John Hussman

John Hussman writes a weekly market letter. Last week's letter was titled:

March 10, 2008 Recession, Far More Foreclosures, and Eventually, Commodity Weakness

You can find the full text of it here. I wanted to lift two paragraphs (within JH's quotation parameter) to pique your interrest:

Finally, on the commodities front, the CRB (a broad index of commodities process) has hit fresh highs in recent days, but Friday's weak employment report has spurred questions about the sustainability of the runup in commodities. If you look at long-term commodity charts, you'll quickly become convinced of one thing – commodity prices are cyclical. They don't necessarily overlap economic cycles, but it is dangerous to believe that the cyclical dynamics of commodities prices have been forever changed by China and India. The price levels may very well be higher in the future than they were in the past, but cyclicality is something that should be expected in both commodities and the stock prices of companies that produce them.

It is accurate intuition that commodities are generally stronger in economic expansions than they are in contractions, but that intuition can fail when U.S. real interest rates are negative. At those times, the heavy downward pressure on the U.S. dollar tends to be supportive for commodities. Given that commodities have already had an extremely strong run, it would be overly speculative to take positions here on the expectation that the run will continue, but the evidence suggests that we should expect a serious break only when the rate of inflation breaks.

I read JH every week--though clearly I'm a week behind! He serves as a welcomed antidote for the perennially sunny forecasts of most market pundits. All issues are good, but this week was chock full of gems. I hope that you'll check for yourself.

Bear Stearns Redux

I thought this e-mail from Vince interesting about Bear Stearns. I had forgotten the story (though it was resurrected when Bear's HF's were in trouble--and it's worth noting that these were the first HF's to fall in this CDO crisis) about Bear's failure to participate when LTCM failed.

From: vince farrell
Sent: Sunday, March 16, 2008 1:16 PM

"No man is an island, entire of itself..." John Donne didn't mean Bear Stearns when he wrote that ,but it's applicable. When Long Term Capital Management failed in 1998 (see Roger Lowenstein's "When Genius Failed", a superb book), the NY Fed gathered the heads of the Families in a room and said figure it out boys. The hat was passed and, as I remember, about $300 million apiece was the ticket and the system was saved. Except Bear Stearns. Bear walked out. The Bear has always been edgy. But when two Bear Stearns hedge funds failed in this credit cycle, and Jimmy Cayne, the CEO, was found to be playing bridge or golf while his section of Rome was burning, the companies fate was sealed.

Wall Street has a long memory. Bear had no friends. While it is true that in Wall Street terms if you want a friend, get a dog, it helps to have "relationships." Cayne's indifference set Bear off "entire of itself" and when calls were made for help last week there were no takers. Alan Schwarz, the new CEO, is a competent, really good guy. But he had no institutional depth in this market having been a banker his whole career. He probably has a golden rolodex for investment banking deals, but no relationships in this new world. He also made a dramatic misstep. Walter Bagehot, the 19th Century British financial journalist wrote "Every banker knows that if he has to prove that he is worthy of credit, however good may be his argument, in fact his credit is gone." (Thanks to the NY Times for the quote.)

That's why this will be a one-off situation. The WSJ had a good analysis Saturday on Wall Street's liquidity positions. On November 30, Bear had $17 billion in cash and owed $102 billion via secured financings. The $102 billion were loans made by "counterparties" and secured by assets Bear had on its balance sheet. If those assets declined in value, Bear would have to put up more collateral, or margin. Turns out the cash reserve was insufficient, and, and this is the big AND, the counterparties were no longer willing to make the loans, and the loans were all short term.

Lehman is a big bond player, like Bear,and was much mentioned last week as a firm that should be watched carefully. But Lehman has a much larger pool of liquidity at hand. It has $182 billion in secured financings but only $28 billion come due in the next 12 months and the firm has a liquid reserve of $35 billion. While the cash is 19% of its total secured financings of $182 billion, similar to Bear's 17%, very little of the debt is due in the next year, let alone right away. Additionally, LEH has $60 billion in liquid assets that could be sold and just last week close a $2 billion UNSECURED credit line. So, LEH has total liquid assets of close to $100 million, or some 54% of its collateralized financings. This is better than Goldman (38%), Morgan Stanley (39%), and Merrill Lynch (34%), and those firms also have a more diverse business mix.j

Lehman, and the other firms, have something Bear did not. They have relationships forged in the recent history of financial chaos, where they stood next to one another. Dick Fuld runs Lehman. He knows not just the other Family heads on Wall Street, but you can bet he knows the counterparties that Lehman has borrowed from. If Fuld, or Blankfein of Goldman, or whoever, had to hit the phones, the calls would be answered.Bear and Cayne were never there for anyone else, so turn around was probably fair play.

What an interesting week it was. Bear liked to be a maverick which is all well and good, but you better not tell too many people to screw off and you better be on the job and not at a bridge tournament.

Gimping along at BJ's and Memory of My Broken Arm

Last night I made it out to book club. Crutches on salt-treated steps in the rain is pretty scary. My left crutch skidded all the way out, but I was ready for it. I've been quite good at recognizing potential hazards. No harm; no foul.

I've mentioned that I've had a hard time with steps. Mark, a crutch-walking expert, determined that my crutches were too low. Next, he taught me how to go up/down the steps--you first, then the crutches: "Otherwise, you are just pole-vaulting." I have to say that going up the stairs on crutches is quite a bit easier than skooching up on one's bottom. It takes a lot less effort. To be sure, though, I've more arm strength now. Previously, I do not think that it would have been possible, and poor results (my falling) would have been seen.

My daughter last went to the store three weeks ago. We'd eaten about everything in the house, to include pantry and freezer items. It was time to go, so Mark and I trekked out to BJ's. I was able to snag one of the portable carts. What a godsend. We managed to get everything that we needed without resorting to fisticuffs.

My foot has literally turned the corner. The last four nights have been comfortable--a far cry from those fitfull nights of rather dreadful discomfort. I took a bath yesterday in our bathroom. It doesn't have a hand held shower. I made out fine. I even cleaned the shower. My husband has not once cleaned that shower in the 23 years we've been in this house. Not even when I was pregnant and about to pop. Oh well. He did save me from cracking my head on the brick steps during my crutch pole vautling, so all must be forgiven.

I couldn't help but look at my left leg with some pity. My thigh and my calf have withered at least by a third. How quickly our muscles atrophy from non use. I still remember when I was 8 soon to turn 9 and broke my arm. When they took my cast off, my arm was skinny and very dark brown. Ugh.

That day in early July is still very clear to me. I found the first ripe wild blackberries that grew on giant canes in an overgrown area between the farm across the street and the road. I held these jewels delicately in my right arm, while I pedaled excitedly home to show my Mom. See, blackberries meant cobbler! Naturally I was bare foot! My right foot slipped off the pedal and hit the road painfully. I lost my balance, and my bike toppled to the right. I fell on my right arm on the road.

I got up. The blackberries were crushed in my hand and my elbow and forearm were all cockeyed and hurt like hell. I was only about 50 yards from home. When I show up the door (I don't think that I was crying), all my mother could see was my blackberry-stained hand and my crooked arm. It was horrific looking, to be sure!

She loads me in the car and we start to the hospital. This is about 10 a.m. in the morning. We have to turn around because she cannot remember if she turned the iron off or not. We go to the hospital where again my purple/black stained hand causes surprised looks. I remember being in the hospital for a long time--many hours. They wouldn't give me anything to drink in case I needed surgery. I remember one woman coming over and stroking my hair while my mother was trying to hunt down someone to care for me. I was probably whimpering at that time.

Finally they send me to an orthopedic to have my arm set. I arrived at the Dr's office about 5:30 p.m. The room is crowded. The next name that they call is not mine. It is a man who has a cast on his leg. I still remember his great kindness, insisting that they take me first.

I still remember their setting the bone. The nurse was pulling my arm and the doctor had my arm in both of his hands. I started screaming I was in so much pain plus I could here the bones crunching together. He put my arm down and told be that he wasn't going to set my arm if I were screaming. I'm sure that I whimpered through the balance of it. I was in pretty desperate shape by then. Since my break that morning I had had no food, nor water, nor pain medication. I think that was a lot to ask of a young girl.

I did emerge with a white cast and purple hand, which would stay that way for about a week!

Summaries from Gary K and FSO

Art Cashin with UBS floor operations on the NYSE, is interviewed each morning just before 9:00 a.m. He's a terrific combination of war horse experience and straight talk. He commented that this was one of strangest markets he's ever seen. Talked about HF managers still being in pampers and unaccustomed to bear markets; accordingly, they were weak short holders.

I've been watching the VIX. From Bloomberg:

The Chicago Board Options Exchange Volatility Index rose 14 percent to 31.16 for the biggest advance since Jan. 17. The so- called VIX, which tends to increase when stocks fall, has gained 80 percent in the past year.

I sold my CNI APR 50 puts for a 50% gain. I still have my BNI puts (APR 80's). It may have been early on CNI, but with the VIX spiking, I thought that I would take advantage of the rich premium. The strength in BNI still surprises me. Yes, I know that Warren Buffet has been increasing his stake, but he was also in HMO's. In my view, he was buying at the top. (I know a bit about this sector.). I must confess that I do not know so much about rails, but from what I've seen from their financials, they've not demonstrated the growth or pricing power that seems to be widely touted. Positive earnings have come from cost reductions. The rails have been wrapped into the commodity story. We'll see how it works out. I made a gain that I was happy to take.

I took small positions in WCG and WLP in my retirement account (to diversify out of money market). I think that given the drop, they have more upside potential than downside. If I'm wrong, it will not be lethal. I also took out a small position in URE (double long the IYR). With an interest rate decision close, that could be a near term catalyst for a pop; but I cannot say that I'm enamored with the fundamentals.

In my spec account I have DUG and UYG. I'm re-thinking my short position in OIH through DUG. OIH held up better on Friday than I expected. That is telling. I'll present that thinking in another post. That account is just north of $20K. It has been volatile, and I could have managed some positions better (one being SMN which I gave up a $1500 gain that could have been realized the very next day had I stayed in my SMN position). Nevertheless, I cannot say that I've been disappointed. But I will be sorely if by UYG and SMN go down. And they both could in a doubly bad way!


Comments from Gary K's 03.14.08 radio show: He does his expected rant about the BSC--I'll not regurgitate that! Here are paraphrased comments:

In bear markets, things go down to unfathomable levels.

Stay out of financials;

It is getting ugly now;but he's looking for stocks that are holding up well. (e. g. MA).He's gearing up, because everyone is negative and bearish.

It's okay to get in a little late; it's never okay to get in too early.

Looking for characteristics of a new bull market.

• In this down day, AAPL, BIDU have refused to go lower. These stocks have held tight. Including MA. Unbelievable relative strength. RIMM above 50DMA. Western Digital, some commodities have also fared well.
  

When the bear market is over, we will break these lows to the downside and wash out weak holders.

I repeat, we are still going to break these lows, but I'm going to watch what isn't going down.

I don't like it when the crowd joins me; everyone is bearish and depressed.

Bear market could last another 2-3 months, or another year and a half.


Odds favor we'll break the lows and wash out alot of people before any meaningful turn comes.

When the market ultimately turns, no one will want to get in. I will.


Am I turning bullish. No. I just have to prepare.

Gary also mentioned Barton Biggs' (a Wall Street legend) comments, and did a little internet search. Doug Kass wrote an article on TheStreet.com, "Where Have the Fundamentals Gone?" that would be worth your time reading. You can find it here. What I want to call your attention to is the perfectly wrong-headed advice that was given. Of course, this advice could have turned out to be right. The point? Had you taken the advice, you would have lost money as opposed to missing out on a rally. I urge you to take a moment to read this brief article. I like Doug Kass alot. He tends to have a bearish bent and sees the "warts and all".

I did watch AAPL yesterday and thought it looked strong in a down market. Also, the HMO's were holding their own after their precipitous drop.

The next time you are tempted to believe that the market is a perfect discounter, I want to point out that all of the risks were known more than a 18 months ago, and became very clear 7 months ago. Nevertheless, financial and brokerage stocks remained relatively strong. Off their highs certainly, but not appropriately discounted. One could argue credibility, that the market may have over-discounted the problems. I don't know, but it is a mess. Now I'm getting ready to listen to FSO. I'll summarize those comments below:

Well...this isn't going to make any of us feel better. We may all need a lithium drip prior to listening to any financial program! I would encourage you to listen. Comments from Jim Puplova (JP) and Frank Barbera (FB). I've never heard FB so negative. All comments are FB except as prefaced by 'JP'.

• Credit situation has been relentless since last August.
• Moves have taken the market to technical extremes that we've never seen before--to a dark point of reckoning. We've arrived at proverbial Y of the most epic nature.
  
• Anything technical has been trumped by fundamentals; message of the market is that the US has fallen into a liquidity trap from which there is no way out.
• Rising commodity price is acting like a tax on the economy.
  
• Fed easing is pushing us toward an economic collapse.
• JP sees slow death of consumption. If COL goes up you cut back on discretionary spending.
• JP Thinks we will go through a series of bailouts. Gazillion dollars in cash.
  
• If you look at the low bond yields, it is the last great bubble; end of the recycle trade, artificially low yield was a by-product of OPEC and Asian recycling. Both trades have gone away and reversed to negative. What has supplanted that capital has been the fight to quality from the credit crisis. With a negative net yield, at what point do they move higher? When that happens it will be 'game over'. At that point you are in a real collapse.
  
• JP discusses monetizing debt through world savings (ours or others) you are able to export inflation.
• I see that in light of all the failures this week, if you look at fed financing debt with savings, you can export inflation.80% probability of a full point cut--If 1% or even .75% cut, USD will chain react to the downside. Producing higher commodity prices. Fed cutting aggressively makes the recession worse (due to commodity increases). They are pandering to Wall Street and the banks to put on a positive carry trade for the banks to re-liquify (over a long period of time). The problem here in trying to help--crippling the economy in two ways: crack spread will likely widen We are not currently feeling the effect of $108 crude (or 120-130 several weeks out). These high energy stocks will effect business and spending. Lower rates acting like a tax. Fixed income savers are being "taxed".
  
• Next couple of days could be a fatal juncture.
• Volkers policy of high rates to protect currency to cause positive real rates, but would cause industries to correct.
  
• These measures are not allowing the necessary corrections (e.g. in housing markets). We are sacrificing our currency to avoid correction. The lender of last resort has to protect its credit.
• Housing market needs to correct.ONce that stampede gets started---where the dollar can go could just be getting started. I hate to think what this world could look like , if they cut sharply and we revert to a cycle of lower dollar, higher gold, higher oil--will crush the economy.
  

I'm breathing deeply to keep from hyperventilating! Cool heads must prevail, but at the same time, who wants to have their head in the sand?!! I found the discussion about bonds being the next bubble very interesting. It seems to my amateur eye that bonds have very little upside potential, and the flight to quality has depressed bond rates. If the currency is to depreciate more--and I had hoped that we might be bottoming, but I've abandoned that hope--being in bonds will be a money loser two ways.

• Way 1: There will be a loss from currency depreciation;
• Way 2: There will be a loss from negative real interest rates.
  

Wondering out loud.....I've expressed concern here about the safety of money markets. If the USD is to depreciate further, then perhaps the safest place to be is in a foreign currency ETF. I did put some money aside in FXA. Regarding following up on bond funds, I'm putting this off, because I don't think that I want to be in bond funds for the aforementioned reasons.

Bear Stearns' Unhappy Circumstances

I'd ascribe credit to the photo to the left, but it was on one of those chain e-mails. It feels a bit that Bear Stearns had an ill wind blow up their kilt, and their collective arse is being exposed.

They mark the first to fall. Their business was highly concentrated in much of the specious structured debt that has contaminated the financial system.

It does appear that the Fed is working in lockstep to prevent a debilitating crash in a financial institution--not to save it, but rather to stabilize the situation while remediation efforts are underway. If BSC were forced to sale the illiquid securities that it holds, then such a fire sale would ignite another wave of writedowns that would endanger other institutions.

Is BSC the last? Whose to know. But the sooner these floaters (I've posted here the surprising lack of floaters), bob to the surface and make themselves known, the sooner confidence can begin to build.

May only fair winds lift your kilt.

New Sidebar

I've created ANOTHER new side bar. This one is for intraday thumbnail postings. You'll remember that I was working on my big Stock Charts symbol loading by sector. Well, those are very helpful to look at intraday. I will create and load these thumbnails periodically. Naturally they will be out of date fairly quickly, so I will likely keep the thumbnails for the week and then discard them weekly to keep the content there fresh.

Why don't you take a look at my newest post--one on Oil Service? I just posted the thumbnails about 20 minutes prior to the time of this posting.

I'm particularly happy today as DVR was upgraded. It is currently up 14% for which I'm quite happy. I'm holding this in my spec account.

Please let me know if you have any problems downloading the thumbnails. They are in excel, but you can get the viewer, or "preview" on line.

A Good Mantra

In Real Money, Doug Kass made an interesting post (it's a paid subscription, so I'll only pull out the phrase that really resonated:

"sometimes it is best to admit some confusion and to avoid conviction."

The Continuing Backdrop and The Importance of Forgiveness

While there is general euphoria over what the Fed did yesterday, I don't understand how it improves liquidity that will make its way into your pocket or mine. My understanding is that there was a massive confidence issue among the banks. Maria B. on CNBC made a comment that the US took 25% of its balance sheet and committed it to the financial markets by lending "up to $200 billion of Treasury securities to primary dealers secured for a term of 28 days (rather than overnight, as in the existing program) by a pledge of other securities, including federal agency debt, federal agency residential-mortgage-backed securities (MBS), and non-agency AAA/Aaa-rated private-label residential MBS. " Click here to see the full release.

I'd like to hear someone address what happens in 28 days. Don't get me wrong. I think that the action was necessary, and for that necessity, we must understand that the financial system is tied in a huge Gordian knot (hence the picture). Accordingly, I see yesterday's reaction to be manic in nature. The realities of the financial system still have to be worked out. Here are some of the lingering issues (not to sound too depressive!):

• Housing values are under pressure--pressures homeowners and erodes tax base;
  
• Job losses are mounting;
• Job creation is slowing and is likely under-reported over-reported;
• Discretionary income is decreasing due to food and fuel costs increasing;
• Inflation is mounting.

Notice that I didn't mention anything about Elliott Spitzer! I generally take no amusement in the misfortunes of others despite the seeming deservedness of the misfortune. There's a reason why the aphorisms, "People who live in glass houses shouldn't throw stones," and "The pot calling the kettle black." So I'm just reaffirming the aphorisms, though I'd be lying if I were to say that I did not find the information titillating. News passing this moment that he is resigning as governor.

All of us have lapses in judgment-some lapses are of greater magnitude than others. Seldom are our lapses made so public. There's an irony in relationships here. The best relationships are founded in love and compassion: unconditional, love and compassion. To really test the unconditional quality of that love and compassion there has to be some condition to test it. (I'm not talking about behavior such as emotional, sexual or physical abuse). And if there is an opportunity to forgive, that means that the relationship's tenets have been transgressed.

When presented with these opportunities that shake the foundation to its roots, that is where the relationship is tested. A rich physical and emotional relationship, to include enjoyable sex, mutual interests, delightful conversation do not test our relationship. These elements certainly enrich our relationships. Our relationships are tested when we engage in our human fallability and hurt the people we love.

My point: Do not mistake women or men, in a relationship transgressed in a way that causes deep hurt, who stay in a relationship as weak. The truth is these men and women who can find it in themselves to forgive his/her partner and work on repairing the relationship demonstrate great courage and great humanity--for they are demonstrating that the love in the relationship was indeed unconditional through their capacity to forgiveness.

Reflections on a Superific Day

From the Wall Street Journal:

From Yahoo Finance:

I'm proud of myself that I'm not feeling 'left behind' in this rally. MarkM appears to have jump this galloping horse of a market mid-stride, and his comments have been spot on.

Maintaining perspective in all things is key. If one doesn't ride the loss down (which I've not--I've only been quaking that my money market accounts will all of a sudden be down 20% one day!), then missing out on a one-day missile launch is not a problem.

On another blog, a reader took the writer to task in not forecasting this move. Such reactions reflect either a poor understanding of the market or a mistaken belief that market pros have a crystal ball. We were certainly due for a rally--many were expecting one. When you are down 1000 point in 8 days or so,at some point in time, market physics requires there being some relief! In fact, I went back to Saturday's post. I think that I summarized it pretty well:

Regarding a multi-week rally. Oh to have a crystal ball! I'll hazard a
guess that (1) in the absence of bad news we can have a rally or at the
very least stabilize; (2) in the absence of bad news and coupled with
even modest GOOD news we could have a good rally; and (3) absent bad
news and coupled with some superific good news we will have a terrific
rally. I tried to think of examples of what 'modes good news' would be
v. 'superific good news' but I've not way to calibrate that. Perhaps
just absence of bad news and the market stabilizing in and of itself
would be modest good news. Anything beyond that would be 'superific.'

I think that we can agree that the highlighted phrase represented yesterday's action!

I think that GaryK noted some facts on other large moves on Fed news. He notes the dates of Fed action and the resulting moves:


08.16.07 Dow was 12500; it moved to 12900; and closed the next day at 13100
09.18.07 Dow +336; S&P +43
11.28.07 Dow +304 ; S&P +40
01.23.08 Dow +630
03.11.08 Dow +416

Other comments, Gary made:

"Day 1 of attempted 1000 over 8 days 5th month of bear market. No leadership. NO new leadership to lead the market. Oils/commodities had been topping got a jolt today. Looking for a rally in the 4th day--Friday--need big volume day with 1.5 - 2% and look to IBD for confirmation. If it is to be something of import you'll have plenty of time to get in.Nasdaq's biggest 10 days ever were in a bear market."

Friday, then, will be the follow through day that we'll be looking for. That will be the return of "real buyers" as opposed to "short covering buyers".

Oh What a Day!

Today was a spectacular surge due to the Fed's latest innovation. I'm not sure that this creates any additional liquidity, but surely it has to increase confidence. I know that Gary K in his very good discipline will be looking for a follow through day. It was until I understood better the nature of short covering rallies--the volume and explosiveness-that I truly understood the importance of follow through days. Tonight we be a good time to listen to him to find out what he is looking for.

If you want to see the top NYSE short interest positions. You can find that information here.


The HMO stocks were killed today. The DJ US Healthcare Index was down 11.5% today. The HMO's, which are a part of that were down as much as 30%. Here's a snapshot of two day's activity (click to make larger):


In voyeuristic mode again, I made an chart of the top 5 Instituional Holders for WLP, UNH, HUM:

I took a speculative call option (yep, wrong way) on WLP last week thinking that it might snap back. However, I did this against the technical picture saying bad news was coming. Also, I did it against my knowing that HMO's are not recession-proof. I shared my frustrations in an earlier post, so I'll not bore you with my lament yet again.

I found it interesting that Capital Research and Management had substantial positions in both UNH and WLP. I also note that there is not an updated form (per NASDAQ inst. holdings report). Anyway, much agony to be had in this sector which was just decimated.

Spring Flowers

Flowers from my garden.

New Sidebar Content & Other Stuff

I've created a new side bar to put web resources for research stocks and stock sectors in a easy place for you to access.

The news about the Fed making $200B in auction securities available. This is helping the markets because it eases the impasse. I suspect that there was pressure from European banks as this sticky booger has landed in both Europe and Asian banks. I wrestled yesterday with buying some UYG. There is much truth that the hardest thing to do is often the right thing to do. That means, taking partial profits on well-appreciated assets as well as buying ones that have been battered on the rocks of current economic realities. I'd like to be able to do this action well most of the time. Currently, I do it well occasionally. I'll shoot for 'frequently' as opposed to 'most of the time' as an intermediate step!

WLP delivered an upset number to Wall Street after hours yesterday. Here's proof that 'a picture is worth a thousand words'



My original thesis on the HMO's was that they would come under pressure. However, I've been proved wrong, and the stocks went up. Earnings reaffirmations everywhere. Given the elasticity of all of the HMO's in rebounding from declines, I took a forward position on WLP through options. Small amount. Well, my original thesis came through in spades today.

I have a hard time being patient with my convictions. I'd like to share with you the lessons that I should have learned by now. The definition of stupidity is doing the same thing and expecting a different outcome. So, here's a "My Stupid" (as opposed to "My Bad"--where do those sayings come from???).

• Write my thesis down (my thesis generally involve sectors;
• Note which stocs will be affected should this thesis become true;
• WAIT for confirmation of thesis; and
  
• ACT.
  

My sins are those of anticipation and impatience. I've had opportunities to atone for those sins, but I still seem prone to commit them.

You'll Turn Blue and Die

Strange post title, huh? I was writing to my best girlfriend. She's the only one in life I would tell my deepest darkest secrets. We've been friends since high school. We don't see each other very often any more, as she lives about an hour a way. But when we catch up, about once a year, we always pick up where we left.

I was e-mailing her this a.m., and I was reminded of something that I wanted to share with you. (You know me; I'm warming up to a point!). Her husband's parents have a really neat cabin on the Potomac river. It is on a point on a creek off the river, and just a beautiful, restful place. During our first visit, my daughter was a toddler. There was water all around, and as any of you know, despite one's best efforts, children do manage to separate themselves from you. One only has to pick up the paper to see the tragic consequences.

It's hard to explain drowning to a a toddler. So I adopted a tactic that would make the results of her going into the water abundantly clear. I took her to the water. I explained that it was deep and that she could not swim. I then said, "If you get in the water and sink; you will turn blue and die." I asked if she understood that. Now, I did not tell her any of this to give her permission to wander around with this graven image in her head while I kicked back and had cocktails. Rather, I wanted her to understand the consequence.

Some of you may look at that comment and think that I was nuts to have a discussion like that with a toddler. She's almost 20 now and was on the swim team--I didn't give her any phobias. As a parent, I've tried to be no-nonsense about explaining life's realities (good and bad) to my children. And, they've always been able to ask me anything and get a straight answer. I think that it developed their empathy and understanding of others and the realities of the world.

With respect to investing and trading, all of us read the admonitions of experienced folks that give us a list of warnings. We all read them. Some read them and think that they are immune to them. Dennis Gartman has a widely published list of rules that I thought I would resurrect. I picked these up from The Big Picture which he published from John Mauldin's newsletter.

To keep within the theme of this post, I would title these: Dennis Gartman's Rules of Trading: If you break them, your portfolio will turn blue and die"

R U L E # 1
Never, ever, under any circumstance, should one add to a losing position ... not EVER!

Averaging down into a losing trade is the only thing that will assuredly take you out of the investment business. This is what took LTCM out. This is what took Barings Brothers out; this is what took Sumitomo Copper out, and this is what takes most losing investors out.

R U L E # 2
Never, ever, under any circumstance, should one add to a losing position ... not EVER!

We trust our point is made. If "location, location, location" are the first three rules of investing in real estate, then the first two rules of trading equities, debt, commodities, currencies, and so on are these: never add to a losing position.

R U L E # 3
Learn to trade like a mercenary guerrilla.

The great Jesse Livermore once said that it is not our duty to trade upon the bullish side, nor the bearish side, but upon the winning side. This is brilliance of the first order. We must indeed learn to fight/invest on the winning side, and we must be willing to change sides immediately when one side has gained the upper hand.

R U L E # 4 DON'T HOLD ON TO LOSING POSITIONS
Capital is in two varieties: Mental and Real, and, of the two, the mental capital is the most important.

Holding on to losing positions costs real capital as one's account balance is depleted, but it can exhaust one's mental capital even more seriously as one holds to the losing trade, becoming more and more fearful with each passing minute, day and week, avoiding potentially profitable trades while one nurtures the losing position.

R U L E # 5 GO WHERE THE STRENGTH IS
The objective of what we are after is not to buy low and to sell high, but to buy high and to sell higher, or to sell short low and to buy lower.

We can never know what price is really "low," nor what price is really "high." We can, however, have a modest chance at knowing what the trend is and acting on that trend. We can buy higher and we can sell higher still if the trend is up. Conversely, we can sell short at low prices and we can cover at lower prices if the trend is still down. However, we've no idea how high high is, nor how low low is.

R U L E # 6
Sell markets that show the greatest weakness; buy markets that show the greatest strength.

Metaphorically, when bearish we need to throw our rocks into the wettest paper sack for it will break the most readily, while in bull markets we need to ride the strongest wind for it shall carry us farther than others.

R U L E # 7
In a Bull Market we can only be long or neutral; in a bear market we can only be bearish or neutral.

In a bull market we can be neutral, modestly long, or aggressively long--getting into the last position after a protracted bull run into which we've added to our winning position all along the way. Conversely, in a bear market we can be neutral, modestly short, or aggressively short, but never, ever can we--or should we--be the opposite way even so slightly.

R U L E # 8
"Markets can remain illogical far longer than you or I can remain solvent."

The University of Chicago "boys" have argued for decades that the markets are rational, but we in the markets every day know otherwise. We must learn to accept that irrationality, deal with it, and move on.

R U L E # 9
Trading runs in cycles; some are good, some are bad, and there is nothing we can do about that other than accept it and act accordingly.

Thus, when things are going well, trade often, trade large, and try to maximize the good fortune that is being bestowed upon you. However, when trading poorly, trade infrequently, trade very small, and continue to get steadily smaller until the winds have changed and the trading "gods" have chosen to smile upon you once again.

R U L E # 10
To trade/invest successfully, think like a fundamentalist; trade like a technician.

It is obviously imperative that we understand the economic fundamentals that will drive a market higher or lower, but we must understand the technicals as well. When we do, then and only then can we, or should we, trade.

R U L E # 11
Keep your technical systems simple.

The greatest traders/investors we've had the honor to know over the years continue to employ the simplest trading schemes. They draw simple trend lines, they see and act on simple technical signals, they react swiftly, and they attribute it to their knowledge gained over the years that complexity is the home of the young and untested.

R U L E # 12
In trading/investing, an understanding of mass psychology is often more important than an understanding of economics.

Markets are, as we like to say, the sum total of the wisdom and stupidity of all who trade in them, and they are collectively given over to the most basic components of the collective psychology. The dot-com bubble was indeed a bubble, but it grew from a small group to a larger group to the largest group, collectively fed by mass mania, until it ended. The economists among us missed the bull-run entirely, but that proves only that markets can indeed remain irrational, and that economic fundamentals may eventually hold the day but in the interim, psychology holds the moment.

And finally the most important rule of all:

R U L E # 13
Do more of that which is working and do less of that which is not.

This is a simple rule in writing; this is a difficult rule to act upon. However, it synthesizes all the modest wisdom we've accumulated over thirty years of watching and trading in markets. Adding to a winning trade while cutting back on losing trades is the one true rule that holds--and it holds in life as well as in trading/investing.

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Dennis Gartman: This is what I have learned about the world of investing over three decades. I try each day to stand by my rules. I fail miserably at times, for I break them often, and when I do I lose money and mental capital, until such time as I return to my rules and try my very best to hold strongly to them. The losses incurred are the inevitable tithe I must make to the markets to atone for my trading sins. I accept them, and I move on, but only after vowing that "I'll never do that again."

Leverage: A Nasty Eight Letter Word

So much of what the credit markets are wrangling with is leverage. Fixed income strategist arbitrage small percentage differences between what they can borrow v. what they can earn. I think that is called positive carry. For those of you who followed along in MAR/APR 2007 in the discussion of the the paper, Hedge Funds and Systemic Risk, you will remember that the riskiest strategy, indeed the one that caused most hedge fund failures was Fixed Income.

Why? The answer is simple. When you lever up, small changes in the underlying investment can equal big losses. I prepared a very simplistic example.

If you are levered 5:1, then your investment gets wiped out with a 16.67% loss. But that is YOUR money. If you lose more than that, then you have borrowed money that you have to pay back. I heard someone say that the Carlysle affiliate invested in GSE's was levered 32:1.

As people are de-leveraging, either by choice or necessity, it feeds a cycle within the entire market causing prices to go down further and pulling more into the vortex of money going down the drain. Leverage ratios are based on the market market value of an investment. The market value of many of these credit products (and I'm not even talking about derivatives) is plunging. Price goes down; leverage ratio blows up; margin calls are made. I'm sure that there are many margin calls that are not being made satisfactorily.

This example is very simplistic, and I'm sure that I'm not telling you anything that you do not already know. But seeing it on paper is sobering. It is these credit events that levels out dynamic hedge fund strategies and causes previously non-correlated outcomes to correlate.

I have to say that I'm becoming gravely concerned about my money market accounts, and I may look to move money into something a little safer than Fidelity's FDRXX which is what they require my retirement money when not fully invested to be placed. I know that I sound like Chicken Little, and I've expressed that concern before. I don't think that it is a misplaced concern.

Sidebar Changes

Rather than create a post that has the weekly sectors, I've created a sidebar that has all of the postings there. I've just uploaded the most recent one for 03.07.08. However, the data is as of close today, so it is one day off.

I also created a sidebar for Institutional Voyeur uploads. I only have one!

I hope you find the sidebar useful. I'm pleased to see that folks are downloading these files regularly.

Lucky 13

Here's an update on the Lucky 13. So far this year they are down 12.12%. This snapshot is intraday today.

A Cruel Irony and The Miracle of Microfiber

There's a cruel irony for folks like me who break a foot in the ordinary course of business (NOT in athletic pursuits). Someone clumsy enough to break his/her foot and is relegated to crutches is akin to asking a motorist to drive a race car at 200 mph. To be sure, I would probably have better success in a race car at 200 mph than I'm having with these crutches.

Normal schlepping around is no problem. I cannot go great distances, for I not have neither the arm nor right leg strength. Plus gravity is not kind to my left foot. But, I can get around. Over the weekend, I'm trying to find a more couth way of getting up and down the steps without skooching on my butt.

I think that I mentioned previously that my husband is an expert crutch walker having both broken his foot as well as blowing out either his ACL in his left knee. I came home from work one day to find my husband sitting on the front steps with a friend of his. He had crutches out (from the foot break). That's never a good sign!

My husband is a very proficient dirt bike rider. He's been riding since he was 14--at the time he was probably 45 or so. He was just messing around in the front yard and popped a small wheely. In planting his knee, though, he managed to hyperextend it. I took him to the hospital. He really screwed himself up.

I remember looking at his posterior side. The entire back of his leg, from buttock to heel, was nothing but a ribbon of bruise. The tear caused lots of bleeding. So he was on crutches, and his knee dialed into a specified degree in a knee brace. Ugly stuff. But experience that have made his instructions on going up and down steps informatinon from a trusted source.

While the front steps are easily managed on crutches, my attempt last evening to get up the interior steps (which are a bit higher and more of them) ended in defeat, and I ended up on my butt. It was not a gentle bump, as I am reminded this morning.

I did find a useful trick to managed my foot comfort in this boot that is the equivalent of a foot/leg insulated dive suit! I'm still having foot burning discomfort, but not nearly to the extent as before. A couple of days ago, I had the bright idea that if I placed my washed and dried foot in a microfiber cloth, it might act as a moisture wicker and create some air space between my foot and the boot. It has done both.

When I used to run (I was a modest runner, as I did not start until I was 40), I had a microfiber spa towel (a 20" x 12") that I kept in my waist pack. It was expensive as towels go. But it was lightweight and very absorbent. As you know, the key to not overheating too much is (1) not exercising when it is very high humidity/temp; (2) proper hydration; and (3) moisture management. Well, that microfiber towel (in addition to my performance wear) went a long way toward helping me get through my run.

While useful for sports, microfiber products were not readily available for household use. Over the last couple of years or so, they are both prevalent and affordable. I've bought them a Costco and BJ's. They are great for cleaning with water, cleaning products or used by themselves for dusting. Nothing dusts better than a microfiber cloth. Just toss in the washing machine when done. It's important not to use bleach on them or fabric softener. The bleach will eat them up and the fabric softener negates the static chart that allows them to capture dirt. The excellent cleaning results from the microfibers which stick to everything. It also means that it will pickup and grab stuff like leaf bits etc. if you are using these outside.

These cloths work for sensitive jobs too--like face washing. I sound like that guy on TV selling Kaboom! But the cloths are a great product. If you don't have any, consider adding these to your home supplies.

A New Look!

Can you tell that I've had a bee in my bonnet? With my lack of mobility, I thought that I would take some time to learn more CSS stuff and work with Adobe Photoshop. It has been a frustrating process. As you can see, my entire information mosaic was lost. It was time to freshen that up anyway. But stil.....%$#%!^^

First, I have to give kudos to Amanda @ http://www.bloggerbuster.com/ This young woman has created a blog that really helps non-designing folks to add some interest to their blogs. If you have a blog and feel hemmed in by the formats, do visit Amanda's site.


I realize that this color scheme is a rather drastic departure from my previous blog style. Did you think that you had wandered into the wrong neighborhood? Kick off your shoes and grab a beer or your favorite beverage! The weather is getting warmer, and these images are those from the beach. Specifically these are from Cape Hateras. The background is stylized sand (from the picture with the shell-like rock, which I took).

I need to work on a couple of things. I'd appreciate your feedback, either nay or yeah. My project was as much a learning for me. And I wanted that learning to be good enough to not be embarrassed to publish the result.

Our power was out a good bit of the day yesterday. We had hellish winds. So I'm behind on my weekly sector report. I'll try to update that this evening. Otherwise, it will have to wait until tomorrow.

Comments Follow Up

Two perspicacious readers, Jest and MarkM, left comments on the last post, for which I thank them both for taking the time to do so. Please make sure that you read them. I wanted to bring some of their topics into conversation in a post rather than relegate it to the comments section.


Both Jest and MarkM are TA fans. So am I. And as I thought about my previous post, the comments here in addition to other "arguments" I've seen about TA v. fundamental analysis, the following occurred to me: You cannot TRADE successfully without technical analysis--in fact you don't even need fundamental analysis; however, you cannot INVEST (as opposed to TRADE) successfully without fundamental analysis. And, I'll tag a qualifier on the latter. Without exercising some technical analysis to evaluate your entry points, an investor is deprived of a strategy that may increase his/her probability of improved returns. To do otherwise, in my view, is akin to driving while blind. It's worth noting that no matter how prodigious one's skill is in either TA or fundamental analysis, one can still fail, and fail miserably. Therefore, protecting capital should be the paramount strategy regardless of the tools that one employs.

Jest also notes to "only invest where your personal traits and strengths give you an advantage." I'd like to hear a bit more of Jest's view on this point. I think that it is useful to parse out which investing constituency we are talking about. If one were to carve out traders and very active investors (such as those who are reading this, or the other blogs I and my readers visit), there's a huge bulk of money that belongs to people who are passive investors. I believe that these folks (and I was one of them) would benefit from having a fundamental understanding of business cycles and sectors that follow those cycles. Being in the right sector at the right time goes a long way toward assuaging any deficiencies in understanding a particular stock. Many folks only have mutual funds; however, with the sector universe of mutual funds so rich in offerings now, being better equipped to make diversification and rebalancing decisions among sector offerings would, in my view: (1) decrease the amount of risk that many of these investors face; (2) increase their returns; (3) reduce volatility; and (4) protect capital (I realize that this is a function of 1 and 3).

I've not researched this, but I think that it would be a terrific offering by mutual funds to offer investors a business cycle mutual fund. It would be actively managed to overweight/underweight exposure to various industries as economic cycles unfold. Maybe someone offers this--if they don't, I think that it would be a boon to the average investor. Comments on that thought would be welcomed.

I'm going to say something terrible now, and if any reader wishes to take me to task, they can--but I'm going to be a complete worm and tell you in advance that I'm not going to debate it! But I really believe that the "buy and hold forever" strategy (read: sacred cow) is so widely touted because it is the easiest strategy for money managers to convey to their clients that results in the highest ratio of fee to time expended. I know that sounds jaded, perhaps even paranoid, but I truly believe it.

Jest also notes the state of mainstream economics. I've not delved into economic theory, Keynesian, Austrian or Lilliputian! It is really beyond my level of understanding, and I think that of most people. (Though I profess admiration for those who tackle it with such gusto--my hat is off to you, Jest!). Now I'm making a tangential jump off here.....On another blog (Real Money on TheStreet.com) someone asked about the implicit guarantees on the government sponsored entities (GSE's)--that's Fannie Mae, Ginny Mae and Freddi Mac. It came up because NLY dropped from $20 to as low as $14 or so in the last couple of days. These guys only have FNM investments.

It's worth noting that Jim Cramer touted NLY. (Jest's comment of investing where you have an advantage comes into play here!) I've been wary of any of any of these types of stocks because regardless of the safety of the investments (more in a minute) the interest rate on many of these bonds were not credit risk adjusted. If there is one thing to understand about the conditions of the current credit environment is that NONE OF THESE INSTRUMENTS had correct interest spreads. When the credit spreads blew open, that depreciates the price of the principle.

The credit markets are in a lather. Many believe that the GSE's represent government backed securities; hence they are less risky. This understanding is an implicit one that abrades against the explicit language to the contrary: Here's the statement from a Fannie Mae prospectus (and you'll see it on the others, too): "Our guaranties are not backed by the full faith and credit of the United States."


It's useful to understand (and I unfortunately have an inconsequential command of such a consequential matter) how money gets recycled in global commerce. One reason foreign governments have such a high investment in US debt and GSE instruments is that it is a way to recycle export dollars. If you want to see the major foreign holders, you can do so here. Note that this is not a percentage of total issued debt. I'm too lazy to find that this morning. I'm working up to a point here!

The point: Yesterday, apparently, there was a moment where Paulson could have acknowledged the implicit understanding that GSE debt would ultimately be guaranteed by the US. He didn't bite. Because of the implicit understanding (an assume, with the admonishment of what happens when you assume) on the part of investors, the leverage loads on buying such securities is pretty high. Remember, to arbitrage interest rate differentials, or even to increase your returns on low interest rate securities, you have to lever up. When you lever up, small changes in the levered investment--in this case discounting of the security due to perceptions of credit-worthiness--can sink the ship (or float the boat in a wonderful way should it go in your favor). Such is what happened to NLY.

Now if we are calling into question the credit worthiness of the GSE's, that is just another earthquake rattling the credit markets. So many money markets hold this stuff: Insurance companies; Foreign investors; Moms and Pops. If these GSE's are allowed to fail, then our USD will come under tremendous pressure--and commodity prices will become even more expensive. I'm not saying the GSE's will fail. In fact, I'll state this: THEY WILL NOT BE ALLOWED TO FAIL. If I'm wrong on this statement, being taken to task on the error will be the least of my and your worries, for the world as we know it will come to an end!

Rather, I'm pointing out that what happened to NLY is something that you should be aware of--and particularly something that you should look for in your portfolio. Credit markets work on confidence--and when confidence is lost, fear sets in. We are witnessing this at unprecedented levels (except maybe what happened in the '30's). Remember just a year ago when the estimates for the credit blowout were believed to be small in comparison to the Asian debt crisis. I think that we've outstripped that in spades. Having said all of that--with all this dislocation, therein lies opportunity. I think that much of that opportunity is for folks who have unfettered access to the books of these distressed organizations and who can conduct appropriate due diligence. That's not to say that shrewd, risk tolerant investors cannot make some gambits in that area. I know that my own capabilities are sorely wanting in that area for these types of investments.


MarkM notes that timing does work and offers a couple of suggestions on that. I don't negate that short term timing works, but it is difficult, if not impossible, for the AVERAGE investor. We can all agree that MarkM is not average in the least! Nevertheless, I think that EVERY investor--whether you have $10K or $1M+ in the market, needs to understand market cycles or sector rotations. Watching the whoosh in and out of sectors over this past year has been spectacular to behold. And this declining market cycle, the whoosh out began with the REITS. Accordingly, it makes sense that this group will be the first to recover. Interestingly, all of my health care REITS (on a watchlist) were green yesterday. I think that the REIT's are going to require one really "know" their investment. I still think that there are some pressures there, and I'm not a buyer unless I do some due diligence. With respect to sectors and economic cycles, the financials are generally the first in and the first out (FIFO). Commodities are the last in and last out. That would be LILO! I'm not aware of last in first out (LIFO) sectors

MarkM, I agree with you on commodities. In fact, I think an interesting pairs trade would be UYG/SMN (ultra long financials/ ultrashort basic materials). I think that the commodities NEED to fall to get a decent rally. However, and I'm not sure how to parse this out, both of these sectors have cross currents that we've not had with other market cycles. (Please correct me if I'm wrong on this). For the financials, it is the credit market disintermediation. For the commodities, it is the weakness in the USD (its plunging) coupled with global demand from emerging markets that make it difficult for that fall to happen.

I think that the commodity action is much like that with the tech horsemen that were goosed up by traders prior to their ignominious falls. I've some SMN which returned a healthy 8% in on e day. I've been in and out of this one as I've been "early" to that thesis. These 2x can act like a 2x4 on your portfolio if you get in going to the wrong way. I have to confess, though, that in my spec account, I started a position three days ago and scared myself out of it when X was goosed. I thought about being early, again, and closed. It was a costly mistake--lost a lot of potential gain.

Regarding a multi-week rally. Oh to have a crystal ball! I'll hazard a guess that (1) in the absence of bad news we can have a rally or at the very least stabilize; (2) in the absence of bad news and coupled with even modest GOOD news we could have a good rally; and (3) absent bad news and coupled with some superific good news we will have a terrific rally. I tried to think of examples of what 'modes good news' would be v. 'superific good news' but I've not way to calibrate that. Perhaps just absence of bad news and the market stabilizing in and of itself would be modest good news. Anything beyond that would be 'superific.'

Of course, I'm just an observer. It has been a fascinating show for which I've tried to keep my ticket fee reasonably priced.

Thoughts for This Friday

Over the past year, I've tried to cull through some of my information channels. There are so many opinions in the market place, when one gets bombarded with too many, it is unproductive. It's not that the opinions are bizarre or unfounded--most are quite compelling and well argued. But two diametrically opposed opinions cannot both be right in the same time frame.

The ultimate filter for divergent opinions is experience and the good judgment that follows. Unfortunately, I don't have that experience having spent most of my adult life indifferent to the market. I never followed it. Couldn't tell you any of the daily, weekly, monthly or YTD moves. I looked at my mutual fund balances. If they were up, that meant I had chosen well. If they were down, well....that was just normal. Today, I can tell you every day's market outcome. The price of gold and oil. I know them. Leading and lagging sectors. I generally know them. However, I have to ask myself, "Am I a better investor for having these facts?" I'm going to say, "Somewhat," if only in being able to draw some conclusions about the nature of market information which I will share with you here.

Essentially "market information" is resident in two venues, both readily available:

• Price and volume action in individual stocks that are constituents of sectors and indices.

• Opinions (whether publicly stated or through subscription) about the meaning of the aforementioned price and volume information. Within this category I'll throw in opinions about the economy, politics, technical analyis, position of the sun, moon stars and one's mood on any particular day!.

At any point in time, there might be divergences within those groups--and I want to speak to that. But first, I want to make a statement. The adages that the stock market is always right and that it is a perfect discounting mechanism are not notions that I embrace. If my last year plus of individual observation and study have taught me anything, it is this: The stock market is nothing more pricing mechanism good for that snapshot of time. No more, no less. It represents the incontrovertible judgment that the market has made today on the price of that stock.

Ultimately, our job as investors (or traders or speculators) is to determine whether there is a misalignment between the current perception of an investment's price and the future value (which could be a long or short time frame) of that investment based on qualitative (emotional such as pessimism/optimism, fear, greed) and/or quantitative (valuation metrics such a earnings growth, financial strength, and overall economic factors such as interest rates, availability of credit, expanding/contracting market for goods sold) factors that will influence both the direction and magnitude of future price change.

Technicians used technical analysis to look at price/volume action to make judgments about future price action. They are measuring the delta between current and future price relative to past patterns and relationships. Say what you will about technical analysis, there are certain points that every trader is looking at on the floor--and those points represent very important psychological stops (as well as stop loss stops). Technical traders might buy a stock that has nothing more going for it than price momentum. Based on the momentum moves that I've seen, these momentum plays are not for most investors, but rather are trading vehicles that require vigilance. My sense of it is that if you happen to already be invested in a stock that suddenly becomes a momentum play, it is prudent to take profits. These stocks can double and then crash.

Fundamentals investors are looking digging through current and past financial information, product offerings, product position in the market, market share, cost of inputs, distribution of US v. non-US sales, management team, technology and a host of other 'stuff' to determine if there is a misalignment of current value to future value. I believe that determining where the stock's industry home lies in the current economic cycle is key as well. Money moves in and out of sectors--sometimes with such volume and rapidity--that it sinks a few ships. No one wishes to have shipwrecks in their portfolio.

I know that I'm not saying anything new or insightful. Nor am I trying to provide a comprehensive view of either technical or fundamental investing. Rather, I'm reinforcing the point that no matter what your investment style or your tools, ultimately the same target is being sited: increasing one's capital.

Despite one's prowess in technical and/or fundamental analysis, one can still get it wrong--materially wrong. In such cases, the investor/trader must have capital preservation tools in hand. As this market has undergone this transition from bull to bear, there are remarkably few people talking about the importance of capital preservation. I'm sure that you've seen these tables before, but I'm going to provide it here. Below is a table of investment loss sustained and the resulting investment gain needed to restore capital. An admitted short-coming is that this is not tax-effected. When I've more coffee and more time, I'll produce a table that shows that.



Wall Street admonishes investors to always stay invested. You cannot time the market, they say. I agree that short term timing of the market is difficult--and that is for traders, not investors. But there are some pretty reliable 4-6 year patterns that by paying attention you can capture a good part of the gain and avoid a good part of the loss. You can see how much Gary Kaltbaum has evangelized this point so well. Rev Shark on Real Money has too (in fact, both have been in lockstep in their opinions about the market. Rev Shark requires a subscription; Gary K is free).

When choosing an investment, then, an investor has four things to consider, really:

• Thing 1: There is a future positive divergence in the investment's current price and it's future value, (If one is shorting, then flip it to a negative divergence!);
  

• Thing 2: The reasons why there will be a divergence;
  

• Thing 3: The time frame in which the divergence will take place; and
  

• Thing 4: The risk reward ratio: How much capital is the investor willing to risk while awaiting the unfolding of his/her price divergence scenario to unfold.

Ultimately, the successful investor will not be one who is right all the time. No one is. A successful investor is one who quantifies his/her risk in terms of time frame and permitted loss before re-evaluating the thesis. It doesn't mean that the thesis is wrong, necessarily, but rather the time frame is wrong. Best to preserve capital and await a more advantageous entry unless there is new information that increases the probability of the investment succeeding.

When I look at the Nikkei's performance since the early 80's I cannot help but consider the US's situation. Japan had a real estate boom that went bust. Even today, their market is not even 1/3 of the highs in 1989. For a buy and hold investor--as many of us are admonished to do by the investment community--would not have fared well, and no amount of rebalancing of sectors or diversification would have saved him/her. I'd like to read more about their situation and any intersects with the US.

I'm not saying that the US market will fall into such an abyss. But if it could happen in Japan, why couldn't it happen to the US? The Japanese economy was one of the strongest in the world. It is clear to me that our economic and political hegemony have peaked. In the aftermath of their economic decline, I guess the Japanese chose deflation rather than inflation. Plus, they were a country of savers, not debtors. I don't know the effects of that, as I've not studied it at all. You can tell that Russell's paper recommendation, "Irrational Optimism" seared my soul! But I do think that it is important to understand that conventional wisdom can be neither conventional or wise. Nevertheless, it is always convenient and comfortable--and convenience and comfort can lull us into underestimating risk.

As I post this, the jobs numbers and addition Fed infusion news has been released. The Fed infusion is a 28-day get out of jail free card--it is not liquidity that will make it to Main Street. It is liquidity that will literally keep the wheels from falling off of the carts that have been wobbling under the overload of structured debt that was too freely loaded.