Tick Tock

On October 1, my blog will have a three year anniversary. I will also celebrate my 27th wedding anniversary. I've written (including today) 1242 posts. My write rate though suffered a serious downtrend this year with client responsibilities. It's not without a large measure of shame that admit that content has been lacking--largely due to my not feeling that I've a bead on anything in particular. For those of you who have been long time readers, I appreciate so much your coming to this sparsely written corner of the world!

The terrific thing about writing a blog is that you have an instant searchable index of stuff. I've found it very helpful to have that. I'm still a big believer that writing instills discipline to one's thoughts. You have to think about something to get it down on paper in some coherent form. And while my work this year has not been terribly pride inspiring, when I look back at some of my posts, I am proud of that work. Over the course of the next couple of days, I will go through my posts and find a few that I believe are worth reading again.

I still remember this beautiful day in April of 2007 in this post. I was very busy in doing my research early in that year and warning you of systemic risk which will continue to be the best research and work that I've done on this blog. I have a picture of my redbud. Since that date, I've buried Greta (the pretty setter), Mylo and Chloe under that tree. I still have the beautiful Forest Pansy redbud that blog friend (where did he go to?) Mark M recommended. Lucy is under that tree, and it grows more beautiful each year. I will always remember him for that contribution (as well as the infamous woodshed).

The point being (not to sound overly maudlin) is that our blog experience does create real connections. I've an internet friend, Nona2000, who encouraged me to blog. Bill Cara, whose work I've always respected, was also very encouraging to me. Roger Nussbaum's and Tim Knight's blogs are also places where I found my "voice" in addition to the wonderful gang over at Real Money (Rev Shark's blog). I have a deep gratitude for the hosts and the Bloggers who have made my participation there enjoyable.

So, that's kind of my drum roll for October 1.

Mercury stations direct tomorrow. I've know idea what that will bring, and your mileage may vary!

My Non-Astronaut Week | Vertical Flips

Just when I thought I had deciphered about all I could decipher in a year's time, Ameritrade rolled out its Think or Swim Platform. Yesterday, I felt like a deer in the headlights. It is an application that is both broad and deep. I just listened to one of the webinars. The intro was really helpful. All I can say today after spending a bit of time with it is WOW!

I don't say WOW too often. And I've said it twice in two days--yesterday being the other circumstance. You will remember that HPJ is one of my holdings. I elected to unload it yesterday. I had a terrific gain, and I wanted to lighten up. See how much this stock loved my unloading it. (Yellow area is where I deplaned!)


Geez....double Geez! Clearly I will never be an astronaut as I'm ill-suited to ride a rocketship. I only had 1000 shares of this. And it seemed like the move that it was going to see might have been made. So taking my 90%+ gain an running before gravity took hold seemed prudent. So much for gravity! I'm not much given to coulda, woulda, shoulda, but.....sigh!


I drew Fibs from 1991 for no other reason than I wanted to. Here's the chart.


I've no idea which way the market goes, and as I remind you, no one else knows either. But it is relative safe to say that either way it breaks, up or down, there are good reasons for it.

I thought it would be interesting (and likely NOT worthwhile), to take the above chart and do a vertical flip on it. Here's what I came up with:

Remember, this is a vertical flip. I happened to count the months from the first rise/decline and applied them to the second rise decline. I get the 500 area if there is TIME symmetry. I'm not saying that it is. But I thought it a fun exercise.

Stupid Stock Tricks Exposed!

Options expiration last week was not kind to me, and my COST puts expired worthless. To be sure, had the market reversed, I'd have some muted crowing. But in a sense it was my market turn bet. Thankfully, I had the good sense to have some SPY calls, so I was able to mitigate the damage. Nevertheless, my beautiful gain on FDO puts eaten up with impunity.

Sigh....

I had another one of those moments last week where one of my stocks jumped into the stratosphere. Now I know that I should sell into that, but I was viewing it and had a moment of "I'm late for my appointment and need to leave, we'll see what happens."


BEST is one of my little Chinese fliers. They make anti-counterfeit wrapping.

In my speculative account, I have this small holding HPJ.

I've managed to take this account from $5K to $26K back down to $15K now at $18K. Easy come; easy go! The huge downdraft from $26 to $15 caused me to beat a retreat on that account.

A moment's of imprudence can certainly do a bit of damage. I think that I'm most dangerous after I've had a spectacular position reward. I'm at my most thoughtful when I've been humbled by an errant position.


I'm forced through my conscious to provide this chart of COST. My Prince Charming that ended up being worse than a toad! The yellow area is where I thought the stock would not hold. I'm not a physicist, why did I try to play on on this?


I will at least say that I'm pleased that my expectation of the market in general is playing out, and that I did not take any untoward positions against it.

Loan Loss Reserves

It's been a while since I've slogged through the bank loan loan loss reserve schedule. The last time I wrote about it was on April 14, 2008 here. Here's what I said:

Now, have you heard one banking analyst talk about the above schedule? I think not. The last time I pulled this schedule out was to remind readers that when the analysts said about 16 mos ago that "loan losses are low" (1) we are at the peak of a cycle AND (2) that means that there is one place to go (like low unemployment rates). I'm tempted to say that with the crappy underwriting we are likely to see numbers that exceed the one from the recession in early 90's.

Here's what it looks like now. I noted in yellow the curve when I wrote about it.


The peak was about 2.75%. We are at 2.94% or a mere 7% higher. I'm going to posit that we'll see this number get MUCH higher. Why?

• I believe that we'll have an L shaped bottomed recovery (I'm not talking about the market, which I believe has gotten ahead of itself).
• Underwriting was so much more responsible then v. now
• Asset values were not so extended then v. now
• The weighting of loans in the pool given the massive reissuance is tilted toward the lesser quality, more poorly underwritten loans.
  

How high can it go? I really don't know. I boldly said on Toshi's blog (Tim Knight) that it could double. To be sure, I've no valid empiricism for that. But I think that I can safely say that a 7% increase with the fundamentals at hand will be eclipsed by a larger number.

Inflationista/Deflationista Revisited

John Mauldin has devoted his last two missives to The Elements of Deflation. You can find his latest missive here. This last missive helped solidify for me my lay understanding of what I believe is an important issue for money stewardship.

You've no doubt been assaulted in the news about the inflation that is about to overtake us. I remember talking to an investment professional (friend) about 2 years ago, and he was quite certain that inflation was right around the corner. For the life of me, I could not see it, and I certainly didn't place any bets on it. What I have been looking for is the toggle that moves us out of deflation and into inflation.

Mauldin answered that question for me in this missive, and it centers on the velocity of money. All the money printing in the world (and I've stated that the problem has always been larger than any Central Banker's wad) will not give rise to inflation until the velocity of money increases. It's a nice mental model to give some purchase to thinking about deflation v. inflation. I guess that is a bit of a forehead smacker (doh!) moment--but I'll take those. Given that I've written about this in the past (and my recession call was spot on, though some called me a recessionista). Now, I'm just an evangelista, pointing you in the direction to read information that is unbiased and well presented.

If you do not get Mauldin's letter, consider signing up for it. It is delivered in your e-mail, and he always has thought provoking material. As I'm not an economist nor do I play one on TV, I appreciated complex information being broken down. Wrapping my head around this deflation/inflation thing has been of paramount importance to me.

Other Stuff

Financial Sense OnLine has a wonderful interview with Marc Chandler http://www.financialsense.com/fsn/main.html I think that you'll find it worth your time to listen.

And I always read Ray Merriman. As a student of archetypes and cycles, I enjoy reading about this interplay. I think that Ray is a terrific writer. You can find him here.

Stupid Stock Tricks

I believe that my COST puts will be my Prince Charming Trade of this year--so named as it was likely to be too good to be true. Here's a chart.



Naturally, as I present charts, it is always with the caveat that I'm no great technician. But I do make an honest attempt to analyze them. I was show sure that this breakout would not hold. I could find no instance where it had. Well, my $55 puts expire this week.

The beauty of technical analysis, is that in hindsight you can always find some amalgamation of 'stuff' that will support the reality. That's not a ding on technical analysis, but rather an honest comment on how one can support the outcome. In this particular case, I would point to the lack of p/v overhang in the area of the breakout.

You'll remember last week, I was commenting on the NYSE Composite.
Ultimately prices go up due to more buyers than sellers. Here's and S&P 500 chart


I still think that there is a credible probability that we could have a strong draft upward--a buying panic for quarter end fund managers. (And there is a reverse H&S pattern that has been completed with decent volume).

There's lots of reasons why the stock market should go down. I think that there's some credible reasons (technically and emotionally) as to why it may not crack just yet). (Edit: and one could also argue that there is some natural resistance here).

I'm doing a pup run today....NASCAR is in Richmond today, so I'm on my own today. I can carry out my own coup at home!

I'm also tempted to screw around with this blogging template. I miss my sidebars, and I was too busy earlier this year to adapt this template to accommodate them. A pretty by not terribly functional template.

Hedges

Barrick Sees $5.6 Billion Charge to End Gold Hedges (Update3)

A blogger on Tim Knight's blog referenced the above article. You can read the article easily enough for yourself. The point of posting about it is to remind you that in the miasmic undulations of the USD and the commensurate reflexivity in prices in both commodities and the producers/consumers of those commodities, hedging is something you ought to be aware of prior to getting yourself in a lather about opportunities.

Forward sales and purchase contracts are used to protect one against untoward movements in something that you are producing (gold, natural gas, oil, wheat etc) and/or consuming (same list). Essentially you are locking in a price. Remember when oil was barreling toward $150? Folks were buying contracts to lock in the price. If you were on the selling end (producer) v. the buyer (think airlines) you made out pretty handsomely depending on the expiration.

If you care to look at the fine print of 10-K's of companies that you are interested in trading (long/short) to take advantage of the move in commodities, you'll be able to ascertain the extent or not of their hedging activities. And it's not a bad idea to keep a notebook on these resource stocks (producers/consumers) and note their hedging practices.

Barrick is taking a $5+ billion charge. That's alot of bananas--slippery, rotten bananas if the price goes south.

A Spiderman Market

Tim Knight has a terrific post on lumpy returns. I can attribute my own performance to particular positions in particular trades that paid off handsomely.

What makes our participation in the markets difficult, I think, is that to be successful, we really have to come to grips with how to fail. We do not approach most things in our life (relationships, education, careers, or something so mundane as driving) anticipating failure (unless we suffer from some psychological condition). If your driving record (# of acidents transactions) was anywhere close to the failure rate of even the most successful of investor (# of losing trades), then you'd likely be uninsurable. You may not know this about insurance: high frequency of small losses will likely land you as being uninsurable.

I was listening to Tim Wood yesterday on Financial Sense online. He's a Dow Theorist, and he is indicating that there is Dow Theory buy signal, and Richard Russell indicates same (but Russell thought we were embarking on a new bull market last July or so).

Hmmm...........

Everyone has fancy charts about this and that. There are plenty of reasons to be believe that the market will go down. All of the bad news is rather proliferate. Perhaps that widespread knowledge of all the economy sludge is just what is the wall of worry here that the market is scaling with the confidence and alacrity of Spiderman. Here's my modest thesis on why the market may just continue to go up in the short term whether or not there is a Dow Theory Buy Signal or Not--but first a chart. This is a Renko chart using weekly numbers. It's a forest-not-the-trees look.




I must say, that this chart easily could break down perhaps more easily than it could break up. Here are a few things to consider:

1. The volume, despite much grousing to the contrary, is pretty darn robust to my eye. Forget about green shoots; look at the green bars (bottom of chart).
2. There is a p/v void just above the levels that we are now (highlighted in yellow). Means to me that there is not much resistance--but you know that I don't hold myself out as a great technician. I'm just a simple girl with simple charts.
3. Emotions always trump fundamentals in the short term (fundamentals always win in the long term!). Accordingly, I believe the following reasonings have some merit

• this rally is not believed in and widely believed to be a bear market rally. [I do believe it to be such.] The trick here is to really know what the real contrarian thinking is: that it is a bear market resumption OR a new bull market. I don't know the answer to that--but I do know this--that what people say and what they do with their money are two different things.
  
• Seasonal factors (the negative connotations) are so darned widely accepted, that I believe that MOST believe that the rally is running out of room due to the dangerous waters of SEPT/OCT; and it is inevitable that the market will fall here. (also see above).
  
• IF the upper level on the chart is breached, it will potentially create a monstrous buying/short-covering panic that could take us well into the yellow highlighted area. September is also the end of the quarter which lends a wee bit of credence to this.

4. Lastly: The fear of being left behind is the most powerful and dangerous emotion there is. Has that fear already manifested, and the chart is merely reflecting that? The answer, my friends, is the key to navigating this juncture successfully. If I told you I knew, I would be lying.

I still do not believe that the FINAL bottom has been put in this market, because of this: we never failed to get upside on good news. We did finally stop going down on bad news, but to get the monstrously good bottoms that Napier talks about, we're not quite there.

I had this "what if" epiphany just now as I write...What if March was the final bottom (notwithstanding just what I said above!) in the one-two punch of October (1) through March (2)? God, the more I write, the more confused I get!

But that is really the point of my writing about any of this, and why my blog is so named. I'm a nobody, I do not mind looking like the fool. I would be doing you a disservice, though, if I didn't put up this chart and my comments because I do believe that they are important considerations in managing risk.

In business, you create models that purportedly assess risk. You create Scenarios 1, 2, 3 or what have you and the you assign a probability to those outcomes. Voila! Out comes an expected value based on a probability distribution. You parade it about, it gets vetted and ultimately the organization bets its capital dollars on that.

In truth, there are three problems with that:

Problem 1: You may not have considered all of the scenarios, only the one's that are most evident to you (and to your audience--the people who will vote your proposal up or down).

Problem 2: Your assignment of probabilities is based on what? Well, it's generally based on how much you want or not the outcome. Hmmmm, my expected probability does not meet the threshold, what happens when I tweak the probability of Scenario 2....Oh!!! That's more like it. Your pass/fail test is met. Confident?

Problem 3: It's the obvious one. There is only one outcome--and it may be materially different than what you anticipated. Relative to your expectation (and all of the fallacious but seemingly logical reasons for having those expectations) you may have much reward or much loss as a result.

Why does anyone go through that? Because it is the only thing you CAN do. For all of the endemic problems with that process, you ultimately have to have a framework for making a decision. And though your scenario creation and your probabilities might be fallacious, you've committed to pen and paper what your expectations are. Businesses cannot predict the future. Market pundits cannot predict the future. Economists or government officials cannot predict the future.

But while none can predict with accuracy the future, each of us has to make a decision about it--prepare and position ourselves for it with some model that makes sense to us, and takes into account our risk considerations. And when the model proves that the future does not meet our expectations, then we must think, revise and recast all the while being mindful that we may be wrong some portion of the time. And, when (not if) we are wrong, we've not done irreparable harm to our finances, our body, relationships or things (home, car etc). It's a dynamic process--not a static process.

All we have is our expectations for the future, the points on which those are based and the reassessment of those expectations as the fullness of time unfolds. So Spiderman climbs the wall until. . . . it makes interesting reading, which is why Disney bought the franchise, and why we have 24 hour financial news networks!

A Resource for You

http://www.ichimokucharts.com/

I was looking at an old chart in Stockcharts and it was one that I had Ichomoku clouds on it. One thing led to another, and I found the above website. It has a nice technical overview of various markets--gold, oil, currency.

Why not check it out and see if it is helpful to you?

FDO

I've been stalking the discount stores. You can find them here
on FINVIZ. (Also all charts are click to make larger). This group has been the beneficiary of the 'story' of the trade down. My theory (okay MY story) was that

(1) These stocks have already been a beneficiary of such move.
(2) If the economy were to improve, money would go back into trade up retailers
(3) If the economy stayed in stinkie land, it was unlikely that these stores would receive materially more business.

I'm too scared to short in any size, but I did accumulate some puts on them. And I was very much underwater yesterday as FDO ran up along with DLTR's good number. I had a $1.50 basis in these puts. And I doubled my position by buying more at fifty cents. Yes, after being underwater so much and violating every tenet of not adding to a losing position etc., I did it.

It was a bit of a stupid stock trick, as I did not realize that they were reporting today. (I did that with HERO one time, and was a beneficiary of that stupidity. I would have never bought the stock or added to my position had I known.). It' also something I typically check.

Well they reported and the numbers were just terrible.

The options soared. I didn't get the $2.59 high of the day, but I nabbed $2.30. I just reflexively put an order in at the upper end of the range for the entire thing. If it goes to $20, I will not care. Short-term hold; really nice payback.

It's important to note that it could have easily gone the wrong way, and I'd have a big loss on my puts. But, I've learned to not risk option premium unless I'm 100% okay with waving it all bye-bye. I'm not very good with options, but I've had better success by having some strict disciplines.

Many await the jobs numbers tomorrow....there is always a wait and see in the market, isn't it? That's why I recommend Mamis's book The Nature of Risk. Too often, perhapse even now after reading it several times, I want to find certainty before making a decision. Paralysis through analysis, you've heard frequently. I've been there. I may even be there now! I'm heavily cash, but I've some positions that I've been taking opportunistically.

Gold is benefitting. I sold my TGB into the strength. I had some Great Basisn Gold (GBG). It has been a laggard in this run up, but I believe it is because it is not one of the 'names'.

As you can see, volume has been massive: 3.55 times normal. There's all sorts of news floating about regarding Hong Kong becoming a gold center. They are physically moving gold out of London to HK (hmmm...sounds like a "24" series where Jack Bauer averts would be terrorists from intercepting the gold!).

Where gold ultimately heads is for the future to tell us. You do know that Mercury goes into retrogade on the 6th. Miscommunication and travel mishaps can be expected. The last Mercury retrograde (and you know that I take all this was lots of salt), I had 40% of my rolling stock undergo some trouble.

Agricultural chemicals are having some trouble, though today they performed pretty well. I bought some BG OCT $60 puts.

In hindsight, I might have waited. But there is some vulnerability there. It might be a stupid stock trick. The nice thing about putting it in the blog, is that I can go back to it and give you an update.

Finally, this chart on COST just plain bothered me:



That's an awfully big rocket launch. I bought a few Sep $55 puts which seemed terribly cheap. It seems like a decent risk reward.

So today, I'm quite happy. Remaining thoughtful and disciplined on my next choices will be a requirement. I may not have done that very well today!