Resolve

Tonight we will simply (should be stay awake) toast in the New Year. In past years I've had a dinner party...small with some good friends. I've made some wonderfully memorable dinners. But not this year. I may not even try to stay awake this year. It's funny to think 10 years ago how there was much handwringing about the computers of the world coming to a grinding halt. We even know people who were hoarding food and water.

I'm not a believer in fear mongering. I'm not a believer in carping from the sidelines. I see much of the media sausage--to include private blogging--to be devoted to negativity. I've never believed that positive change comes about from that sort of mentality. Rather, if the amount of energy spent railing was channeled into working toward effective change and positive outcomes, we'd all be the better for it.

I'm planning on being economic in my resolutions and merely reprising my 2008 resolutions which I've listed above. I adopted this format as a balanced scorecard approach. I have all of those items filled in, but that is no interest to any but me. But I would encourage you think about taking a similar approach in order to balance how you think about your life.

I've been reflecting a bit this week. These reflections have been of an odd, meandering type, likely induced by a confluence of factors that I'll not bore you with. But as this year closes down, I've this distinct feeling that I've traversed over some imaginary threshold. I am not the person that I once was...and this is not a feeling that I've ever experienced. No, I'm not having some psychologically dis-associative event (not that I would even know what that is!).

Perhaps all of this is merely my having to embrace a new decade age-wise....I'll be 50 this year...and that is decidely on the tail end of middle age. I wondered about it so I consulted Wikipedia:

The US Census lists middle age as including both the age categories 35 to 44 and 45 to 54, while prominent social scientist, Erik Erikson, sees it ending a little later and defines middle adulthood as between 40 and 65.

Whatever the threshold I'm passing over--I hope to not trip. Ultimately, I resolve treat each day as the beginning of a new year (which it is!)and greet it with courage and grace for the opportunities and challenges that it holds. That seems like quite a fine way to begin.

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Recommended Reading | The Three Books I Always Recommend

My list of book recommendations is short. Further, my list does not include the typical titles. But the question is asked many times, "What books do you recommend" and my inclinations to be lazy and have something handy are so great, I figured that I'd do a post. Plus I was able to use the cute picture of Minnah.

• Psychology of the Stock Market, G. C. Selden: A 1914 copyright date reminds you as you reading it that the more things change, the more they stay the same. Though I recommend your buying this slim volume, it can be downloaded from Google books here.

• Secrets to Profiting in Bull and Bear Markets, Stan Weinstein. The charts in the book are not of the quality that our contemporary eye would hold them to. I wished the book would get updated. But this book is the best "must read" for new investors/traders.

• The Nature of Risk, Justin Mamis. This book will inform your thinking about risk in the market and cultivate an understanding of time risk, price risk and information risk.
  

(Side note: I read Weinstein long before I discovered Mamis. And in reading Mamis, I was struck that Weinstein's book spoke about similar principles. I later learned that Weinstein became the editor of Mamis's The Professional Tape Reader. For fans of Helen Meisler, she was mentioned in the forward to one of Mamis's books. He was her mentor--"the very best mentor one could have.")

I'm now going to add a fourth book to the the trio above:

• Beating the Stock Market, R. W. McNeel. Another oldie--1924. It's a slim volume that reminds us that while the market seems complicated, it really isn't. I will forgive his chapter on Women, Poor Losers.
  

I particularly recommend these older books to people prone to thinking about the market as something rigged against them by ranting against the proverbial "They". Both McNeel and Selden's books address this sinister "They". Both authors opine, and I paraphrase, that it is the hobgoblin of minds that do not understand the speculative process. I believe them to be correct, and I note that the folks that rail the most against this so-called "They" are the ones that have the least success.

Best to free our minds of such shadows. The greatest force that prevents our being successful in the market is ourselves.

Happy Holidays

My best to each of you during this time when a confluence of spiritual disciplines intersect and remind us of our collective humanity and the importance of having a bountiful spirit.

Looks like Santa brought a cat...

The Importance of Mental Models

I wrote a post for The Slope of Hope. I hope that you'll visit it here.

http://slopeofhope.com/2009/12/the-importance-of-mental-models-by-leisa.html

Sunday Outdoors

Today was a pleasant day of walking the dogs through the snow. I took 164 pictures. Of those, there are about 15 that are good, and about 3 that are terrific. The pic to the left is from today, but I stylized it. I had to lay on the ground to take it. It was very cold.

The birds are frantic. There is no ground except where the roads have been plowed. Mark and I headed out to the Southern States for bird food.

There was a spectacular sale on the bird food--to include bird feeders. We bought black oil sunflower seeds (like heroin for cardinals and titmice). I bought some work gloves too.

It was a pleasant experience to walk into this store that caters to people who need to feed dogs, horses, birds and use outdoor tools. A small store that had it's own cat sitting in one of the beds--a delightful find for me. A considerate and helpful staff. They greeted several folks coming in by name.

Standing in line was a man buying food for his hunting dogs. He breeds beagles crossing blue ticks and tri-colored beagles. I laughingly said that must give them more ground clearance. He laughed back and said, "Walker hounds are too hard to chase!"

He mentioned that he sold several of his hunting dogs to a man in Buckingham County. Gave him a good price because he was also invited to hunt on the man's 1800 acres. He said, "People say that you are not supposed to fall in love with your hunting dogs. I love every one of mine." He showed us a picture on his phone of an 18 deer that was gracing the wall of the man's home. Two thirds of the points were on the right hand rack!

It was pleasant interaction among strangers--and a reminder that people are people regardless of their occupations. It's not what you do, but the joy in which you do it that matters.

Weekly Sector Update

Another flat week on the broad market with just a change of .03% across the broad market but some interesting action underneath. Below is a summary of the best/worst performers. You can download the full report here which includes the full list below and weekly charts for all of the sectors.

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% Bollinger Bands | KAZ

I began this week taking a position in KAZ, and I wanted to revisit it with a technical indicator that I've been using with good success. Here's an annotated, daily chart:

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One of the most helpful technical overlays for me is using the % Bollinger Bands. I found KAZ by doing a search for narrowing Bollinger Bands. On the chart above, the indicator is behind the price, though you could have it separate. My preference is to set it behind the price but make it translucent so that it does not distract. The scale on the left is for the Bollinger Band %.

Extreme readings are unsustainable. As you can see, each time the reading peaked, the stock pulled in. Today KAZ had a most extreme reading at 1.34. I've noted the peaks with circles and showed the subsequent price action. Buying when the volatility is so high generally translates into your not receiving an advantageous price. (I noted my purchase price at $1.07 on the chart). Times of high volatility are an advantageous place to sell.

I did not sell into this volatility explosion--but I was sorely tempted. My position is rather small. If I had more shares, I would have sold into this. My expectation, as documented by the arrows above, is that KAZ will pull in. Notice, too, that it stopped at $1.30, and that was a previous place of resistance with much higher volume.

Let's see what happens to KAZ next week. It might just be an incendiary move that pops and then fizzles. The setup presented a very nice opportunity for a short term trade. The chart has some long term promise as well.

A Volatility Squeeze Play: KAZ

First a chart of our subject. This is a weekly chart of KAZ. I like to look at weekly charts when I do my scans.
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I found KAZ in doing a sector view of Basic Materials: Independent Oil and Gas. I looked through every chart, and this one caught my eye. I guess you could say that I felt that I was shopping at the Dollar General store, because the stock price is just slightly above a dollar. Here's a summary of what KAZ from their website:

BMB Munai, Inc. (BMB) is an independent oil and gas company engaged in the exploration, development and production of crude oil and natural gas. The Company"s operations are primarily focused onshore in proven oil and gas producing territories of Caspian Sea region of the Republic of Kazakhstan.

Here's what I liked:

• Volume constructive in October.
  
• They've reported already, so bad news surprises were unlikely.(To be fair, though, I did read that they were working out their loans. Their balance sheet looked strong enough, so I didn't feel that there was much downside risk. Nevertheless, I included it below).
  
• The Bollinger Bands (not on the chart) are narrowing and are inside the Keltner Channel. I believe a move is building steam.
• I like the Volume by Price distribution....it's bottom heavy and there is some airspace above.
• The stock took a hit when they had to issue one of the deadly "financial statements are not to be relied on" press releases. The subsequent restatement was positive.
• The stock is trading at .26 of book value and it has positive equity.
  

Here's what I'm neutral to mildly disliking:

• Institutions were bailing out on KAZ. At less than $1 per share, it becomes I tough hold--but...maybe that bailing created a fire sale.
• They have some debt that they are trying to negotiate (see above). It needs to be reiterated here though.
  

Pluses outweighed minuses. This is spec money, so I took a position on Monday at an entry of $1.07. Had I been more patient, I could have had a better entry price for that day. Today the action was quite favorable.

I recently posted about HPJ. Perhaps I'll have a chance to see if I can follow my own codified rules. Stay tuned!

Position: Long KAZ @ 1.07

Learning to be an Astronaut

It's not enough to find a stock in which to take a position, but it is also important to manage the position. The literature tells us to keep our losses small and let our winners run. Sound advice. However, when faced with a loss, our head often counsels this way: "If you (as if there's a two-party conversation!) hold onto this stock, it will come back!" Conversely, when faced with a gain our head (again thinking that it is apart from us!), has equally pathetic counsel: "Better to sell it now...you know what they say, 'nobody goes broke pocketing a gain.' Besides you big dummy look at those losers in your portfolio--be quick before this turns into one of those. "

It's worth remembering that your mind really doesn't have a mind of its own. And you can go broke by failing to take a gain. How? Simply by hanging onto your losers while tripping up your winners after they've made it through the first turn on their track to unknown price heights.

Let's take a look at one of my winning horses, HPJ. I had a 97% gain on this stock. And the stock lingered a wee bit too long (to my eye) for a follow through in volume. Plus, it was a volatility play, and selling into the volatility break out is part of the strategy. But rather than selling all, I could have done it more deliberately. Here's the chart (sigh!).


So selling was fine (more on that later). Re-buying after it comes back in is part of the strategy too. I did not do that. I passed on not one but two low volume pullbacks.

It is important to differentiate between hindsight bias and transforming 'coulda, woulda, shoulda's' into learning vehicles. What would my learning be from this trip down memory lane? What would I have done differently?

• On first volatility breakout, sell 1/2 position.
• On subsequent pullback, add to the position--now full position.
  
• On second breakout, I would have sold 1/2 position again, and looked for another entry. As you can see from the chart, that is what some other eyeballs were looking for.
• I would have sold 2 of 3 tranches into the melt up and kept 1/3 position.

Now plenty of folks keep buying into these melt ups. My DNA is not wired that way--not on these speculative stocks which can pop and drop rather quickly. But I want to learn how to ride a rocket ship longer before bailing.

Position: Lamenting HPJ - the one that got away and went up, up and away.

Weekly Sector Update

Is it possible that another week has gone by? Is it possible that with all of the chop, drop, rock and roll that the SPY ended last week at 111.01 and this week at 111.11?

Yes, all things are possible in the market. Here's a slice of the the sectors showing all sectors with a +/- 2% change against the narrow move in the broad market--a reminder that there's always a bull or bear market somewhere!

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Sector symbols/data are from Stockcharts.com

To see my full weekly data sector report, you can go here.

Weekly Sector Update

I've updated the DJUS Sectors. I've only included weekly charts, not daily this week. I've updated it on the "Resources" tab, and you can find it here.

There is much surmising about which way the indices will break. The choices are simple:

UP
Down
Sideways

Of course, you know that NO ONE knows with any certitude which way it will go. Frankly, I'm tiring a bit of the blowhards that have made all manner of predictions; cherry pick a few of the right ones; and chest thump their s0-called accuracy while ignoring all of the wrong calls that have been made.

All any of us can do is consider the weight of the evidence. I prepare the sector updates each week because I believe that having an understanding of the undulations among the sectors will give one some insight on what is holding up/back the indices. I offer this view which is an extract of the top/bottom performing sectors v. SPY:



Looking only at the SPY, there is only a modest decline over the week. But looking at the sector action, there are two "Holy Guacamole" sectors: Airlines and Business Training.

My point in sharing this with you is that by poking below the surface, you will see things that are not tipped by the hand of the index by a surface reading. Spending a little time looking at the undercurrents will give some insight. There is still sector leadership, but it is changing.

With the USD gaining some strength, then commodities are going to come under a bit of pressure, and you are seeing that in the results above. Also, multi-nationals who have benefited from the tailwinds of a declining USD will soften. I also believe that there is potential for some mitigation of the underlying fear of interest rates increasing to make up for the currency decline which might cause our foreign creditors to demand greater return.

If the USD turns down again (and yes, I'm aware of the arguments that predict the long term demise of our not-so-mighty dollar), then we'll see a resurgence in these sectors. And, we'll see a resurgence once the fundamental picture strengthens.

For now, the sectors that are declining are providing benefit to the economy as a whole because the cost of doing business is less. Watch the small caps for some strength, as they will now be the recipient of tailwinds.

Great Basin Revisited

Since my last post on GBG, the company has reported earnings, and gold has gone into parabolic mode. GBG has not been the leader in any of this, but it is a name that I've held. It has been undergoing a very nice consolidation pattern, though it has been nothing short of a laggard. The volume patterns and price action appear constructive to my eye, and I expect this stock to break out with some earnest here.

Here's a chart of GBG through the close of the day yesterday:
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And, here is a chart of GLD in parabolic mode!

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Parabolic conditions offer great reward with commensurate great risk. While I would prefer that GBG not be such a laggard, my expectation is that there will be some price appreciation here. And my risk/reward modality is such that I would not enter new positions here.

Position: Long GBG

A Resource for You: AMBG Trading | Colored Commentary Video

AMBG Trading: Colored Commentary consists of two videos that is well worth your time to listen too. In fact, I'd recommend bookmarking the post and listening once a month as a refresher.

Post Reprisal: A Modest Proposal

I originally published this post almost a year ago. Given the news about loan modifications--particularly the paucity of mods, I'm lazily reprising my Modest Proposal in original form that can be found here:


I have an idea, likely hairbrained, but that will not stop me from stating it.

Here are some simple facts to consider:

* Anyone who bought a home in the last 3-5 years paid too much.
* Some of those people who bought a home did so under false pretenses--I'd not extend these benefits to them.
* Many of the those people are hard working Americans, who did not lie, who did not fully understand the egregiousness of loan resets etc, or simply believed that continually increasing home values would mitigate any concerns that they had.
* Home prices are falling and LTV ratios are very unfavorable for lenders.
* Payment/interest resets are putting borrowers (the good ones and the bad ones) under stress.
* The recession will put more mortgage/home owners at risk.

My proposal is not to help with the last bullet or help scammers or speculative borrowers. Here's my proposal.

Objective: To find a manageable way to help both borrowers and lenders to rework loan terms; keep borrowers in their home to the extent practicable; not deal an egregious blow to lender balance sheets for principal modifications.

Example: Borrower (qualified, and no falsification) bought a home for $400K and the loan value was $400K (LTV=100%). At the time of purchase the home's fair value was not impaired. Interest rate is 6.%; term is 30 years; payment is $2,400.

The home can now has a fair value of $320K. That is an asset impairment of $80K affecting both the borrower and the bank. The bank and the borrower agree to modify the loan provisions. We bring in another party. The Fed. (Why not?). The bank records a temporary loan impairment of $80K. This impairment is guaranteed by the Fed (or through some other arrangement) so the bank creates a deferred loss that is carried on the balance sheet and shown as a contra receivable.

The loan is modified so that the principal is now $320K, the payment term is 35 (420 months) years and the interest rate is 3%. The payment is now $1,232 per month, for a reduction of 49%. Each time the borrower makes a payment, the amount of the temporary impairment is reduced by 1/420 or $190 ($80K/420). The bank will record a loss in the amount of $190 for each payment made. (One could fashion some tax consequence to the borrower in the amount of reduced tax benefit of interest payments).

Periodically, the amount of the impairment unamortized balance will be reviewed. To the extent that the impairment can be recouped (there is a recovery in home prices that would make the $80K temporary impairment now $60K, the bank will reduce the impairment prospectively. The decrease in the impairment (net of expense already recognized) would be added to the principal amount of the mortgage and the future amortized expense reduced. (Loan receivable would be increased and the deferred liability would be decreased).

I realize that is pretty complicated way of monitoring values, and perhaps there is some regional house price index that can be used--like CPI--a housing price index: HPI.

I'm sure that there are lots of problems with the above, but I see a few benefits:

* Induces borrowers and lenders to work together;
* Allows the lender to not recognize an immediate loan impairment (as the Fed guarantees the temporary impairment); keeps the loan from becoming a non performing asset (so the bank stabilizes their asset ratios, but interest expense is reduced); reduces foreclosures; supports housing values;
* Allows the borrower to reduce their liability on the temporary impairment so long as they are making payments--so that is an inducement for them to make payments;
* Pings the borrower by reduced tax benefits of mortgage interest to the extent that they have received a benefit. (Rather than having to pay income taxes on debt forgiveness).
* Reduces the "freebee" perception by those who did not get themselves into the pickle.