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

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

On Predictions and Time Frames:

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

Can one make a credible prediction about if/when there will be a recession? Yes--and the factors that throw one into a recession are many. Accordingly one needs a confluence of data supporting the argument for the probability of a recession, an if A, then B, C, D. . . . happens. I wrote an unusually excellent post (only because I quoted someone so much smarter than I!) on recessions. You can read the full text here: But since moving from post to post is disruptive, I'll copy from that post. These are the three elements needed for a recession according to Marty Zweig:

• Extreme deflation characterized by a PPI index drop of 10% on a 6 month average of annualized m-t-m changes.Take current year m-t-m inc/dec and average it with the last 5 months (sum the mtm change each month for the last six months and divide by 6).If that 6 month average is at least –10% then you have cleared this test; (I've not calculated this. I don't think we are there. I think that with the ISM falling, we will BEGIN to see where that calculation becomes meaningful).
  

• Ultra high price/earnings ratios.He labels 10-14 aS normal P/E range. Upper teens and twenties is what he calls high; and (we are in this level now).

• Inverted yield curve.Zweig used the Moody’s Aaa Corporate Bonds yield as the long term rate and 6 month commercial paper rates as the short term rate. (I've not calculated this). Addendum 11.13.06--Of course we all know that we have an inverted yield curve, and SFO did a wonderful story on that which you can find here.

I'm also intrigued with the notion that upheaval in the financial markets can bring about a recession--they cause the recession rather than predict it. The linkage makes sense in a couple of ways. Way 1: The credit markets drive liquidity and when liquidity dries up (spontaneously combusts as it did last week) that reduces capital available. Way 2: Liquidity fuels asset prices, and when liquidity is removed to de-leveraging, asset prices fall and wealth is reduced. It's simplistic I know, but it's something that you must be aware of. At the very least, you use it as a backdrop to evaluate what you are hearing from experts.

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

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

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

Experts:

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

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

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

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

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

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

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

Recession Chatter

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

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

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

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

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

• High employment
• Steady jobless claims (no spikes)
• Wage growth
• Consistent albeit slower growth

Well, the first three items are just what you would see at the apogee of the economic cycle--prior to a downturn. Further, they are backward looking. So be careful what you listen to and what you conclude from these arguments. I still must point to the incongruence between the slowdown in housing and the lack of job losses. I still ascribe that incongruity to undocumented workers, and I would point to WMT as being the bellweather for that stat. Not surprising, Arvelund considers WMT his favorite economist.

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

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

??????????????

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

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

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

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

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

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

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

Brief Note

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

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

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

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

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

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

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

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

Easy Come....Easy Go E-Trade

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

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

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

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

Daisey

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




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

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

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

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

 

PostScript:   April 14, 2021 I had to have Daisey euthanized. She lived a long and happy life. For some months she had been on and off her food--more recently off.  She was also experiencing weakness (but no stiffness or pain) in her hips.  Stairs were difficult.  On this day, she was not able to stand on her own.  It was time...I had her 13.5 years...she was at the top of her lifespan at 16 - 17.5 years (hard to know the starting age).  I am now Setter-less.  I came back here to see her original picture. We are now down to just one one dog.  It has been decades since the count has been that low.

Driving Ms. Daisey

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

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

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

Today's Market Close

Will upload later, Blogger being a booger.

Daisey

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

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

The VIX

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

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

Nevertheless, I found this statement on page 293 talking about the Vix.

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

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




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

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

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Home Visit

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

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

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

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

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

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

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

Enjoy the balance of your weekend.

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Bring Out Your Dead

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

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

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

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

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

Gurus

MarkM writes

L-

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

I know you place a lot of trust in Dag's opinion as well but I can't understand for the life of me why continual injections of liquidity are always good for the market as he opines. If he has further insights in his newsletter, could you please share? I am not an Austrian school economist but if there was a magic bullet such as this we would just flood the system ALL THE TIME.

I'm not going to answer the question, for I really don't know the answer. I find the statement about liquidity a bit of a head scratcher. Perhaps the "answer" is time frame: short term we are scratching our heads, but long term, as part of the natural economic cycle, liquidity gets injected.

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

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

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

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

Gary K

He is saying that the confirmed rally has failed.

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

Do listen to him.

Working on Shorting Skills.

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

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

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

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

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

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

FARO
TUP
SRCL
FAST
HWAY

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

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


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

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

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

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

Sweet Jesus on a Biscuit

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

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

Another Hedge Fund Freezes

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

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

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

Bloomberg is also reporting this:

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

This strikes me as crisis intervention.

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

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

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

Gary K--Uptrend Confirmed

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

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

E-Trade Update

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


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

The Insurance Hoax.

Bloomberg has a series of articles called the Insurance Hoax

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

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

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Overlord

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

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

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

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

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

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Credit Bubble Collapse or The Vindication of My Armenian Grandmother

You cannot cover shit with snow.

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

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

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

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

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

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

• Hedge funds were highly levered--regardless of what their overall strategy was. Accordingly, any contraction in leverage will require their selling assets to maintain asset to collateral ratios required by their lenders. I don't know if the average leverage employed by hedge funds is greater or less, but I'll go out on a limb and conjecture that it is more. So the contraction of liquidity will affect all funds.
  

• Hedge funds have proliferated since the last stock market debacle, and many of these managers will be inexperienced in how to deal with such a situation.
  

• Therefore, more hedge funds that are more levered = greater risk to my inexperienced eye.
  

• Hedge funds account for more than 50% of the trading volume (according to one source that I read and reported here). I would bet that most lenders are contacting their hedge fund clients to find out exactly WHAT they are holding to assess their own exposure. Further, they will likely be discussing how to re-calibrate debt to collateral ratios. I'll surmise, then, that there will have to be a selling of assets to meet margin calls. It would seem to me, then, that all sectors will be subject to further selling pressure--particularly some of the momentum names (RIMM, AAPL) and much-favored sectors such as oil/gas, commodities--regardless of underlying fundamentals.
  

My typical caveat--I could be wrong about all of this.

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

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

My every wish for your safe passage.

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My Book Club

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

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


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

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

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

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

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

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

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

Crust:

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

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

Filling:

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


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

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Bankruptcy Risk

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



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

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

The Thrushes have Departed

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

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

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

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

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

A Little Levity

For those of you with nothing better to do, you can find this ad at Calculated Risk. One has to be careful with these ad. Roger Nusbaum had a very suggestive ad (buxom (as in surgically enhanced boobs about 4 standard deviations from the norm) saying that she liked d_ _ c k) but it was an ad for some trading website. Now I clicked on that ad to alert Roger. I did not click on the above ad (which is just a picture).

I'm at the age now where finding the name of my perfect lover is the least of my priorities. Now finding the name of the perfect chiropractor or canine trainer would be something that would interest me!

Today's Market Close

Well, I think that Chicken Harris was in the markets today! I'm listening to GaryK now. He thinks that we are in a bear phase. Make sure that you catch his show.
A couple of days ago I wrestled about whether or not I should send a note to my friends. I've been expecting this market to crash for the last year, so I didn't want to unnecessarily alarm my friends or look like a fool. I elected to send the following note to my friends (yes, I have a few (sic's) in there--but they know that I can spell and am a decent grammarian, so they'll not discount my message based on that:

I'm sending this note to each of my friends with the following large qualification: I’m no market expert.

Nevertheless, I did want to alert you that the credit markets have become all out of sorts lately. I’m not making any prognostications about the market, and Thursday’s and Friday’s weakness in all of the world markets (except for the Chinese Shanhai which is in it’s own world) are reflecting the concerns of a widening of credit spreads. The market typically corrects when the credit market contracts-and it has contracted in a big way. How much it corrects and/or how long it takes to recover is a fool's speculation. I'm not engaging in that or am I tryin to be a Henny Penny. But, I can encourage my friends to ensure that their portfolio can weather such a contraction. I think that it would be worth your time to take a minute to look at your investment allocations and talk with your financial advisor within the next couple of days.

I elected to send it because I would rather look like a fool than NOT give my friends a heads up. Did any do anything? I doubt it, but my conscious conscience (perhaps I'm not even conscious) was clear. Now at the beginning of today I was thinking, "Leisa, you are going to look like a fool." Naturally with the close, I felt less stupid.

Today's Lament: Why the %$!#%$^!$%&&% heck did I sell my MTG puts? I sold because despite all of the long, hard work I put in, I let others (the market pundits) talk me into thinking that I was wrong. Of course, the price action in the stocks supported that I was wrong. I did the prudent thing, and I closed my position--but at a modest profit rather than the obscene profit that could have been mine, mine mine! (maniacal laugh). I also had some terrific ALL, LTR and HIG puts--all of which I should have hung onto. But hindsight is 20/20. Heck, if you lack the conviction, you lack conviction--sometimes one's conviction can lose you money!

Today's Smart Thing: I shorted SRCL @ $49 (watch them get bought out!) because there was a short squeeze on July 27. I've not had the best of luck shorting, but I'm getting better at it. I figured it will be ripe for a fall. I also bought some QID. Both in my taxable account. My non-taxable accounts are mostly in cash (80%). I do have some Sep MDY 152 puts. And small positions in ROG, SEED and QUIX. I had more short positions, but I closed them out profitably before the bounce. I'm sure that I'll wish that I had them.

Good luck to you in these turbulent times.

Commerce Thrives in the Most Unlikely Venues

The Economist has this provocative, if not grisly, story in this week's magazine. You can find the article here. It is named, "Wet Goods and dry goods".You may need to be a subscriber.

The title of the story is a bit misleading. The goods, as it turns out, happens to be fresh corpses (wet) v. not-so-fresh corpses (dry). We can always appreciate that capitalism will (1) fill any niche that suffers from a supply and demand issue, and for which circumstance once can be handsomely compensated and (2) always prove irrepressible for it speaks to the very essence of our nature: greed. Secondarily, we are alerted to a new place where inflation has cropped up. Here's an intro to this unusual commerce:

"Chinese tradition demands that husbands and wives always share a grave. Sometimes, when a man died unmarried, his parents would procure the body of a woman, hold a “wedding” and bury the couple together.. . .

The practice is most common in the northern provinces of Shanxi, Hebei and Shandong. This is China's coal-mining heartland. In mountainous Shanxi, pit accidents kill many men too young to marry. Compensation to the family is spent on giving their son a wife in the afterlife."

Inventory for such pairings has traditionally come from hospital mortuaries, funeral parlors and body snatchers. Four years ago, fresh merchandise would fetch only a few thousand yuan; however, now such merchandise commands a rather lucrative price of 30-40K yuan equating to $4-5.3K. For that price, more assertive entrepreneurs have resulted to more aggressive grave robbing in addition to murder.

Oh, the cultural binds that tie us! Does it remind you of kidney snatchers?

Here's a little story from my past. I have no idea if it is true or not. My immigrant Armenian grandparents had a store at 28th and M Streets in the 1940's. It is an area called Church Hill--one of those previously exclusively black neighborhoods that within the last 10 years or so recently undergone a renaissance of sorts where now you have to be rich to live there.

My grandmother would tell us about "Chicken Harris"--a black man feared by his community. Why? Apparently he supplied the Medical College of VA (MCV) with bodies for cadavers. As my grandmother would tell us, on Friday and Saturday nights when his fellow black men were engaging in revelry which generally involved imbibing too much alcohol, Chicken Harris would roam the streets in a horse-pulled hearse gathering up those who were too drunk to resist.

I don't know if it is true or not. But hearing this story as a child scared the bejeebers out of me.

Country ETF performance for the week ending 07.28.07

I have a list of ETF's that I keep. As I composed the previous post, I thought it would be a worthwhile use of my time to show the performance of each of these ETF's as compared with the US indices as a matter of developing of broad view of the global markets. You will need to click on the graphic to make larger.

You'll forgive my laziness (I hope) in not putting in the names of the ETF's.

Reflections of Friday

With a storm last evening, bringing with it some much needed rain, this post is a little late.

One of the things that I’m grateful for is having had the opportunity to be a market observer over the past 18 months or so. I’ve had pockets of having very little time to observe and longer periods, such as recently, that I’ve been able to watch more intently.

I do not know what is to come to pass over the next few weeks as the market grapples with the issues that have nibbled along the sidelines that are suddenly coming to the fore. I keep CNBC on, but it is in a room adjacent to my office. Though I have lots of beefs with CNBC, and I’ll not air them here, I do get some benefit even if it is to provide a counterpoint.

One thing I found of interest was their “Trillion Dollar” survey. All of them dismissed that there was a correction underfoot and believed that we were just undergoing a bull market correction. And I’m not dismissing their view….but it will be interesting to watch how this unfolds and be mindful of who says what so that later one can evaluate the quality of the guidance. I’m certainly not giving any guidance. Though, I still find Gary Kaltbaum one of the best commentators out there. Better yet, his show if FREE.

I believe that many investors have been lulled into a false sense of security through their diversified investments across the globe. I keep a list of ETF’s, and over the last couple of days, I think that every one of them has been in the red. Given that my internet access is kaput, I cannot provide fast facts, but I believe that EZA was down as much as 8% yesterday. This would have been on top of Thursday’s loss, which was likely in the 3-5% range.

I think that in general there is a distinction between diversifying country-specific risk v. global risk. The former you can diversify away; the latter is inescapable, so long as you are in equities. I believe that the dynamics (in so far as I can claim even but a rudimentary understanding) among the currency and debt markets—they are inextricably linked—have created a global risk environment that I do not believe the average investor appreciates.

It is the interplay of these dynamics of currency inequalities and risk complacency of the debt markets that have fueled the incredible rise of all of the world markets.

Now you have heard the same reasons as I have heard.

• There’s a global economic boom—Agreed, but if all of the central banks are curbing capital expansion by increasing interest rates, why do any consider that NOT to be a reining in of some of that expansion. There is a lag effect, and that lag eventually bites one in the arse.
• There’s a global liquidity boom—Agreed, but lenders have been complacent about risk. When that complacency is shattered then credit spreads (the difference between sovereign debt and other “stuff”) widen. When credit spreads widen, you lose liquidity. Since writing this on Word, my internet has come up and John Mauldin explains the “dry up” rather well. Do look for it.

And these reasons are REAL reasons, but after a while, real reasons start to lose their connection to reality. Martin Goldberg has the most terrific post on Financial Sense on Line for Thursday, July 26, 2007(Financialsenseonline.com). I hope that you will check it out. He speaks specifically about the discounting of information by the market. It really resonated with me, as the effectiveness of the market’s discounting of information has been a rubric to me. Here’s a quote

Discounting Mechanism? Not Near Market Tops!

A bull market “climbs a wall of worry,” and such is the case with this bull market. However, there is equal wisdom in the saying, “the stock market is a discounting mechanism that discounts the future.” It is this saying that suggests we are close to a market top. Why? Because today’s stock market not only doesn’t discount the future, but it barely discounts the present. This is evident by the amount of significant moves that are occurring the day of quarterly earnings announcements. Tuesday’s Amazon.com quarterly results are especially reflective of a market that not only doesn’t discount the future, but barely discounts the present. It was up over 20% on Wednesday’s trading. Similarly, one of the most visible and scrutinized companies in the word, Apple Corp., was up about 10% in after hours trading based on its after hours quarterly earning report.

A more accurate view of the stock market as a discounting mechanism is that at market bottoms, the market is extremely forward looking as it begins to move higher. The discounting window moves to shorter and shorter term time frames as the bull market ages, until finally at the top, very little if any of the future is discounted. The recent behavior of these large and visible companies to trade instantly and significantly higher based on what is announced the day of quarterly earnings, is a sign of a market that is not discounting far into the future if it is discounting the future at all.

Today's Market Close

What a day! My portfolio was actually up as I was hedged. So some of my formerly pukey puts perked up remarkably today. I had shorted EPP and I closed that position out today in my taxable account. I could have collected more dollars as I was not expecting quite the sell off that we got. While I left money on the table, I still had money in my pocket. I have no positions in my taxable account as of the close today. So I've plenty of gun powder.

While I lamented my letting my ALL puts and my GE calls get away, today I was not mourning the GE calls that I thought I had sold "too early".

It's worth noting that gold weakened today as well as the myriad of gold stocks. I know that at some websites gold is held out as the panacea for all that it is ill in the market. However, when liquidity is taken out of a market, that reduces inflation fears as well as clips the speculative excesses. It is no more a safe haven than a rattlesnake nest.

I hope that you and your portfolio fared well today.

It's Starting to Matter

Over the past few days, the market has been hesitant. Will it capitulate? I surely do not know, but today is not shaping up to be so hot.

There are two things that have stuck in my brain over these past few months, and you've seen me mention them here.

Thing 1: One of the key contributors of fueling the market is liquidity. When that liquidity dries up, be it through the carry trade unwinding or the hesitancy of investors to buy debt at paltry prices, the party ends.

Thing 2: Market corrections trigger recessions.

Before going to sleep last night I was reminded of the discussion on hedge fund risk, and that the highest probability of hedge fund failure was due to the fixed income market. You've seen at least 4-5 My friends, what each of us has witnessed unfolding is the constriction of the credit market. The great funding sphincter has now girded itself up. Remember when the media was telling us that it was a "subprime" problem? It was never a subprime issue, as you know. Rather, it was a matter of money that was too cheap chasing yield--and that chase was so focused there was no regard for being compensated for risk. Now the LBO kings are having trouble funding their deals.

The news as it has been unfolding, which in my view has been one of the most irresponsible plying of the journalistic trade as it pertains to mainstream media, is now starting to confirm the nascent fears regarding the overall credit market. But you know that, because you have been looking at the sites (such as Bill Cara, Barry Ritholtz, Calculated Risk, John Hussman) that have illuminated these problems and have looked askance at the ebullience of this market.

So we've gone from the ghetto (subprime) to the palace (LBO Kings) but neither are far apart. They both reside in the neighborhood of greed. And, everything that we've heard about the irrationality of what would seem reasonable fears to normal people such as you and me (decline in housing, consumer weakening) was merely pablum.

Food Inflation

Mark and I used to watch 60 Minutes as a matter of religion for many, many years. I still have some images in my head from some of the reporting, none more graphic than this one:

A food market place in China that had cages containing cats, monkeys, dogs....stuff we would consider pet-like but in China is considered food.

Now, this image is more than 20 years old. The story, of course, was that it was difficult to feed x-billion of people of China on a daily basis. If memory serves, as GDP goes up, birth rates go down. Nevertheless, as we look at milk and fish and agrarian products, there is no question that the simple price elasticity of supply and demand for food stuffs will make it more and more expensive to eat. It already has.

(I also have an image of their doing an expose of a chicken processing plant. It happened to be while we were eating dinner--a dinner of chicken. We do not watch TV while we eat anymore!)

I suppose that rather than euthanize the hundreds of thousands of unwanted animals in this country, we could merely ship them over to China--or wherever else--as a tasty treat. When you are hungry, I suppose the notion of food changes. Mark and I were talking just the other day (yes, I know that this will sound morose) that if Macy were really hungry, would she attack and eat us. (This did happen in an Innuit village during the flu epidemic in the early part of this century. I think that the villagers had already died; and the animals, dependent on humans for food, were merely trying to survive. But that is different than attacking and eating).

We also asked the obverse question. If we were hungry, would we eat her? Of course, these are stupid questions to ask, because until you are in such a situation you really do not know what you are truly going to do. I'm hoping that neither we nor Macy ever have to make that choice.

Anthony Bordain who is a chef, writer and TV personality wrote a book called . I picked up the book after hearing his being interviewed by Terry Gross on "Fresh Air". It was a remarkable interview. He spoke about how intimate the act of cooking your best and offering it to the guests in your home was. Of course, food offerings are culturally dependent. So if you were in China, Fluffy or Buster might be on the menu. In Peru, they serve guinea pig--it is a delicacy.

His book, The Nasty Bits, is titled after what one views from the fresh kill of a seal by the Inuit. What struck me about the interview was his reverence for the ritual of offering food--no matter what it was. Moreover, he spoke about the graciousness on the part of the receiver for consuming this fare---no matter how dissonant it might be from one's own eating habits. In fact, he stated that it was the ultimate exercise of arrogance, the ultimate offense, to refuse to eat what one was offered. I've referenced this interview before on my blog. So forgive my repeating it. Like the visual image, this radio interview is an auditory memory that I hope that I will always have.

I was reminded of the interview (and the book which I bought based on the interview) by seeing a snippet on "No Reservations" (his TV show) day before yesterday. I've never seen his show previously. He happened to be in Peru eating.....guinea pig.

Today's Market Close

I'm having some difficulty uploading the market close from the WSJ. I"ll insert it later.



Do listen to Gary K's show for this evening if you haven't. Market leadership is getting trashed a bit and that is cause for concern.

I was looking at a group of food stocks. All down today except one: SYUT. It's a US company in China that makes infant formula. Here's the chart:




I had some DXD that I purchased day before yesterday as well as some DUG (double inverse oil/gas). Just a feeling. I did close out of DXD. Those double inverse funds are ugly on gap ups (I had one recently and it cost me about $3K). Of course we may have a gap down tomorrow--but I'll not lament.

Sorry for the placeholders!

Today's Market Close

While it is easy to be entranced by the DOW and it's stupendous rise, it's worth consulting the advance/declines. I think that the WSJ did a terrific job adding their market data center. Stupendous.

I do have a confession that I must make. I had $40 calls on GE for August. I let them go on Friday. They are back up nicely today. Hindsight is always a miasmic perspective. Frankly, I'd rather lose the future gain than have the calls be worthless. Here's a picture of GE.
My testicular fortitude failed me on Friday. I did have some gain, so it wasn't a bust. But there is a fine line between conviction and foolishness, and I don't pretend to be able to divine between the two with the best batting average.

Grave Diggers!

The only thing worse than a gold digger is a grave digger. Today I nabbed two. Yes, you know them....Lacy and Macy!

The nice thing about being both a woman and a Mom is that you have these well developed instincts--spidey senses. Though I have no idea why, something made me get up and gaze out the front window of my office. Even without my glasses, I spied Puppy #1 and Puppy #2 (my pet names for Lacy and Macy; I'm not sure who is #1 and who is #2) under the red-bud tree. I went out there and discovered to my horror that they had almost succeeded in digging up my beloved Greta. I could see a portion of the quilt that one of them had pulled up and ripped. Had I been 15 minutes later, the sight would have been much worse. I shudder at the thought.

Our soil is quite loamy. So it makes it easy to dig. And I suppose that with their keen noses that they were able to catch some odiferous wafting some 3.5 ft below the surface. Naturally, I got a whiff or two since that 3.5 ft had been breached by the miscreants. So I repacked the grave; yelling at both of them and working myself into quite a lather. AFter Lacy tried for round 2 of digging, I took Lacy home and locked her in her garage--after round 2 of yelling. Macy retreated out of site. I then looked around for materials to secure the grave (for no sooner had I repacked the soil than Lacy (neighbor's dog) started going for round two. Ugh!

So I found some solid bricks--not pavers which would have been lighter--that I gingerly put into the wheelbarrow--4 trips worth. Why gingerly? As you know, my track record with personal safety has been a bit spotty of late. Wasps came out of the crevice between the stacks, so I suspect that there is a largish wasp nest somewhere in those bricks. I was pretty careful, for among snakes, wasps and spiders there is no shortage of things that can hurt you around a brick pile (or wood pile for that matter). Thankfully, the brick pile was a non-event.

Now I have a lovely brick pattern atop the grave. It was also a good physical work out that I'll likely remember for a day or two.