Moral Hazards, Kitchen Hazards and Swimming with the Big Dogs

I started this post this a.m., but am only getting around to it now (for reasons that will become more clear).

Friday was certainly an interesting day in the market. I'm still trying to balance my long and short positions rather than just retreat to cash entirely.

Moral Hazards. Bear Stearns may become a poster child for moral hazard. Looks like they got bit by the hand that was feeding them, but their investors are truly the ones who have been sucker punched. If I were an institutional investors, I would chose my investment banker much like I would chose a certified financial planner--fee for advice, not fee for products. With the push for fee revenue, I'm not sure that I would "trust" the advice of someone that had a menu of products that they were SURE would be right for me. There is a terrific article on Bloomberg regarding the BSC hedge fund demise...if you're looking for a dose of schandenfreude mixed with a bit of poetic justice, do read this.....



Kitchen Hazards. Jacques Pepin (above) ( famous chef, handsome devil) said that you should keep your knives very sharp so that when you cut yourself it will be clean and heal quickly. Yesterday I cut the right corner of my left index finger off. I'm able to type a little, but I'm fading fast here. At least it was a searingly sharp knife, and my finger is healing, but naturally I've managed to bump it about 4 times today with unhappy results.

Swimming with the Big Dogs. Yesterday I took Macy (The Chumenator) for a swim in my neigbor's pond. My neighbor has two other dogs both of whom love me as they do their owner: Lacy (a lab/beagle/bird dog mix--she's 1 month older than Macy who just turned 1 year old) and Ginger (a 100+ lb Golden Retriever), who also enjoy this activity. I throw things out and Ginger and Macy fetch them in. Lacy jumps in and drafts on Ginger--something that she has done as a puppy by latching onto the base of Ginger's monstrous tail and swimming behind. Unfortunately, she tries to do this with Macy who is ill-equipped in every way to do this. (I will try to get some photos and post to include another dog, a yellow lab of one of my neigbor's friends--to watch them all swim, fetch and play is wonderful, and there is some beautiful golden light in the evenings).

Well...I decided to launch the kayak so that Macy and Ginger could swim along with me while I FETCHED the things that they failed to pick up. It was quite pleasurable until Lacy jumped Macy and sent her under water. Macy panicked and desperately tried to get into the kayak. I did succeeded in getting Macy into the kayak only to promptly flip it. WE both went under water but bobbed up quickly. I suddenly found myself with about 220 lbs of dogs and their damaging feet ripping at me. I was momentarily terrified. I managed to fend the dogs off. It took me a little time to get underway so that I was actually moving with Ginger, the overturned kayak my shoes and the oar very slowly toward shore. I was reminded how old and out of shape that I was.

I have three horrible bruises on my left arm from being raked by somebody's claws. (I hope that I'm never mauled by a dog--even when they are not trying to harm you their exuberance can leave marks!). Naturally I was tired after the incident and from continuing to recover my massive 3 week sleep deficit. But after lying down, I realized that I was too hungry to sleep. So I went into the kitchen and found my husband opening tuna fish. Immediately I pulled out shallots and celery and began cutting away. But I was tired and not paying attention (and I really have no good form in cutting where only one's knuckles are exposed) and sliced a good sized divit out of my index finger. Plenty of blood and pain that extended into the balance of the evening. Joey, it must be something with those moon-vibes over this last month! Bad moon for me, for sure!

Lesson: No knife work while tired.

CDO's

For those of you who were kind enough to follow me through CDO's in my series of posts (as well as those by Calculated Risk), you are not surprised, and more importantly, you are knowledgeable about the issues being discussed. I know that I feel better prepared to understand the issues. And if you are hearing "this is contained to BSC" that's BS of the lowest sort. HSBC already had a hedge fund in this area blow up and now BSC. These are hedge funds attached to very well-capitalized firms.

There are hedge funds with bank, insurance, pension fund and other private-held funds that are certainly exposed to these areas. The insurance companies, AXA, HIG also have exposure. Will this be the great unwinding? I don't know, and I'm not trying to engage in hyperbole. But remember the housing recovery? It ain't happened yet--but like the second coming of Jesus (no offense to the devout--my Armenian grandmother predicted every year for that event) it has been oft predicted to be just around the corner. Sub-prime contagion contained? Nope. We later found that Alt-A had similar problems.

I'm out now to enjoy the weekend. It's been three weeks since I've felt well enough to have some fun.

Gary K's June 20th Show

I would recommend your listening to Gary K's show for today. He gives a comprehensive list of sectors that are starting to roll over.

My personal investment style is to be in sectors that are more favorable for the current economic cycle. I'm a big believer that if you pick strong stocks in strong sectors then you reduce quite a bit of the risk of making the wrong stock choice. Regardless of what the market is doing (topping, ramping, declining) there will be sectors that will experience various degrees of benefit/detriment commensurate with that cycle. I'll remind you again of George Dagnino's business cycle (at PeterDag.com)--and you can see that in my info mosaic section.

CNBC Fantasy Portfolio Update

A winner still has not been announced. This is what is posted at their site. Had I not been a contestant (I say that only in the loosest of ways!), I'm not sure that I would have known about this stuff. How sad that this challenge has been marred in this way.

"We have an update on the CNBC Million Dollar Portfolio Challenge. As CNBC first reported on May 30, we were contacted by several contestants alleging unusual trading in violation of rules of the contest, which ended on May 25.

As CNBC said at the time, we immediately launched a thorough investigation of the contest and we are now focusing on three specific areas of concern.

We are investigating whether one or more finalists wrote and executed computer program scripts to bypass the contest's security measures.

Additionally, one or more contestants were able to change their trades after the markets closed at 4 PM ET, but before the trades were processed by CNBC. That way, a contestant could have executed trades after hours, and have the trades priced as of that day's market close.

CNBC has retained two leading consultants in the information security industry to investigate these two computer programming related issues.

In addition, there have been allegations that one or more contestants may have engaged in illegal market manipulation to affect actual prices of stocks represented in their contest portfolios.

We have engaged an independent securities expert to determine whether such activity took place.

As we said previously, the rules state that CNBC has until July 8, 2007 to declare a winner. Although CNBC hopes to announce a winner before that date, it is more important to ensure the individual awarded the Grand Prize is in compliance with the rules.

Integrity is paramount to CNBC. We are taking all allegations of improprieties very seriously. CNBC will provide updates on the air and on CNBC.com as they become available."

June 20 FSO Market Wrap by Frank Barbera

I like Tim Wood and Frank Barbera, both market technicians that seem to be very data dependent regarding their views on the market. I always enjoyed listening to the two of them on FSO's Saturday morning installment, though the recent format changes has their visits alternating.

I thought that Frank's recent market wrap, which you can find here was excellent. I suggest your taking time to read it, and I think it is worth the paper/ink to print.

Retail Estimates

From Bloomberg

"Best Buy Net Falls 18%, Trailing Analysts' Estimates (Update1)

By Mark Clothier

June 19 (Bloomberg) -- Best Buy Co., the largest U.S. consumer-electronics chain, said profit fell 18 percent on sales of less profitable laptop computers and lower prices for flat- panel televisions. The company cut its annual profit forecast, sending the shares down 3.9 percent."

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Retail has been surprisingly resilient. I'll remind you that last month, most of the retailers were reaffirming their guidance. In fact, CNBC and others were going out of their way to make that notation after May sales came in and underwhelmed. Only a handful of retailers stepped up to the plate and revised their FY07 forecast downward. I found it a bit funny that these folks could unequivocally affirm guidance when there were still eight months or so of unknowable consumer behavior.

I'm sure that many of you know this, but it bears repeating. Executives/managers do not have a crystal ball on the economy that is any more accurate than that of anyone else's. Remember the homebuilders' guidance. They reported a crappy quarter but forecast smooth sailing ahead. In fact, they did that at least twice before the incontrovertible evidence that declines would continue had to be publicly acknowledged.

My friends, retailers have the SAME CRYSTAL BALL as that of the homebuilders. Perhaps more accurately stated, they have the same MOTIVATION to hold out for the rosiest view (affirmed prior guidance) just prior to the evidential matter of declining prospects becomes so overwhelming that they have to capitulate and say that they were wrong. This is PRECISELY what EACH one of the homebuilders did. Now the consumer may still prevail. But I would hazard a guess that Best Buy is a pretty accurate bellweather for the gadget heads' appetite for jiffy cool neat-o stuff.

My point is simply this--Always be skeptical of guidance from management, particularly when that guidance seems at odds with observable data. The timing could be askew--that I know well. But never look at management's guidance as a salve for any misgivings that you may have for a company's future prospects.

Position: I do own some RTH July 100 puts that are not doing so well. These were up as much as 30%. I broke my own rule on options--to sell at 30% gain--but because I thought the retail decline would be complete by now, I elected to be greedy and wait. I managed to mitigate the pain by going long on RTH and getting a nice pop when it bounced. So, I'm not crying or anything. But you make your rules for a reason; and it's best to be consistent in following them.

Happy Father's Day

Sorry for such parse posting of late. I experienced a relapse in my condition, so last week went downhill fast. Brain power and energy were seriously compromised. I still have not read the Henry C K Liu article. So much for "feeling like myself again"! Well, it did last a day.

Luckily the drugs (prednisone) and antibiotic number 2 kicked in, and I could attend a wedding last evening. So before the prednisone, I couldn't breath and couldn't sleep. With prednisone, I can breath but cannot sleep. I'm trying to contain my sleep-deprived crankiness to those who love me most.

Today, I'm making an old fashioned chocolate cake for a Father's Day (FIL) dinner event. It's a bit of a production. I saw it on Cooks Illustrated. I may not be remembered for much when I die, but I will be remembered for the desserts that I've made--honor enough for me.

For all of you fathers, my best to you in your special day. I hope someone made you a special dessert.

New Article by Henry C. K. Liu

I regret that I've not read this article yet, but it is about real interest rates. There are two parts; I've linked the first part only. As you know, interest rates have been foremost on the minds of investors--eliciting a negative reaction yesterday and a positive reaction today.

I'm not sure if I'll get a post out of it or not. Today, I'm just starting to feel like myself, so I'll have a little brain horsepower if there is something there that inspires me to tackle it.

June 12 Market Close

Market top? Rest before rocketing higher?

I surely don't know, but you know that the airwaves, internet connects will be jammed with opinions that play to our fears and uncertainties.

Horizon Offshore

I've had the fortunate experience to own two oil services companies that have been purchased. First was THE, purchased by HERO. Today, CalDive is buying Horizon Offshore of which I have 500 shares. I had also picked up HERO when it tanked after the news of the purchase. I actually made more money on HERO than I did THE. I also sold THE too soon. The purchase price was a combo (like CalDive) of stock and cash, so part of THE's purchase price was tied to HERO's. So I could have doubled my pleasure by holding both, but there was risk in that, and I didn't want the double jeopardy either!

There's been speculation of consolidation in the oil services area, but much of that has focused on the larger names. Both THE and HOFF have been under the radar. Lehman publishes some excellent industry reports, and oil services is no exception. I always do my own due diligence, and I picked up HOFF based on that work.

It's not the snake you see that bites you. . .

is the lead in to Jeffrey Saut's excellent market commentary. Of course, with my garden encounter this weekend, the aphorism resonated particularly pointedly!

If you are not a regular listener of Saut, you may wish to add him to your resource list. I thought today's commentary was particularly good. His commentary is not daily, but you can count on him for 3 or so days. The written transcript is available the following day.

I hope that you'll take time to listen to today's commentary.

REITS and Interest Rate Hedges

I cannot help but wonder what the real interest rate exposure is for this asset class. Given the burgeoning of interest rate derivatives, you'd have to wonder how much of their interest rate exposure (to rising interest rates) was already covered.

Market Respite

This week should prove interesting for the market. I suppose that this will provide some affirmation or either cast aspersions on Friday's indices relaunch (which Gary K reminds was on lower volume). I'm not sure what to think. Admittedly, I've not done too much thinking these last few days other than my being reminded how grateful I am to be born post discovery of antibiotics.

We've been suffering from hateful hot/humid weather, but such are the character of VA' s summer days. The doctor says that the Spring was the worst one he's seen for allergy sufferers, and even those who've NEVER had problems. It was not comforting news, but it certainly explained a good bit of my misery.

It feels good to be on the uptrend rather the downtrend. I figured it was time to stir around a bit, and worked in the garden. We have this wonderful loamy soil. Everything grows well in it, including weeds. So I took a hand cultivator and worked around a few things. It was quite enjoyable until I disturbed a snake in the ground. He literally jumped out of the hole at me causing me to shriek and jump back. He then coiled up under my sage plant ready to attack. He didn't appear poisonous--likely a garter snake. I was surprised by his aggression (and by HIM)--I'm sure he was as startled as I was. He had his tail just a twitchin' and there was a tiny crimson protrusion that was flashing. He wasn't very big, maybe 18-24 inches. I lost my appetite for hoeing and decided to switch to the watering can. I am happy to report that there were no further incidents.

Trustee Sales

(CTML) As trustee sales have moderated in the past 60 days, I've not posted them. However, today, they were markedly higher. They were the highest since January AND 11 of the listings were more than $200K--unprecedented. Three of the properties were the same last name, but different first names. I'll surmise, then, that they were flippers.

Behavioral Finance--Fundamentals

I found this article on behavioral finance that, for those of you who have an interest in the essence of what it is about, will find an interesting read. Here are the particulars. Click on the title to view the paper.

Behavioral Finance
Jay R. Ritter
Cordell Professor of Finance
University of Florida
P.O. Box 117168
Gainesville FL 32611-7168
http://bear.cba.ufl.edu/ritter
jay.ritter@cba.ufl.edu
(352) 846-2837
Published, with minor modifications, in the
Pacific-Basin Finance Journal Vol. 11, No. 4, (September 2003) pp. 429-437.

Abstract
This article provides a brief introduction to behavioral finance. Behavioral finance encompasses research that drops the traditional assumptions of expected utility maximization with rational investors in efficient markets. The two building blocks of behavioral finance are cognitive psychology (how people think) and the limits to arbitrage (when markets will be inefficient). The growth of behavioral finance research has been fueled by the inability of the traditional framework to explain many empirical patterns, including stock market bubbles in Japan, Taiwan,
and the U.S.

Today's Market Close

CTML

I hope that your portfolios weathered this storm. Here it is June 7, and all of the things that I expected that any reasonable investor would understand about the market and the economy is now coming to full realization. I have no grand insights. I'm like Day 10 into this ^$#!#$^ sinus infection and Day 4 into my antibiotics after my own system failed me miserably! So thinking viscous has been replaced with non-thinking viscous (now where else would you ever read it portrayed that way!).

My portfolio was actually up today, but I'll confess that I've missed out on a big piece of the gains in the market. Trying to time the market is a fool's game. I know that. When you look at the charts and you have the benefit of hindsight it is all so clear. But what you do not have is the asynchronous view of what people were fearing when (collective handwringing, and you've seen it on these pages) v. when the market reacted.

My Portfolio Challenge is still a ????

I wanted to see how I finished in the last round of the CNBC portfolio. Now, I didn't expect to win anything, but I was just curious which strata I ended up in. Here's the message:

The CNBC Million Dollar Portfolio Challenge ended May 25th. CNBC has been contacted by several contestants alleging unusual trading in violation of contest rules among some of the 20 finalists. Once these questions were raised, CNBC immediately launched a thorough investigation to determine who may have violated the rules.
As the rules state, CNBC has until July 8, 2007 to declare a winner. Although CNBC hopes to announce a winner before that date, it is more important to ensure the individual awarded the Grand Prize is in compliance with the rules.

Thank you again to everyone who participated in the CNBC Million Dollar Portfolio Challenge. We will email everyone when final results are available.

Today's Market Close

I've been keeping a low profile, as I've been under the weather. Above is today's market close. I've not posted it in a while since we've been up, up and away.

I would encourage you to listen to Gary K's show this evening (I'm listening now--GaryK.com). He's being measured in his discussion of today's market. Here are his numbers to watch for potential breach:

Dow 13423, if breached watch for 13210
S&P 1505

He's not giving numbers yet for Naz or Russell 2000.

Coal Stocks Update

I've been a little under the weather, so thinking much less posting has been a bit strained. But I can operate Hypersnap, so I took a picture of the Coal Stocks as of market close today. Do click to make larger (CTML)

Overall, this hypothetical group has done well, gaining 18% since April 5. I've always believed in the power of the sector in stock valuation. I identified this sector first through my own work first, and then noticed that more folks were writing about them (there is a behavior attributed to this--like buying a white car and then noticing how many white cars are on the road). Anyway....best stock purchase outcomes have always come from doing this sort of winnowing through the stock universe.

It is important to note, though, that with cyclical stocks such as these, while the recoveries are attractive, when they hit their demise, the red ink can flow pretty heavily. The reversals in these sectors can be quite stark--as in 40-50% reversals. I don't like to hold through such reversals, but there are certainly tax considerations if you hold stocks such as these in a taxable v. deferred taxable account. If you have such accounts and you've not thought about allocating different types of holdings among the two, perhaps talking with your financial advisor would be prudent. As they say...it's not what you earn but what you keep.

Retail Pessimism?

(CTML)



Look at the increase in short interest in the RTH--it increased from ~43% from April. I have puts on RTH (Jul 100's). They are not doing so well. I elected to keep the puts, and I bought RTH to soften my short position. Below is today's picture at 11:30 a.m. I'm going to hazard a guess that the buying interest is short covering rather than confidence in the consumer and confidence in the retailers. I elected to close my long position @ $107.63

Addendum:....WMT's recent news is driving this. Their chart shows this identical uptick. Nevertheless, the shorts get squeezed in RTH when good news for a beast such as WMT erupts.