LOVES to be on her leash. I took her for a 2 mile run/walk and was sadly reminded that I'm old. But I managed to run about 1/2 way.

As I was on my walk, I talked to a neighbor who was taking a second look at Macy and asked what type of dog she was. I said bull dog and that Mark (my husband) told me that he had a bulldog. Well, he brought Jax around. A beautiful sweet dog. He was very gentle and sweet toward Macy (and me). Macy wanted to play, but he has hip/knee problems, so just a sniff and a wag was the most he could play. I was glad to have the interaction, because I'm not quite sure how M will do with dogs that she has not been raised with.

The home visit liaison brought her dog--a male setter type dog. He looked just like a large Lacy (neighbor's dog): pure black shiny coat with feathering on legs, ears and tail. Macy did very well with him. So number 2 contact with heretofore unknown dog went well. I feel like she will acclimate well to a new housemate. She needs a new "big-dog friend".

I think that I mentioned that Greta used to go down to an elderly woman's house (two properties away and across the street) and sit with her during the day. My neighbor (her son) who lives across the street from us asked Mark about Greta, as they had missed seeing her (she would visit them too). I should have sent a note to John's mom to let her know. I always thought that it was sweet that Greta would visit her. John' a wonderful neighbor. He was probably my age (47 on the 15th of this month) or just a bit younger when we moved out here. He seemed so old at the time! Age certainly brings perspective. When we were building our home in 1984, he helped Mark lay some hardwood floor and he graded our lawn. We've been fortunate to have so many immediate neighbors that we've known for more than 20 years.

Our weather has been beautiful this weekend. The heat has broken as has the humidity. Already the late afternoon shadows are getting long. Our sunflowers in the garden are getting ripe, and the birds will be feasting on them. Everything else in the garden is spent. I bet that garter snake is 10ft long now! In just a few weeks it will start getting cooler, and we'll transition into a gorgeous Fall. Actually, all of our seasons in Virginia are gorgeous. Fall is always a welcome respite to the heat, though a hurricane or two generally plows through every 3-5 years. It's been a quite hurricane season--no regrets there.

Enjoy the balance of your weekend.

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Friday, August 10, 2007

Bring Out Your Dead

Today's market was fairly tame once the beginning a.m. jitters were resolved. The Fed came in on their white horses to inject liquidity. Good that they did; terrible that they had to.

I have this vision of Ben Bernanke pushing a wheelbarrow through the muck chanting, "Bring out your dead.". I imagine an investment banker or two may have a hedge fund manager hoisted on his back screaming, "I'm not quite dead yet". I do think that there are dead bodies out there--dead bodies in the form of blown up hedge funds and investment managers having to answer to whomever regarding WHY some of this $hit is sitting on their balance sheets.

Do we have an overdone selling panic. I think that some would have you believe that. While I truly do not know, I don't think that it is over yet. I think that there will be more unpleasant surprises.

My shorts did fabulously today. I am quite pleased with this week's work. Though I say that I'm not a day trader, I am trying to scrape up enough money from making considered trades so that I can justify my existence within the confines of my home. My family adores my being at home; but, I have to be productive in the economic front. Thankfully our needs are modest, but I have to earn my keep so to speak.

It's hard work, though, making money in the market. But I'm going to try to make this work.


MarkM writes


Premarket futures say that we will retest the lows today. Not unexpected. "V" bottoms are rarer than "W" ones.

I know you place a lot of trust in Dag's opinion as well but I can't understand for the life of me why continual injections of liquidity are always good for the market as he opines. If he has further insights in his newsletter, could you please share? I am not an Austrian school economist but if there was a magic bullet such as this we would just flood the system ALL THE TIME.
I'm not going to answer the question, for I really don't know the answer. I find the statement about liquidity a bit of a head scratcher. Perhaps the "answer" is time frame: short term we are scratching our heads, but long term, as part of the natural economic cycle, liquidity gets injected.

But the question poses an opportunity to respond in a different vein. I read the opinions of many folks. As a lay investor, it is difficult to parse out the stuff that "matters", because what matters to one person may not matter to another. Though I find it highly instructive, I do not use it. I look at his picks, and his track record is terrific. But if I cannot understand the investment, I will not make it.

Granted, that stance has led me to wonder why I do not just find a system/guru and use it exclusively. I suppose that I'm just a born recalcitrant. More likely, I want to understand "stuff" for myself. I will say that I've gained much more confidence in my ability to synthesize the stuff that I read, and I will point to my posts of March/April as evidence of my having a basis for that confidence. (As I write that, it sounds arrogant, but remember, I speaking of MY confidence in MY stuff--not that anyone else should have that same confidence).

I do believe that I can safely say that I've graduated from the unconscious incompetent to conscious incompetent. I think that I earned my badge by researching and understanding for myself (1) the depth of subprime; (2) the proliferation of hedge funds and their risk profiles and increased the risk of interdependence of financial institutions, to include insurance companies, with hedge funds; (3) the nature of the credit markets and the economy; and (4) the lack of or dissonance in the commentary in the major media outlets v. what is really happening. The latter you've seen very little written about. Trust me on this, when the credit market seizes up so will the economy. The sonorous chant of "global economy, liquidity boom, high employment" will lull you into a stupor that will soon part you and your money if you are not careful.

What I'm pi$$ed about (moderately so), is that because I did not trust my understanding, for no competent person was talking about it OR were playing down the risk, I walked away from several extremely profitable positions that would have well compensated my time. I had put positions in MTG, ALL, HIG, LTR--and I let them all go with a modest gain because of lack of conviction. I've refrained from going back and calculating my gains, but it would have been more than $40K. That may not be much money to you, but it is to me.

Thursday, August 09, 2007

Gary K

He is saying that the confirmed rally has failed.

His show is so terrific. I think that he is one of the best commentators out there.

Do listen to him.

Working on Shorting Skills.

One of the skills that I'm trying to learn/master is short selling. I must tell you that I've lost good, spendable money shorting or being in puts. But these losses have been my "tuition", and I'm getting better at it. Just as when one goes long and must have stops, you must do the same with shorting. Now, this is not a post to invite you or to teach you how to short. As I say frequently, take no advice from me regarding investing--but I have a myriad of other practical advice should you ever wish to pose a question!

Nevertheless, I want to tell you about some of the work that I've been doing and transactions that I've placed with good success. Like a hunter, you must stalk your short pray. I've been stalking short candidates. One of my real perplexions would be noticing huge spikes in stocks when they had some minor good news (or not so bad bad news) on their earnings release. (And of course the news would be that" investors welcomed the news and the stock went up X"). For the longest time, that never made any sense to me. But it began to make perfect sense to once I started reviewing the magnitude of short interest.

Just as a wholesale selling panic in a stock can lead to a wonderful oversold position where you can pick up good stocks cheap, a wholesale buying panic can lead to a potentially profitable short position. When you short a stock, you are selling something that you do not own. Eventually you will have to buy it and cure the share deficit. You hope, of course, that you will be buying it back cheaper than what you sold it for.

However......if you've levered up to sell something short, your broker will have margin requirement that you will need to meet. If you are short 1,000 shares of SRCL at $44 and it goes up to $56 (which it did recently) then that creates a wee bit of pressure in terms of a margin call. OR, and this is important, your broker may be forced to deliver some shares and seek you out to cough them up. (Someone correct me if I'm wrong on this, but I saw an experienced poster/trader on Real Money say this).

Your loss at this point is 56-44 or $12 (that is a percentage loss of 27% (12/44). As the price goes up, people panic or reach they're buy stops (obverse of sell stops) and the price goes parabolic. So the next time you see an anemic report met with extraordinary action, then look at the short interest. You can do that at this site.

I've been creating a list of these parabolic moves, and I've being stalking them. I get scared and bail too soon and such, but here are a few things that have been on my list:


Today I made money on SRCL, FAST, HWAY. I closed out positions way too soon on TUP--weenied out. Lost conviction. FARO, I sat on my thumbs and missed a great opportunity. But I weenied out. As with most things, you generally have to move fast and make sure that you know where your stops are so that you don't dither around.

You may ask, "Why does looking at the short position matter?" It matters two ways. First, if it is a very heavy short position, you may sell short and end up running around with your hair on fire as the stock continues to move up and up. I really recommend your being familiar with how a stock acts. In general, I've noticed that shorted stocks move with much buying pressure until about 10:10 a.m. or so. Heavily shorted stocks do they same thing except they catch their breath and move MUCH HIGHER. Here's a terrific example of SRCL:

Second, once the shorts have bought, who is really left to buy if there is but a tepid report on the company's prospects? Just has you have exhausted sellers, you have, in the case of panicked buyers, you have exhausted buyers. If you are long a stock that is heavily shorted and you are met with these lackluster results and are looking for a reason to sell optimally, you have one.

Again, none of this is a recommendation. Barry Ritholtz noted in one of his trader education series (The Apprenticed Investor--If you've not read this series, by all means do so on his The Big Picture Site) that one really needed to know how to short stocks. I'm a novice at this, but it is something that I want to do with greater skill and confidence. And I truly believe that you will become better at understanding a stock thesis if you can cup up with reasons to buy vs. reasons to short and weigh them with some consideration. It's worth noting that managing this stuff can make you frazzled--I'm feeling that way now. I'm really quite tired from managing the three open positions that I had. I closed out FAST, but I still have SRCL and HWAY. But I had a nicely green day on that work.

Because of what I believe to be hedge fund liquidations, I think we are seeing weak names go up. There was very anomalous (to my mind anyway) action in several stocks--FAST included. (I may re-enter this). Remember, a margin call means you have to close positions to raise cash. That means that if you are long you sell and if you are short you buy. When you short a stock it shows up as a negative in your account. If you've never shorted before, you might think that if you've sold the stock, they put cash in your account. They don't. So some of this furious, odd buying is what I believe forced liquidations.

I just try to make things make sense in Leisa-land. While I'm always successful with finding an answer, it may not be the right one. Perhaps I should say that I find an explanation but it may not be the answer.

Sweet Jesus on a Biscuit

Tim Knight (and I hope that you read his excellent blog, see the link to the right), said the title of this post on his blog, and I've just become quite taken with it. I thought today a nice opportunity to use it.

I don't have much to say about today that you've not heard me say before. I will be listening to Gary K. Perhaps the uptrend hit a speed bump.

Another Hedge Fund Freezes

As you probably know by now, another bank, in this case, BNP Paribas SA, France's biggest bank, has frozen withdrawals from three of its funds. You can read about it here on Bloomberg.

The Dow futures are currently down ~125 pts. But the futures and how we close are often divergent. As I noted yesterday, it appeared to me that the market was still nervous, witness the dip between 3 and 3:30.

I think today that we will see the financials get hit again. The Bear Stearns news inserted itself into investors psyche and then somehow was miraculously assuaged. I think that as we hear more about hedge funds having assets that are difficult if not impossible to value we will get a full seizing of the credit markets. If there is going to be a systemic risk event in my lifetime, I think that this might be it. I'M NOT PREDICTING ANYTHING and I surely do not know a thing. But it would seem to this amateur observer that this is a catalyst event. There are going to be many spooked investors with their money locked away in these hedge funds. This situation needs to become unwound and the string has only now been pulled.

Bloomberg is also reporting this:

The European Central Bank said it will launch an unlimited fine-tuning operation today to add liquidity at 4 percent after demand for cash in the European money market drove interest rates higher.
This strikes me as crisis intervention.

I also understand that there are two Cayman island hedge funds that are going bankrupt with more than $4B USD in assets.

Now I noted yesterday that Gary K said that the technicals confirm the uptrend is in place; when he gets a confirmation, he probes (as I noted) with small positions. A perfect discipline to ensure that in the event that there is a false signal, losses are minimized.

I also want to caution you to take everything that you hear from these hedge funds, banks--any with "skin in the game"--with a grain of salt. These people are responsible for managing expectations positively, not for telling you their worst fears. I'm not saying that is lying; but it could very well be whitewashing a situation that has not been fully understood even by them.

Wednesday, August 08, 2007

Gary K--Uptrend Confirmed

Per Gary K the uptrend is confirmed and he is going back into the market. As is his usual qualifier, he's watching and taking probing positions.

The market internals were better today as you can see from the above. Though note the V-dip--there was a rumor that "someone" was going to pre-report some bad news. This sort of action proves that the market is still jittery. I would surmise that we are likely to test the old highs from here.

E-Trade Update

I've not posted my e-trade account in a while. This is my pot of gold in that I have two gold stocks. I sold my WZEN which still seems like a good move. My account was over $16K, but just barely, then it went down below $15K. Here's the whipsaw! This is speculative money in a speculative account.

The symbol for Eldorado Gold is EGO. I typed in EDO and I found this interesting stock in which I have no position.

The Insurance Hoax.

Bloomberg has a series of articles called the Insurance Hoax

I hope that you will take time to read it. Based on the articles, it appears that McKinsey consulting has been quite busy counseling insurers how to make more profits at the expense of the insureds. I'm disgusted by the articles.

There is also a wonderful video by Whalen, and analyst (I could not figure out how to link to it) on hedge funds and subprime. A very in-depth and articulate view for just a few minutes.

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Tuesday, August 07, 2007


That's the name of one of the game my son, Reade, has for his X-box. The Overlord goes through pastoral communities killing halflings. These halflings are rock, club and ax-wielding menaces to the inhabitants of the communities that the Overlord is supposed to lord over! The point of the game (I think) is to clean up these communities and by doing so garner enough resources to rebuild the castle. The inhabitants of the communities are quite happy to see the Overlord and his minions--yes, he has minions!--move through the countryside doing halfling pest control. Make no mistake. The Overlord is evil and is re-building an evil empire. But I suppose that it part of the charm of the game.

Yesterday morning, I tried my hand at playing this game. It has been a long time since I've played a game. My first game was Spyro. For Christmas some 6-7 years ago, we bought our son a Playstation for Christmas. On December 23 in the middle of the night we were visited by a horrible ice storm. I was awakened in the middle of the night by a noise that I could not identify. It was pitch dark, as the power was out. The next morning, we awoke to an ice-encapsulated world.

Ultimately, our power was out for more than a week. The first day or so was really tough because we had to cut our way out of the neighborhood and the back roads. Given that it was near Christmas, once we had cut our way out, we had a hard time finding a gas station (for the generator) in an adjacent county (our county stations were down due to power outage). Ice laden oak branches came crashing down among us. Quite creepy and dangerous.

But find gas we did, and that powered the generator. That meant that we had enough power to fire up the Playstation. For a week I was able to play Spyro. Spyro was the incredibly cute dragon that breathed fire and butted his way through various different worlds with dangers lurking everywhere. He had a little fairy that went with him whose health would fail gradually if Spyro absorbed too many shocks. It was so much fun and addictive. But also frustrating. When I played Overlord yesterday I was reminded of those frustrations. When I play these games I do not feel like I know where I'm going or where I came from. I get lost. Further, the perspective is so limited (unless you get the cheat codes!) that I feel claustrophobic. Plus, with Spyro, I butted enough sheep (he was a dragon, and those sheep were mean buggers) to last a lifetime. And there are abundant sheep that the minions need to slay for "treasure" in Overlord. Been there. Done that.

However, I will say that for a moment being Overlord and having minions at my disposal was thrilling. Though, it is probably not something that I should get used to!

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Sunday, August 05, 2007

Credit Bubble Collapse or The Vindication of My Armenian Grandmother

You cannot cover shit with snow.

I have much that I wish to say about what happened this week, but I'll be brief.

Point 1: The financial media has done an extraordinarily poor job in informing investors as to the nature, extent and consequence of the credit bubble. Worse,
our economic leaders, such as Paulson, Bernanke and other respected people, failed in their duty to give the public an honest assessment of the nature, extent and consequence of the credit bubble. (I almost made that point two, but elected to conflate it here).

Point 2: It was never a subprime issue, but a credit bubble, caused by real interest rates that were too low for too long.

Point 3: So much of the wealth creation in the past 24 months or so in this country has been based on FEES earned from the offering, conversion or securing of the underlying FINANCIAL instrument or in its attendant risk or interest profile (credit default swaps, interest rate swaps). What you finance matters. Financing homes is not the same thing as financing an long term economic producing asset--one that produces goods/services that for long term economic gain.

Point 4: The reassessment and repricing of risk serves as a liquidity reduction in the market. Remember that there was a global liquidity boom which fueled asset prices. Now we have a global liquidity ka-BOOM.

Point 5: What is to become of the duration and/or magnitude of the current stock market decline is anyone's guess. But I'll offer these subpoints for consideration:

  • Hedge funds were highly levered--regardless of what their overall strategy was. Accordingly, any contraction in leverage will require their selling assets to maintain asset to collateral ratios required by their lenders. I don't know if the average leverage employed by hedge funds is greater or less, but I'll go out on a limb and conjecture that it is more. So the contraction of liquidity will affect all funds.
  • Hedge funds have proliferated since the last stock market debacle, and many of these managers will be inexperienced in how to deal with such a situation.
  • Therefore, more hedge funds that are more levered = greater risk to my inexperienced eye.
  • Hedge funds account for more than 50% of the trading volume (according to one source that I read and reported here). I would bet that most lenders are contacting their hedge fund clients to find out exactly WHAT they are holding to assess their own exposure. Further, they will likely be discussing how to re-calibrate debt to collateral ratios. I'll surmise, then, that there will have to be a selling of assets to meet margin calls. It would seem to me, then, that all sectors will be subject to further selling pressure--particularly some of the momentum names (RIMM, AAPL) and much-favored sectors such as oil/gas, commodities--regardless of underlying fundamentals.
My typical caveat--I could be wrong about all of this.

I do believe that the reaction of the Asian/European markets is going to be important. It could add a little hot sauce to however our own markets would react on Monday. Remember, they, too, are finding that they are very exposed to this morass of debt instruments that are declining instrumentally in value. Tim Wood on FSOonline feels like a further decline is coming. I will say that he and Gary K have been spot on (meaning they've not been hopeless handwringers, but have been participating in the moves up but preparing and looking for the inevitable move down) Concurrent with my writing the last sentence my e-mail beeped. I see that M is seeing a tradeable low coming--which means it is not here now.

I do believe that if these issues are as widespread and as deep as I think that they are, we will have a world-wide recession. BRIC still lives, but don't think for a minute that the consumptive power of Americans has been outstripped by those countries. Remember, they still have to be inculcated in the joys of living beyond ones means which requires a seismic shift of behavior tectonic plates that moves one from being an ardent savior to a hapless debtor.

My every wish for your safe passage.

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My Book Club

Last night I hosted my book club at my home. I've been with this bookclub for 10 years or so. I think that is a goodly amount of time for a book club to be together.There are 9 of us--down from 11 due to a couple moving away. Our format is host provides dinner and makes assignments for others to bring appetizer, wine, bread, salad, dessert etc.

Our weather was insufferably hot and we had plenty of tomatoes. So my entree was chicken breasts with Caribbean Jerk seasoning atop a salad of mixed greens, carrots, cucumbers marinated artichokes and lots of fresh-off-the-vine tomatoes. I also provided dessert--a German Blueberry Cake, which is really a blueberry tart, served with vanilla ice cream. If you love blueberries, there is no better way to showcase this fruit than this recipe. Plus it is easy. If you are interested in the recipe, I've placed it at the bottom of this post. -

Our book selection last night was Collapse: How Societies Choose to Fail or Succeed by Jared Diamond. If I could have just one wish for our modern society it would be this: That each person would read this book.

Jared is the author of Guns Germs and Steel. One of the things that he does admirably is systematize complex concepts to provide framework for accessing complex concepts. In fact, his models are so elegantly constructed they provide a comfortable and understandable framework that allows the reader to easily access and intersect with the information that he presents.

In reading Collapse I felt like I was awakened from a deep slumber. I'd write for the the five things that he used in this book to evaluate different how different places/societies (Easter Island, Japan, Rwanda, Iceland, Greenland , New Guinea, etc.) negotiated (successfully or not) their environments, but alas, we did the EPA cleanup to ready for our guests. I have no idea where my book was. I guess if the model were so simple and elegant, I'd remember it, but that really is too much to ask of my poor memory.

As JD lays out each "place" he describes in detail the culture and history to build the context of the environmental disaster that unfolds. In some instances, Iceland for example, the disaster was recognized and movements toward remediation

I'll write more about this book when I have it in front of me. That each of my Book Club friends (and we are all very different in ages, perspectives, gender) were similarly moved was notable. The book simply chronicles, with facts, the effect of humans on the environment. There is no conjecture about global warming. In fact, there were more dire and connected consequences (incontrovertibly so) than global warming to these civilizations--and that is the beauty of the book in my view. One doesn't have to engage the red-herring argument about whether humans cause global warming. Rather, JD lays out in painstaking detail what happens when humans deforest, overfarm, overgraze in one discrete place after another. Those resulting consequences range from horrible to hopeful. And understanding and reflecting upon these consequences is worth our time. And most important is that from our understanding and reflection we act.

Accordingly, for the book's power to create this understanding and reflection as an impetus to act, I wish for each of us to read this book.

German Blueberry Cake (which is really a tart). This is from the Eastern Junior League Cookbook, edited by Ann Seranne. I bought 4of these cook books from Costco. They were packaged together as the Eastern, Western, Southern and Midwestern--such a collection of wonderful recipes.)


1 stick of butter (softened)
pinch of salt
1.5 cups of flour (all purpose)
1/2 cup of

Mix together to form a crumb. I do it the lazy way in the
food processor so it takes less than a minute. Reserve .75 cup of the
crumb for the topping. Press the balance into a tart pan with a
removable bottom.


4 cups of blueberries
3 TBS of
tapioca flour (or regular flour)
1 TB of fresh lemon juice,
1/2 cup
1/4 tsp salt
1/8 tsp of cinnamon.

Mix together and let sit for 15 minutes.
Preheat oven to 425F. Spoon berries into crust. Cook for 20 minutes,
then put on top the reserve crumb and cook for another 20-25 minutes
until the crumb is golden brown. I always serve it slightly warm with
ice cream. It's super easy and more delicious than you can imagine.

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Friday, August 03, 2007

Bankruptcy Risk

I'm going to bring up a reminder of something that I wrote about back in the Spring.
The bankruptcy of these sponsors (New Century, American Home Mortgage, Accredited
Home Lenders) could roil the bond markets if these assets are yanked from the REITS.

Bankruptcy of the Depositor or the The depositor and the sponsor may be
Sponsor May Delay or Reduce eligible to become a debtor under the
Collections on Loans United States Bankruptcy Code. If the
depositor or the sponsor for the
certificates were to become a debtor
under the United States Bankruptcy Code,
the bankruptcy court could be asked to
determine whether the mortgage loans
constitute property of the debtor, or
whether they constitute property of the
issuing entity. If the bankruptcy court
were to determine that the mortgage
loans constitute property of the estate
of the debtor, there could be delays in
payments to certificateholders of
collections on the mortgage loans and/or
reductions in the amount of the payments
paid to certificateholders. The mortgage
loans would not constitute property of
the estate of the depositor or of the
sponsor if the transfer of the mortgage
loans from the sponsor to the depositor
and from the depositor to the issuing
entity are treated as true sales, rather
than pledges, of the mortgage loans.

The transactions contemplated by this
prospectus supplement and the related
prospectus will be structured so that,
if there were to be a bankruptcy
proceeding with respect to the sponsor
or the depositor, the transfers
described above should be treated as
true sales, and not as pledges. The
mortgage loans should accordingly be

Wednesday, August 01, 2007

The Thrushes have Departed

My favorite part of the Spring and Summer is, hands down, the arrival of the elusive wood thrush. I wrote about their arrival in this post on April 25th. They delight through their lovely flute-like call. They typically sing first thing in the morning, after lunch and in the evening. If you reference the post, and I hope that you will, you will see a picture of the wood thrush and a link to their call. I call them 'elusive' for they are heard, but seldom seen--the opposite behavior of well-behaved children!

They generally leave at the end of July, and this year was no exception. Oddly enough, they've been rather quite over the past couple of weeks--but I heard a call often enough to know that they had not left, but they had their regularly scheduled program off the air except for a few snippets. I don't recall noticing this behavior last year, but it may have been just my not noticing it. I'll be watching that more carefully next year.

On Saturday and Sunday they broke their intermittent call behavior and sang non-stop from morning through evening--not even pausing to take a mid morning or late afternoon rest. It certainly was a joy to hear them so actively calling. I heard them briefly Monday morning. Nothing during the day. Nothing yesterday or today. I suspect that their increased call activity was the equivalent of the train master's "all aboard" call prior to their flying to their over-wintering destination.

Our bed does not have a headboard, rather it is a window--a casement window. And since there is only a hand crank within easy grasp, there is no effort to get it to open or close. If you are a woman of my age with fluctuating hormones, you are grateful for a window so close by. And since there is only a hand crank, it does not even involve any effort to get it to open or close. Hormonal considerations aside, if you want to listen for something, like your beyond curfew child coming home, you can monitor things pretty easily. At about 5:30 a.m. the birds begin to call. It is at that time that I open the window to hear them. It is quite a pleasant way to begin one's day.

I've marked the thrushes' departure date on my calendar. I'll look for them again at the end of next April. I miss them already.