Red Dawn in Morning - or Time and Price/Supply and Demand

Being a good steward of your money ultimately means understanding the value of things and being able to manage risk. I'm always a bit surprised to see discussions of technical analysis trumps fundamentals or fundamental analysis trumps technical analysis. I consider them both to be nourishment of the bread and water kind--essential to your investment survival (I'm channeling Loeb here).

You've no doubt heard the expression about 'certain' people: S/he knows the price of everything but the value of nothing. It's an expression worth thinking about as you consider your stewardship responsibilities over your money.

We cannot ever lose site of the simple fact that stocks are inventory, and that inventory is always turning over. And, much like your favorite shopping destination, when there is more inventory than there are willing buyers, prices drop. The obverse goes without saying. Our good friend Seldon reminds us:

Our big capitalists are seldom entirely
out of stocks. They merely have more
stocks when prices are low and fewer
when prices are high

Now my saying this is not a paen to value investing. Rather, it is a paen to importance of knowing price and value and being able to opportunistically benefit from the difference by making a buying or selling decision. And while arguments are fervently made that the market is the final arbiter of price, those adherents forget that time is another important dimension. Panic selling can yield opportunistic buys, and panic buying can yield opportunistic sells.

No matter what your philosophy is OR what your modality is, ultimately you are moving inventory as well. Accordingly you must buy advantageously and sell advantageously. Knowing the value of what you are buying/selling v. the price that those are willing to sell/buy to/from you is an important part of keeping your inventory turning profitably.

There's another dimension, too. That is knowing the season, what to stock and in what colors. That statement IS a paen to the business cycle. Much has been made recently in the increases in metal prices (always a requirement in a recovery) and increases in durable goods (a signal of confidence). Trying to figure out which season you are buying for is not so easy as the lovely symmetrical charts will tell you--a bit like the model size 8 doesn't is different that a real woman's size 8.

I just saw on Bloomberg yesterday (I don't see it now) about how undervalued Chinese stocks were. I've had my best luck with Chinese stocks, but I must admit that I do not trust the reported numbers so much. But I do know this....the Asian economies are being looked to as the saviour for the world. I've maintained in this space before that we are projecting our own proclivities for assuming debt and lack of saving to Asians who are savers. Will these would-be consumers step into the large shoes of the American consumer within a short period of time? I think that you'd have to believe something monstrously untrue to answer yes.

Being "Slightly Better"

I mentioned some time ago that I bought a bunch of books from Fraser Publishing. One of those books was The Battle for Investment Survival by Gerald Loeb. Each time I pick up one of these books, I'm reminded that the basic tenets of being a steward of one's money are not different.

Perhaps it seems useless to read the same concept articulated by different folks, but it does seek to reinforce the concepts and, more importantly, convey a nuance that deepens the understanding. Loeb writes:

Your best weapons against the forces that tend to clip your fortune are knowledge and experience. Realization of the conditions that exist should lead you to learn more about them. . . The acid test is to learn to be a knowing participant in the game of getting ahead of the other fellow. (p. 212).

When I read that this morning, I was reminded of Russel Napier's conversation with James Authers of Financial Times. Authers did "A Long View Segment"...[Geez, I just went over there to find it for you, but I started reading other stuff.....I'll never get this post finished....you are on your own to hunt it out. I know that I posted a link on this blog when I saw it the first time. I'll find it for you later.]

There's the funny joke about trying to out run a bear....you don't have to be faster than the bear, just faster than your companions. Such was Napier's point about successful investing. You don't have to be THE smartest, just slightly smarter/quicker than most people. And that's called out-maneuvering. Those who jumped in the market in March and are likely selling their stocks to all of the underperforming fund managers, were slightly smarter/quicker! They outmaneuvered me, but I was busy saving lives from a burning business.

Financial Sense on Line had Jack Schwager on talking about 'market wizards'. Let's face it...I'm never going to be a market wizard (I'll refrain from saying that you will not likely be one either!). It is almost scary to see these books and interviews wher there is even a suggestion that MOST investors can attain such success. How many cellists get to Yo Yo Ma's level?

Though I've consigned myself that I will not be a market wizard, I don't mind aspiring to being a wizard's apprentice. And if you are going to be better than MOST of the investing crowd, how do you plan to do it? Like most simple questions, it's a powerful one. You might as well tack up "How will I know when I'm wrong?" AND my favorite "What do I have to believe to be true for X, Y, Z?"

I've only skimmed a few parts of this book--enough to want to launch a post in this dry desert of a blog of mine. I hope that this post is only slightly better than something else you might have read today.

Late? Early? Missive

I don't normally write posts at 12:51 a.m. I'm normally in winkie land. Today (err, yesterday!) was my husband's birthday. For whatever reason I was both uncomfortable and wakeful, and I elected to come downstairs.

I'm still finding myself at a strange crossroads. On Wednesday, I had the most wonderful day away from client and market demands. I went with my two friends from my KPMG days (friends of 27 years) to the Barboursville Winery's lovely restaurant, Palladio. They feature Northern Italian cuisine. As I was not the designated driver, I had a 4 course lunch with wine pairing. I generally do not drink in the middle of the day, and I was sorely wanting for both a binkie and a blankie for the ride home.

While drinking, eating and laughing-'til-you-cry, a combination with this threesome, are a wonderful curative, I've not come back to the markets with any sense of feeling grounded. No doubt you are bombarded with opinions--many of them confounding--about what the market will or won't do and why.

But when there is no new thinking to be had, sometimes it is useful to revisit old thinking or go to others and read and think a bit. So my point of this post, is to give you a few things to read together.

First, I wanted to revisit what I summarized from Napier's book. You can find that post here. Second, I always find Jeff Saut to be wonderfully grounding. Do look at this column,

“It takes a licking and keeps on ticking?!”

from this week. (Click on the above).

Financial Sense online has two articles from this week. The one that REALLY GAVE ME PAUSE was Frank Barbera's. If you were to read nothing else, read this:

The Wall Street-Main Street Paradox

You might guess on what gave me pause (but it is late/early depending on your perspective, so there is no point in being coy about it or make you thrash about in your guessing) was this: This rally is so unbelieved in, and so many are coming into the Sept/Oct season with fear, then it would be as perfectly reasonable to NOT expect a decline in this time as it would have been to NOT expect the "sell in May" aphorism to be worthless. I may my negatives wrong and I may have to clarify this post later. And I'm still big believer that we will get a rock'em sock'em downturn from these levels.

Here's my theory: We did get many positive (less-bad varietal) surprises out of earnings. Companies have cut hard. We have to see follow through on revenues rising. So there is a bet of betting on the come that sales revenues will rise and all of this manna will drop beneficently to the bottom line enriching stockholders. I offer that we will NOT see this to be unequivocably the case until the next two quarters. It MIGHT happen with Q3, but I think that there will be so much ambiguity regarding Fed stimulus not percolating through etc. Remember this view is based on the market-as-teenage-boy model will come into play. The market needs a few whacks on the side of the head before the rose colored glasses goe flying. So Frank's view has some real merit.

And finally, Danielle Park's missive gives an interesting perspective

Speculating on Recovery

With respect to Parks, she, like many, note/lament on the lack of volume on this rally. To my eye, and I'm not sure why other commentators (real ones!) do not note this simple fact: the volume on this rally is heavier than the volume leading up to the decline last summer. If you have an answer for that or if you think my eye is jaundiced, you may write me and tell me that politely.

Hopefully there was something of use here. Now I will re-retire!

MOnday a.m.

I don't capitulate much (as my husband would tell you), but I dumped my UNG.

The light blue shading is where I thought the bottom was--"How many more sellers could there be?" I asked naively! I guess everyone who thought that they found the bottom when I did.

It's been a while since I've had options expire worthless, that's more a function of my not dabbling in options than my prowess in them. I had EDZ calls and PRA puts expire. Fortunately, I had a monster win (4x) in RX calls and a nice win (2x) in SSL calls. I sold 1/2 of my SSL Sep 40 calls. I'll keep the rest, though I realize it may be a volatile ride.

I did quite a bit of flipping through charts. It seems to me that there is an airpocket of volume in the S&P. I was looking at it against the Nikkei:

Also, there seems to be some long term distribution patterns in some of the bio-pharma stalwarts.


But I'm seeing some interesting things, too. MF is one. I have a Jan 7.5 call position.



If you are wondering what types of charts these are, they are Renko. I find these charts helpful in getting rid of some of the noise. I will never be able to figure out Point and Figure charts...the element of time is important to me. I prefer to see Renko with the volume bars. To be fhair., there is likely a heck of alotof overhang on this stock....but the price action will tell.

Many are commenting on the disconnect between the market and 'fundamentals'. I'd offer this that "hell hath no fury like a trapped short (or an underperformig fund manager)". It's constructive to think about a few things about this disconnect:

• Money has to go somewhere
• Short covering can provide the most delicious of all rallies
• Fear of missing a move is one of the most powerful (and dangerous) of emotions
  
• Volume is low, so intraday action driven by momentum traders can explain much

A rally is a rally. I've not participated fully. But, I didn't lose any money in the down draft. As individual money stewards, we are not subject to relative performance ratings. Where losing 'less' money than others in a bear market is okay for them, it is not okay for this money steward. Making prudent entries into volatile markets or choosing to stay on the sidelines is fine. If you've lost 50% of your money, you need a 100% rebound to be even.

I'm really liking the term "money steward". It removes lots of the connotations that go with the label investor or trader or speculator.

More Bank Woes | Finding Focus

http://online.wsj.com/article/SB125081267424648035.html

The WSJ writes about mortgage securities on the balance sheets of many regional/community banks. The irony is that for banks that had idle money because there was not growth in their communities, deployed their money in these assets. At the time, it did not seem like such a bad idea as the assets were highly rated. So they avoided making bad loans, but didn't avoid having bad loans on their balance sheets.

You'll also remember insurance companies have gobs of this 'stuff' too, but that seems to be working itself out, though I don't really know how.

So the sticky booger analogy of these assets being made and then flicked with some real sticking power still works. As I was closing down my client, I had another blast from my past. The computer consultant was there. I told him that I always remembered the conversation that we had on computer viruses, and that his sticky booger analogy has been useful in discussing it!

This post is back into the stewardship of money vein. Money sitting around and collecting dust is not good stewardship because there are safety issues (theft, fire, etc). Banks have to earn a return, so you can see that their investing in these supposedly safe securities with a wee bit more yield would be attractive. We saw how that story ends.

The point is that these securities still have to work their way out of the system. And mortgages have two facets: underlying collateral value and repayment. Ultimately prices need to stabilize (otherwise people walk away and give the keys to the bank) and employment needs to stabilize. Employment still is the income stream that most people need to pay their mortgage.

I live in a very small neighborhood. Two people are losing their jobs in the next few months. As I talk to young people, they are depressed about their futures. But as I look back over history, I also see that this 'stuff' gets worked out. Looking back in retrospect always offers greater clarity than a contemporary view of matters.

We can make a decision about how we choose to engage in forging those solutions. This crisis is surely one that will be a turning point in the complexion of our nation. I've been doing some reading in various places. First, I have a real interest in old investing books. I ordered a bundle from Fraser Books who specializes in the reprinting of these books. Investment advice really has not changed much in 100 years. Second, I'm reading Jose Ortega y Gasset's, Man in Crisis. It is one of the books that I found at the used book store in Sylva, NC. There are some real gems in this book, and I will share some of them.

My particular interest in this book is in his historical perspective of generational change. He distinguishes between a linear, soft change, to an abrupt change that serves to challenge the past and break free from it. We see those jolts in our history lessons. These changes release a great bit of energy (and war serves as a manifestation of such release). I cannot help but wonder if we are on the precipice of such a change--a change that will shape the contour and complexion of our nation.

He writes something very interesting, which I'll paraphrase: We are what we focus on. We are a great nation--and the focus for our forefathers was the securing of our collective freedom. At some point in time the focus has become blurred. I'm excited about the book because I believes that it falls into my hands at a time that is meaningful. Here I am, almost 50, and I'm feeling the need to have an understanding of what that generational change is, what it will mean, and whether or not it is a hard or soft evolution.

I believe that this book will give me some needed focus. Since the demise in the credit markets (something I was very focused on), I've felt rather directionless in terms of focus. I feel like this book will give me a construct from which to write with more purpose and clarity.

The Perplexed Investor - Perplexed!

When I started this blog three years ago, it was born from the desire to MAKE myself write about the markets--more specifically my understanding (or lack of) understanding them. There's a huge risk embarrassment, but by doing so, I'm confident that I've become a better steward of my money.

Steward of my money. I chose those words carefully. I elected NOT to call myself an investor or a trader, but rather a steward of my money. We forget that we are human. As humans, labels are part of the way that we make sense of the world. Liberal, conservative, fundamentalist, provocative, predictable, flexible, stalwart, ....... All of these labels connote stuff. Labels are shorthand to distilling alot of complexity into a sound bite. Efficacious? Yes. Accurate....not always.

You might recall last October, I had an ambitious goal of reading Paul Krugman's articles on the Japanese deflation. Alas, my layperson status caught up with me, and I could not muster the brain power to tackle it. Hedge Funds and Systemic Risk, though a stretch, was more accessible.

The fundamentals are so screwed up. Either the market is ahead of itself- anticipating - or the market is just full of beans and getting ahead of itself.

I'll go to my grave believing that the market IS NOT prescient. It is anticipatory for good information, and it needs a hearing aid for bad information. However, once that information SHOUTS, then it hears and dispatches accordingly. That is "The Market Accordingly to Leisa" , and I've seen NOTHING in my observations that would yield a different conclusion.

The dollar is in jeopardy. And if you are in dollar denominated assets, what might you do?

That, my friends, is the answer to the conundrum that we call the market. We are likely to find ourselves in a currency crisis. It is something that I've mentioned here, but I've not committed any real thinking time to it. (Admittedly, it is a stretch). I suspect that if the dollar is to fall, then we'll have our own private US inflationary hell. Perhaps this is how the inflationista's wrest the titular "bad ass" crown from the deflationistas.

To say that this is a perplexion is an understatement. I've posited in this space before the imporatance of understanding currency and the inflationista/deflationista battle.

Tuesday a.m.

I missed the market decline yesterday. My portfolio seems to be rather perfectly hedged. I'm not sure if that is a good or bad thing! Cash position is still north of 90%. I'm not sure if that is a good or bad thing either.

My husband and I went to the upper James River to do a canoe/fishing float. I offered to paddle so that he could fish. I did warn him that if he fussed at me at all, that I would never go again. He restrained himself, and we had a very nice day. As you might imagine, I'm sore, but it is a good sore.

With no cell phone coverage, such endeavors are truly a time to remove one's self from day to day stuff. I didn't see until about 2:45 the market. I had some EDZ calls that expire this week. I probably should have closed them yesterday, but elected not to.

I did see this spectacular drop in SNEN:

I'm not in this stock, as I sold in the volatility moves. They've had some trouble with one of their receivables....and that has exacerbated itself.

I will always be an advocate of mixing technical with fundamentals for longer term investing (read: more than 1 day). If you are a technical trader, they don't mean much. I'm not a technical trader or a day trader. I'm rather confident that I will never be. Part of any of this 'stuff' is that you have to find a style that makes sense to you. And there is no style that absolves you from making an informed decision about what to do with your money.

Ultimately, the best bellweather regarding making an informed decision means that you've consciously made a decision regarding the risks and return you are willing to take over a specified time frame.

---

As I look through some charts from yesterday's sell off, I cannot help but note that in more cases than not, the volume is not very high.

Futures are up as I type.

http://www.box.net/shared/static/ce0qjagkht.png

Saturday Morning Post

I was trying to find a way to have some better clarity on my screen shots….here’s my final version with admission that I didn’t find what I was looking for….

Yesterday I pulled my last information off of a laptop. I bought an 8GB thumb drive since it was clear that my DVD backup failed. The drive was less than $20. Storage costs sure have come down.

Today is my birthday. I’m 49. I hope that I’m never ashamed to state my age, but I could see serial anniversaries of my 49th birthday! I plan to relax a bit today. Mark and I will be taking a canoe adventure on Monday.

I’m trying to get back in synch with the market. I like Tim Wood quite a bit. If you take a moment to read his Friday’s comments on FSO, it would be worth your time. http://www.financialsense.com/Market/wrapup.htm

Ascribing the rally to a new bull market feels odd to me largely due to my believing that we’ve taken a recession overlay (in terms of decline and correction) and are using it on a deeprecession (rather than a depression). Perhaps that term has already been used by someone. I don’t know, but I’m using it here and will lay claim to it.

Time for a few charts:

I have a theory that if we really are in a new bull market (I don’t think that we are) then the trade-down trade, is likely to be over (crowded). I shorted just 200 shares of FDO in my speculative account. You will remember that my speculative account is one that took from ~$5K to $26K. I then blew it up with two bad trades, and it went to $15K. I just left it alone. I now have it back to $17,850. I only have one position, which I’ll show later.

Here’s the FDO chart. I can see it going to 29, and that is the level that it would need to hold. I took my 4.3% gain on my short from an overnight hold and moved on. I don’t mind base hits, but I still believe that the big money is made in the big moves. Big moves are generally apparent in retrospect though.

TGB is a stock that I held in this account as well. I bought it at $2.21 and it promptly fell into a chasm. I’ve marked in magenta my ignominious entry. I should add that it has always been on my radar screen, so I made some purchases at the bottom and sold in my qualified account. This may be a case of selling too soon which is a habit that I’m trying to break. But, I expect that it will pull back, and there will be a chance to re-enter.

SNEN, my Chinese compressed natural gas stock is a wild ride. I’ve been holding to my buy low volatility and sell high volatility. You can see the long shadows on this stock to see the price swings.

The above is a weekly chart. Here’s a weekly chart that shows the action more vividly.

I’m truly finding that using the volatility spikes is very helpful in giving me an objective signal. It’s a stock that I watch and will likely re-enter as I like the ‘space’ that it is in—compressed natural gas for automobiles and engine conversion kits.

Here’s another name in that space: CHNG

I was looking at this stock around March…looking is the operative word, as I was ‘looking’ at gold stocks at the end of November.

Here’s another old favorite:

They reported disappointing earnings this week. I’ve been in and out of this stock (using blv/shv) I’m finding that using this strategy, I’m doing much better at producing these results where I’m selling (the small red/blue) combo. The last mark is where I bought at $4.86. The cat may have run out of lives on this one! We’ll see.

Here’s my one holding in my spec account

It may or may not be bottoming. I know better, but I give into my catfish tendencies to swim along the bottom.

I’m still mostly cash, and have a nice combination of brilliant and dumb ass trades to keep me up about 11% this year.

Saturday Post

Today is bit of atonement for not volunteering much over these last few months for dog transport. I did a quick jig to Fredericksburg from Richmond.  But in a bit, I’ll need to drive to Emporia and take—count them –four—English Setters from Emporia (1.25 hours south from me) to Fredericksburg.

I hope they all get along. 

Duke rode shotgun with me today.  He was a lovely boxer gent who’s health was poor.  Mange and starvation.  Sweet as can be and better days a head.  Thankfully, most dogs we see are in good shape.  So the transports are uplifting, not heartbreaking. 

One of my book club members (and married to another book club member) transitioned this week.  She was only 53 years old.  She was a very beautiful person, with an open, loving heart. Unfortunately, her heart was not strong, and she died from complications of heart valve surgery.  Her life was filled with many battles, but she always had kindness and grace.  We can learn much from these special people on whom life unfairly leans.  Sometimes they break, but the ones who bend with the load, find the song in their heart and the courage of their voice teach us much about both endurance and vulnerability.  I am glad that I was able to hear her song.

I’m not sure what the market’s song is.  My ear has not been tuned in for that, and to be sure it has leaned hard on those who have not been listening.

Today, is just a day of service to others. 

The Privilege of Patience

In summation, action can best be described as “classic,” or as close to classic as can be reasonably expected in the first five months of a bull market following a bear of such magnitude and duration as was seen in ’07-‘09. The market is in that sweet spot during a young bull in which prices are getting marked up broadly because the upper limit on where the economy, earnings, and valuations can grow to is not known. Similar to the mark-up phase of a young growth stock, participants are content to buy “the potential,” and leave dealing with “the reality” of an eventual ceiling in the economy, earnings, and valuations for a later date. 

Kevin N. Marder

Marder on the Markets

Free newsletter that you can subscribe to here  www.GilmoReport.com

Though the reports are not frequent, they are quite good. I lifted the last paragraph to contrast expectation with reality. The market model of "market as a teenage boy" goes a long way toward supporting what most of us would call dissonance. Dissonance is a bit like the MACD, the real opportunity to 'pounce' is when the market expectations are furthest from the reality.  For teenage boys, they require a few 2x4 whacks to the head before your admonishments to them regarding their safety and success (cars, girls, school) sink in.  Those whacks can be something they survive, or those whacks can be life changing, or worse, game ending.

If we set aside the logic that the market should be based on fundamentals, and realize that it is based on expectations (and all manner of other emotions), then we’ll not run the risk of over thinking ‘stuff’.  I’ve a long history of over thinking ‘stuff’, and there is nothing wrong with that.  But the market punishes those thoughtful participants who have their thinking dead on but their timing dead wrong. 

Being too early or too late can be paid for with a dear price.  Those who believe that the market will go up forever or the pullback is unjustified and are positioned accordingly will suffer the same fate as those who believe that it will never go up again or the advance is unjustified. It is what makes a market.

But one can CHOOSE to be another market participant—the prudent or opportunistic investor.  When the risks are high, then step aside or reduce your exposure.  When risks are low, then strike.  It’s not easy to do.  I don’t pretend to do it well. However, I’ve greatly improved my performance by not making big bets when the market’s idea about economic realities has not sufficiently matured (that teenage boy thing again). You don’t LOSE your ideas, though.  Rather, you are patient like a crocodile or a your big cat of choice and wait for the market to catch up to your way of thinking.

 

 

We have the luxury of independent investors to not have to worry about relative performance.  And, if we are prudent and take appropriate, but not outsized, risks, at the right times, then we have compounding on our side.  Averting a 30-50% decline makes it all the more easier to enjoy the privilege of patience.  Having said that, don’t think for a minute that I don’t have some twang of regret for wading in sooner.  I saw the price action, but I tried to out-think it.  I still had my small capital at risk, with some big rewards, which I call my dividend plays.  That was a conscious decision, and I’m not going to re-think it, but I did want to own up to a few of the pangs that I was having.

Currently, the market’s participants believe that we are coming out of a normal recession.  I’m still instructed by the Nikkei….

 

 

We still have the inflationista/deflationista battle.  If we are to have a currency crisis, though, I’m afraid that we will have the inflation that I’ve been thinking that we’ll avoid.  I’m still on the fence about this….and I’m just an average person trying to make sense of it.