Thursday, August 30, 2007

A Celebration Of Nelson Mandela And Freedom

"During my lifetime I have dedicated myself to the struggle of the African people. I have fought against white domination and I have fought against black domination. I have cherished the ideal of a democratic and free society in which all persons live together in harmony and with equal opportunities. It is an ideal which I hope to live for and to achieve. But if needs be, it is an ideal for which I am prepared to die." --Nelson Mandela

As citizens of the United States prepare for a holiday in celebration of Labor Day, those of us who are fortunate enough to live in a free society need to remember those who made our freedom possible. In the not too distant past, tens of thousands of people died annually U.S. industrial accidents and many times more than that were seriously injured. Using population numbers of today, those deaths would be ten times that amount. Let us all honor those who fought for labor rights in the U.S. and around the world as well as those who fought for basic human dignity and human rights. And, for those who still fight for humanity's rights. Most all of us are guilty of taking our gift of freedom for granted yet many still live under the yoke of repression or tragically worse.

It is my belief Nelson Mandela is the most selfless advocate of human rights and the greatest leader of my lifetime. How many have sacrificed over seventy years for freedom and dignity of their fellow man? Especially under the constant threat of death. And were willing to sacrifice their own freedom by spending thirty years in prison for the most noble of causes? In a world that often shows little concern for those in true crisis, Nelson Mandela truly is a man of altruistic greatness.

As Britain honors Nelson Mandela with the addition of his statue to Parliament Square, let us all remember the sacrifices that were made so that we might live in dignity and freedom.

How will you impact the lives around you in a positive way? To give dignity to those in need? Or reach out to someone who needs help?
posted by TimingLogic at 11:10 AM

Is Countrywide A Predatory Lender?

"I believe that banking institutions are more dangerous to our liberties than standing armies. If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and corporations that will grow up around [the banks] will deprive the people of all property until their children wake-up homeless on the continent their fathers conquered. The issuing power should be taken from the banks and restored to the people, to whom it properly belongs. "
--Thomas Jefferson
to the Secretary of Treasury 1802

Many advocates of freedom who have warned about the power banks hold over the people. While I don't necessarily agree point by point there is little doubt that financial institutions in the U.S. have gained too much control over the economy. I ran across a profound Countrywide article at the New York Times. Unfortunately, it requires registration. The link above takes you to a login screen. But registration is quick and free. If this article is indeed accurate, Countrywide's practices are astonishing and disgusting. This is a must read for anyone interested in good newspaper journalism and the mortgage mess.
posted by TimingLogic at 8:48 AM

Wednesday, August 29, 2007

The New Version of Whac-A-Mole: Whac-A-Bank

I'm feeling particularly insolent today as it pertains to financial companies. The Times had an article yesterday citing regulatory filings that State Street management has been busy baking chocolate chip cookies. I guess that's what they've been doing because there aren't alot of plausible explanations of how actually managing the company could have created one hell of a ticking problem. A problem for the owners of the company. As a reminder to management, that would be the shareholders. And, doing so by playing off balance sheet games. I had no idea Anderson Consulting was back in the auditing business. How else do we explain these time bombs showing up on a regular basis? Sarbanes-Oxley and corporate governance reform were for everyone except the financial sector because the auditors have been taking a long nap at State Street and seemingly every other large financial institution. Does that include government banking regulators? Back dating stock options? That's for losers. How about a $22 billion shell game at State Street? This off balance sheet game is way too common of an occurrence amongst financial institutions. Not just off balance sheet but off company. So, for the bulls I have a question. Do you want to bet your savings on the accuracy and quality of earnings at financial institutions? One of the biggest shell games is the dance between hedge funds and regulated financial institutions. That's for another post. Too much to write about and not enough time. Isn't it ironic that unlike banks, hedge funds are a exempted from regulation by the Securities Act of 1933 and the Investment Act of 1940? What better way for regulated companies to skirt regulation? Just a thought. Maybe this is all an anomaly and we'll see a return to Goldilocks. So, I'm rather curious. What industry is the biggest lobbyist in Washington? Could it be? Possibly the financial industry? The same industry that spent $300 million to overturn Glass-Steagall?

The premise argued against hedge fund regulation is what? By some leap of faith rich people are smart and smart people don't need oversight? You mean like the rich and by inference smart bankers at State Street? Countrywide? American Home Mortgage? No, a more plausible generalization is that rich people are greedy and greedy people need oversight. (This is not a bashing of people with successful careers. I absolutely do not espouse such a position. People can be or do whatever they want just as long as they aren't bankers managing my life savings or pension and lobbying for reduced or no regulation.) What happens when hedge funds not only lose their own money but jeopardize my savings through an intricate web of deceit or even legitimate faux pas?

But we shouldn't tax capital. And if we institute too many regulations the money will go overseas. blah, blah, blah.
Cry me a river. A river of financial loss for shareholders and the economy. If we are so worried about competitiveness then we shouldn't allow tax credits for offshoring factories or tax business investment. I guess that's just capitalism at work thanks you your friendly politician. Please, this horseshit about not taxing capital is mindless nonsense beaten into your consciousness by those who benefit. The U.S. economy was a raging success before the current tax code. I don't believe any taxes should ever be raised or any type of class warfare should be used to increase taxes but let's get real. Japan has never been a destination for international capital (I'm not talking about financial shenanigans or carry trades but actual investment.) yet Japanese companies have generally thumped their international competitors for forty years. My point? The primary key to prosperity is to incentivize investment be it on the corporate or individual level not by making sure private equity has a tax loophole to pay lower rates than a school teacher. Does anyone honestly believe a country with an end market as large as the U.S. would attract enough capital with a positive investment tax policy instead of loopholes for private equity? Instead of going to Wall Street as much of it does today, it would reach main street in the form of sustainable investment that creates jobs, increases labor's talent, drives innovation and the associated higher wages. Maybe business investment wouldn't be at such dreadful levels if we had such a policy.

Expect these shenanigans to go on for quite some time. With the new Whac-A-Bank game as one company's mess seems to be contained, expect another to pop up. And as that mess appears contained, we will likely see another. But hey, the game show channel has plenty of guests telling you that financials are a compelling buy because of that great 3%-4% dividend. A little hint for those telling me to invest in financial institutions. There are plenty of ways to actually calculate risk versus the risk free rate of return on government bonds. The Fed Model is not a risk based investment calculator for those still yammering about how cheap stocks are. Anyone recommending financial stocks on a risk adjusted basis is a fool. Anyone not taking into account risk when talking about financial stocks is an even bigger fool. And, what do they say about fools and their money?

Oh, one more thing? This is not 1998. Oh, and one more thing. What does any of this have to do with housing? Housing is a symptom not the problem.

Right on time. As I wrote last year, we are going to see a massive political shift in the U.S. I didn't say it would do any good. But, crisis creates opportunity and it also drives meaningful change. It's all part of the process. A seemingly ugly one but one that does work. That is, until problems are but a distant memory and then we start the cycle all over again.

I'll leave you nuggets of a prescient article from the Post. Not surprisingly it was written two years ago. Was anyone listening?

Nor should it be surprising that such scams went undetected. Hedge funds are notoriously secretive, fending off regulations with the argument that they deal only with wealthy and sophisticated investors.

Former SEC chairman William Donaldson could see this coming but was able to push through only modest regulatory oversight of hedge funds. His successor, Christopher Cox, must show his mettle. At a minimum, hedge funds should be required to send audited, quarterly statements to investors and the SEC. With college endowments, insurance companies, pensions and mutual funds now so heavily invested in hedge funds, this has gone well beyond protecting rich investors.

With $1 trillion in assets, hedge funds have become a dominant force in capital markets, accounting for as much as half the daily trading on the stock market, hundreds of billions of dollars in bank loans and a healthy chunk of the profits of Wall Street brokerages. Federal regulators cannot guard against systemic risk to global markets if they don't know what hedge funds are doing.

This is not a case of a few rotten apples. It's a case of an industry that has become so rich and arrogant -- and so littered with charlatans and con men -- that government must step in to protect the public interest.

posted by TimingLogic at 10:40 AM

Monday, August 27, 2007

Update Of December 2006 Countrywide Funding Commentary

I thought a repost of my December 5th 2006 comments on Countrywide was appropriate given the significant turmoil surrounding the company. The stock hasn't even begun to find support from the cycle starting in 1990. I believe there is a reasonable probability the stock will break support shown below before stabilizing longer term. That is, if the company remains solvent. Regardless of many media commentary that this is a well run company, Countrywide has been extremely lax in its risk management practices. Here is the original commentary along with an updated chart:

Mr. Turtle, how many licks does it take to get to the Tootsie Roll center of a Tootsie Pop? It has been incorrectly reported to be three. One, two, three, four, five. The answer five. Five wave count on Countrywide Funding which made its massive price run providing mortgages to the U.S. housing boom. Supercycle Elliott Wave 5 count? Countrywide Funding down for the count? Das ist kaput?

Many blame the Federal Reserve for the housing bubble with their policy post 2000. Yet, the reality is the housing bubble started in 1995 when long term rates dropped 30% and fueled the second positive wave in housing. Alan Greenspan pushed on short term rates to try to get long term rates to move higher in an effort to moderate growth. Long rates would not cooperate. The housing bubble and equity bubble might be partially to blame on central banking policy but what were they to do short of restricting credit in the mid to late 1990s and crushing the economy? Maybe central bankers need to have a more active policy in credit creation. More meddling by government bureaucrats? We can't have it both ways. You either embrace a liberal policy of government intervention or you don't. You cannot whine about the Fed creating the mess then whine if the government would create more regulation to stifle capitalism and economic vibrancy.

Manias and bubbles are complex manifestations of human behavior. In order to deal with such, central bankers need to re-think policy using this baseline. That means economists need to spend less time studying statistics and more time taking psychology classes in their educational curriculum. And, that means a different type of person needs to be an economist because studying human behavior is not a topic most economists desire, feel comfortable doing or frankly would be good at. At the end of a long wave positive expansion, people and corporations were taking massive risks. That should have been expected, could have been predicted by psychologists and has been repeated since the beginning of man.

So, what does this mean? The housing bubble would have played out post 2000 even if the Fed had not lowered rates as low as they did. Paper assets were extremely overvalued and excess liquidity was looking for a home. They found it in comparably undervalued hard assets. Maybe central bankers could have made it a little less messy but long rates are still not cooperating more than ten years later. Certainly, stricter lending practices were in order and that could have been anticipated as well. Bubbles were around long before central bankers and should central bankers disappear, they will happen long after central bankers because people never learn and we are illogically and disproportionately ruled by our instincts. Hence the term "herd".

Because of human behavior, I have long argued Glass Steagall should not have been repealed and our financial system needs very basic regulation. Regulation that should never be overturned. When it comes to the savings of citizens, basic protection should always be enforced to protect the financial system be it hedge funds, banks, insurance companies or whatever. Today, banks are competing against their customers in the world investment markets and they are effectively using client deposits to do so. Thank your politicians for that great fact.

Does Merrill, Goldman, Morgan Stanley or any other major hedge fund or major corporate trading firm care about their depositors when they are making more money trading their own accounts? The wise old Tootsie Pop owl long ago coined a prescient phrase: Financial institutions "cannot serve two masters". ("No one can serve two masters; for either he will hate the one and love the other or he will be devoted to one and despise the other.) Financial institutions should either serve their clients or they should serve themselves. Allowing the illusion of both for the sake of greed and profits creates unnecessary risk with unknown consequences. Actually, we do know the consequences. It was called 1929.

Did I mention I do not like finance stocks at this phase of this particular cycle?
posted by TimingLogic at 12:07 PM

Thursday, August 23, 2007

Fundamental-less Fundamentals And The Supposed Panic Of 2007

The general consensus amongst many is that investors have been acting unnaturally and irrationally with the recent decline of stock markets around the globe. And that somehow Bernanke could easily "fix" the global asset markets with a waiving of the wand. Ah, the omnipotence of the U.S. Federal Reserve. And how might he do that? Like central bankers did in 2000? Or by walking on water? (That might actually work.) As we've talked about before, central bankers do not control the economy. How again does more liquidity fix a problem caused in part by too much liquidity? What would financial institutions do with more liquidity? Resume their foolhardy behavior requiring even more money to clean up? The Fed is highly unlikely to panic but rather deal with events as they unfold. Attempt to let the markets work and work in "cleanup" mode if something breaks. That is about the only prudent course of action they can take. Now, might world governments enact legislation to help mitigate some of the outcomes? Possibly. But, in the end that is likely to help individuals at the expense of financial stocks. So, how is that good for the stock market?

I also want to respond to those in the media ridiculing the Fed as incompetents. I'm a supporter of the concept of a lender of last resort. That being the Fed. History is littered with tens of thousands of bank failures caused by greed and mismanagement. Now, does that mean I believe governments should be able to spend money at will? No, but those are two separate issues. So, why is the Fed focused on inflation in their public statements? What does the Fed mean when they say inflation pressures remain elevated? Are they stating that the economy is overheated? That they are concerned about wage growth, the lowest since before 1929, putting pressure on inflation? The Fed knows the economy is weak. They've given countless public speeches on weakness in wage growth, income disparity, housing concerns, debt concerns, etc. No, the Fed is fighting the ability of financial institutions and foreign entities to manufacture liquidity, the associated inflationary pressures and all of the other problems they are creating. And, how do I know the Fed is fighting these growing imbalances? Two reasons. One, the Fed is not printing money as every uninformed blogger and conspiracy theorist from here to the moon seems to believe. And, two because I actually listen to what the Fed says versus what the media reports. Example; is it a coincidence that the Fed, the European Central Bank and the Bank of Japan have been vociferous about lax risk management practices and soon thereafter the global markets blow up? Of course not. Ample warning was given in advance. Wall Street, bankers, mortgage companies, hedge funds, etc. didn't listen. They were too busy basking in the financial bubble they were creating. Just like China and emerging markets are too busy basking in their bubble mania as I write this.

Remember, it wasn't the Fed that repealed Glass-Steagall and approved the financial industry's liberalization and deregulation. Many Fed members have argued against it for decades. The Fed does not legislate in the U.S. or elsewhere. Their mission is to keep the system running as best they can no matter what legislators do. (Remember those posts ardently criticizing financial deregulation from last year? At the time they seemed so meaningless. And now?) As an aside, isn't it also ironic that at a time when the markets are starved for liquidity, world governments are consuming large lots of it by running huge deficits? Now what do deficits do? They take money out of the markets and reduce economic vitality and investment. Who needs that money now? Governments or markets?

The Panic of 2007 is being discussed in nearly every form of media. So, is the recent market action based on panic? Was it a panic in 2000 when the same use of terminology was so prevalent? Is this correction purely technical as leveraged funds unwind? Or is it also based on a rational response to fundamentals? How about a simple "panic" quiz. Do you want to invest in a hedge fund right now? Or buy stock in the nation's largest mortgage company, Countrywide? Is one acting irrationally if the answer is no? Are you logical or panicked by saying no? How about taking a different perspective than I've read anywhere else? Have you ever thought that the market was acting irrationally for much of the past five years with nearly no measurable regard for risk management and now the market is simply starting to act rationally to fundamentals? The media keeps telling us the markets aren't acting rationally to the great global fundamentals. Did all of that money and leverage used to abnormally ram global asset markets like never before really reflect fundamentals? The undisputed facts are some significant number of hedge funds and trading desks at major financial institutions have no clue what they are doing as we are finding out. Because someone can borrow money at an attractive rate and use it to artificially push equities higher with manufactured money does not mean it is either justified or based on fundamentals. Is this really any different than speculation in the real estate markets using borrowed capital? Is Wall Street's patronizing behavior any different that that of the individual real estate speculator? They'd like us to believe they are too sophisticated for such action. Do we need another history lesson as a reminder? And what of emerging markets? Do emerging markets, which typically have little transparency, crude financial infrastructures, weak regulatory controls and immature capitalist and democratic structures really deserve to be fundamentally valued at a premium, comparative or absolute, to U.S., Japanese and European equities, real estate, bonds, debt, currencies and other assets? (Remember those posts as well?)

Is this really about subprime debt instruments? Or is that simply the exogenous shock which wakes the world to very heightened risks across a multitude of areas? Are the global fundamentals really supportive of what is the most expensive market in history by many measurements? And, is a ten percent correction enough to bring valuations back in line so that we can start another bull market? For those of you who have been with me since I started this blog, you know the answer. If fundamentals and quantitative analysis are any indication, and in my world they are the only things that matter, the answer is clearly and emphatically no.
posted by TimingLogic at 11:00 AM

Tuesday, August 21, 2007

Friday's Rally

I wanted to provide an update on the S&P megaphone chart I had posted last week along with a few comments about Thursday's turnaround and Friday's continuation of that rally. Not because I have anything to say about my prior post but because it gives me an opportunity to question many people's belief that everything they read or hear from the media is true.

Most in the media would have you believe the Friday rally was because of the Fed's Friday morning actions. That is absolutely false and I can prove it using three separate markets: the stock market, the futures market and the options market. Too many people associate correlation with causation and no one is worse than the financial media. And no one is better at manipulating the media than professionals in the equity markets. Some were saying Friday morning that the day's rally would be the biggest in history as they gleefully cheered the Fed's Friday morning statement. Well, on a percentage basis, it doesn't even register. In fact, the markets have not regained their Friday opening price. The entire day's action was determined by pre-open futures action.

And, what caused the rally that started Thursday at 1pm? Well, we had a market condition unfold that has had a 100% probability of a rally over the last two-ish years. And while not 100% over a longer period of time, it's still an extremely high percentage move higher. In addition to that condition being filled, we hit five major technical support areas: the 200 day moving average, the 23% Fibonacci retracement from the 2000 and 2007 peak, the March 2007 lows, the 10% correction level and the bottom of the updated megaphone pattern. The Fed had absolutely nothing to do with the subsequent rally. Who does it benefit to condition the public and media that the Fed is going to save the stock market as money is transferred from strong to weak hands? If the markets were so enthused about Friday's Fed involvement, why did financial stocks crater on Monday?

posted by TimingLogic at 9:03 AM

Friday, August 17, 2007

The Good Life

Let's share a special moment with the timeless and always fabulous Tony Bennett in celebration of today's rally, the Fed involvement and the return of Goldilocks.

posted by TimingLogic at 7:55 PM

Wednesday, August 15, 2007

Update On The S&P

First off I have to reiterate my perspective that this is a dangerous market. There is an enormous amount of data that leads me to believe we are in the process of putting in a very meaningful stock market top. A top that fulfills all of the characteristics of a major bull market peak. Some additional points to consider include a measure of the global liquidity environment which peaked in May of 2006 and similar U.S. measurements which peaked in late April/May of 2007. My most important buying pressure gauge has fallen precipitously after reaching astronomical heights not seen for decades if not since 1929 or 1946. It is now reacting as it did in the run into 2000. Conclusion? This is not a run of the mill correction and the market tone has changed. As an aside, we surpassed the levels seen in the blow off peak into 2000 in May of 2006 and reached major heights in standard deviation readings this year. So much for dour sentiment surveys. They do not reflect the incredible greed exhibited in the market. And, we have passed the pivot off of the 1994 low, Fibonacci time zone from the 2000 peak and reached key Fibonacci levels on the S&P, NYSE and Dow. While these last points are arcane to almost everyone, they should be taken very seriously. Especially because this market has been driven by technical professionals and not the general public.

As I wrote last week, I believe the market is yoyo-ing right now because quantitative funds and hedge funds are likely in the early stages of blowing up or unwinding significant losses. So, why has the market yoyo'd instead of dropping more? Three possible contributors. Many of the favorite strategies used today involve both long and short positions in the markets. In other words, whipsawing rather than a clearly defined direction might be because of unwinding market neutral positions which involves buying and selling. Then there are those who are likely rotating to defensive sectors. In today's market that is business technology and semiconductor issues as a generality. Not because they are cheap or safe but they are perceived as both cheaper and safer than this market's prior leaders. Is that a positive negative versus a double negative? (Mutual fund managers don't get to pull their money from the markets as individuals do.) Additionally, there are many who believe the global economy will pull the wagon if the U.S. falters. They are buying the dips. Remember, many are still focused on some notion that this is a containable U.S. subprime mortgage problem. It is far from such.

As the chart above shows, the S&P is developing a bearish megaphone pattern. (The same long term pattern I showed for Goldman Sachs in the April 12, 2007 post.) Now, patterns can morph but I expect we will eventually head lower as this pattern resolves itself. We're grappling with a channel bottom and key long term support here so any rally attempt really needs to develop rather quickly or we could see another meaningful swoosh down.

Many are interpreting this levitating yoyo-ing action as bullish or that the bears cannot take the market down. The market has exhibited incredibly weak action with only one day in the last month I would consider constructive. If the massive volume is quantitative funds unwinding levered positions, and it nearly has to be to explain massive and never before seen volume numbers, then a positive perspective on the levitating could be completely invalid. The correct interpretation might be that the unwinding is actually putting a temporary bid under the markets. (A view I believe is more plausible.) So, as volume abates and by implication unwinding of leverage has completed, so does the ability to abnormally ram the markets higher with heretofore levered tactics.

One final note. Many market technicians are pointing to oversold oscillators as evidence of an impending rally. Those oscillators have been oversold for weeks and still no rally. Oscillators are incredibly unreliable trading tools. The market was oversold post 1929, 1937, 2000, 1987, 1973, 1998 and dozens of other meaningful times that didn't develop into rallies. The market will tell us when it wants to rally. Predicting rallies in this environment is not a healthy exercise.
posted by TimingLogic at 7:51 AM

Monday, August 13, 2007

Paul Farrell's Dose Of Reality

As I have mentioned on here repeatedly, I have a great admiration for Paul Farrell and Alan Abelson as altruistic financial journalists. Two grumpy yet hilarious men who've been around a long time and have seen all of the hogwash Wall Street and game show TV can dish out. A dying breed it seems. Unfortunately, I can't link to Abelson because his sardonic yet brutal prose is in Barron's. If nothing else, go to the library and read his work for free. Paul Farrell hits us hard today with another dose of reality. This is an excellent piece that every investor should read and never forget.
posted by TimingLogic at 8:00 PM

Is The Stock Market Any Different Than The Subprime Mess And Warren Buffet Swimming Naked

Television prognosticators have been rolling out the parrots for their opinions on the "news" of the moment. Most are the same who have been yammering all along about the unstoppable global economy. I personally haven't seen any who has effectively articulated what is happening beyond the obvious subprime meltdown. Oh, believe me, they are out there. But, most aren't going to participate in the three ring circus on the game show channel.

That brings me to a suggestion. If financial TV businesses are really serious about helping investors, why not keep a data repository of guests, their positions on markets and a rating system? That would erase 90% of the guests and likely as many journalists based on their historical accuracy and bias. Especially in 2000. The fact that homebuilder CEOs, then hedge fund managers and finally private equity managers have been paraded across financial television with deference and hero worship has surely been a sign of impending doom to all three just as the same idiocy foretold the doom of technology stocks in 2000. I would put forth my opinion that all three guest lists felt nearly invincible by the time they were given such treatment and most don't see the train coming down the tracks.

A television guest rating system would also allow viewers to really learn from the 10% who have something worth listening to. I really doubt anyone learned anything from home builder CEOs who were cashing out options and personal stock sales at record rates while telling us business was great. A rating system might even lend credibility to these stations and encourage brilliant minds to be guests. That would further reinforce their position with investors and lead to even higher television ratings. Of course, that isn't going to happen for a few reasons. First and foremost is television advertising revenue drives decisions. Who wants to advertise on a channel that tells it like it is? "Well, private equity is a bubble, let's go to our TV sponsors." Are you kidding? Advertisers supporting a reality-based view which might be dour at times? That is the world's biggest paradox. In addition, many of today's guests are part of an industry that pays the majority of the advertising revenue for many channels: the financial industry. An honest evaluation of the economy would cause potential investors to hesitate in committing new capital to the very advertisers the networks rely on to stay in business. What advertiser would embrace that? Without the constant flow of new capital there are no large management fees, ski chalets in Colorado or yachts in the Caribbean. No, the reality is advertising revenue is much more important than actually presenting useful information. This isn't just an issue with financial journalism but all television journalism. Where did the all of the great television journalists go? To journalism heaven when business people figured out how much money they could make by transforming news into news bite paparazzi. How many stories are dropped or never reported because of concerns over lost ad revenue or something similar? That is why the internet is so powerful and why all people across the globe should ensure it remains a bastion of unregulated free speech and free thought.

Immediately, upon the market falling the TV personalities and guests all start yammering about a particular point-based concern: first it was housing, then the carry trade and now it is subprime mortgages. The discussion point on every topic seems to be "can it be contained" and the consensus is surely so. If the only problem the global economy faced was subprime, we'd work our way through it with comparatively minimal impact. Not that it wouldn't be an economic drag. That isn't even close to being the problem.

The problem with Wall Street and sound bite journalism is that they see only what is obvious so that is what they focus on. By concentrating on what they see, they are always looking in the rear view mirror and unable to see what is really happening. And I would argue they create a lemming mentality by doing so. As an aside, I actually heard the word lemming used to describe those selling off the global markets. Talk about those living in glass houses throwing stones........That is disingenuous, trite and churlish. So, what did that make everyone on Wall Street when they were shoving assets into the stratosphere? Thank you for that bit of brilliant, insightful and unbiased journalism.

Now that the tide is rolling out somewhat, how confident are you that the stock market has been going up for the right reasons? Especially since those shoving asset prices higher are now exposed to creating the messes we currently see. In other words, do you trust the equity markets were going higher based on fundamentals after seeing what Wall Street has created with the subprime fiasco? I have a question. Would someone care to tell me why the stock market is any different? Why it is not effectively another subprime-type mess created by the same market participants?

"Only when the tide rolls out do you discover who's been swimming naked."

-Warren Buffet

The reality? There are many swimming naked across the globe. That means you can expect to see the bad news spread globally over time. I think many will be surprised who else left their bathing suit at home.
posted by TimingLogic at 8:39 AM

Friday, August 10, 2007

European Central Bank, Bank Of Japan, Reserve Bank Of Australia And US Federal Reserve Add Emergency Liquidity

I'm not sure what the ECB is thinking. Are they intimating a fear of a mini run on the banks and they want to stop it before any panic materializes? The fact that the ECB has literally dropped their pants could have the opposite effect by panicking investors into believing the problem is more severe than most believe. Even if it is. That is one reason why I believe the futures are down so much this morning. That, and the topic of my post re something brewing in the S&P.

Trichet pulled a Greenspan and I have to side with Ben Bernanke's approach to date. That being walk softly and carry a big stick. The markets know without a doubt what the Fed can and will do if necessary regardless of what Bob Barker is wailing about on the game show channel. They have single handedly bailed out half of the world at other times in history. And as I have said repeatedly, the Fed cannot save global asset markets. Nor should they even if it were possible given astronomical valuations. (I recently saw a chief investment officer of a very large investment firm bullishly write of how this market was similar to the 1950s. Really? You mean when the PE of the Tranports was 3-5? What about the Transports now? Uh, probably the biggest Transport bubble in history. Along with many other massive bubbles brewing. Can I get one of these cushy jobs where I spew worthless bull and get paid millions to do it? Excuse the French but I have little tolerance for elitist incompetents who are supposed to be managing our retirement monies.)

So far, what I see is the bulls are like baby birds. Their mouths are wide open and the bears are shoving huge sell orders right down their throat. Someone is stepping up the plate and eating alot of risk here to hold this market relatively intact. And the sellers are giving them an all you can eat buffet. Check please!
posted by TimingLogic at 9:15 AM

Thursday, August 09, 2007

Does Anyone Know How To Provision A WiFi Phone?

Has anyone ever provisioned a "generic" WiFi phone for Skype service? If so, could you email me at the link on the right side of my blog?
posted by TimingLogic at 2:44 PM

Indian Outsourcers To Outsource. Is The End Nigh?

A year ago I put a post up that India's business process and IT outsourcing boom was peaking. Trends never last forever and there are many macro factors that will strain this current bout of offshoring. Not the least of which is that the talent pool in India has become such that anyone with a heart beat is getting a job in that business and labor rates for extremely marginal talent have skyrocketed. This same phenomenon happened in the late 1990s in the U.S. where IT salaries for marginal talent doubled and tripled in a period of a few years. This will ultimately self correct as companies experience weakened productivity, poor customer satisfaction and spiraling costs associated with these contracts.

Now we read in CIO magazine that Indian outsourcers must start offshoring to survive. It's actually quite predictable that Indian companies must tap global talent and become borderless multi-nationals in an effort to remain relevant. In fact, Indian business process and IT outsourcing firms run the risk of rapid irrelevance without transforming their businesses. That transformation requires a deepening and broadening of their intellectual capital beyond cheap labor.

The easy money in business process outsourcing has been made. Now comes the re-evaluation of the fields-of-gold that were promised by consulting organizations encouraging companies to offshore. I would estimate a significant number of outsourcing projects that started the offshoring movement did not yield the hard returns promised (significant precedence) and many softer returns such as client satisfaction, lack of business integration, lower productivity, lengthier product and process cycles and other data points have suffered. As someone who has worked with and for business process outsourcing organizations, I was always cognizant of one key data point: If a company wants to outsource to lower costs, the project will ultimately fail. There are exceptions such as very labor intensive, low margin manufacturing including toys, clothing, shoes, etc. But, that didn't stop weak or short sighted management in many companies from offshoring for that reason alone. The point? Outsourcing and offshoring is not a cure for weak operational management. If one cannot control costs and improve processes in-house, there is no reason to believe outsourced projects will be any different. A vast majority of said circumstances will ultimately cost more money than status quo. Therefore, many of the pioneering contracts could very well return from whence they came at end of term putting pressure on the offshore BPO space.

As an aside, let me make a final comment. BPO, IT outsourcing and manufacturing outsourcing are innovations which found their roots in the American, European and by inference other flexible economies. Offshoring is simply an extension of outsourcing. They are not innovations of India in the services space or China in the manufacturing space. Both are beneficiaries of innovations by other economies. Now, there were some brilliant entrepreneurs in these countries who took opportunity to create great companies. But, as such, they must move beyond the initial lure of cheap labor into value added solutions as Taiwan has so successfully done or ultimately become marginalized against the next wave of cheap labor in the upcoming near-sourcing economies. India and China have been given tremendous opportunities. They must transform or lose the seed of opportunity that has been planted.
posted by TimingLogic at 6:52 AM

Monday, August 06, 2007

Is Something Big Brewing In The S&P 500?

First off, I apologize but this chart was created on July 26th. It really hasn't recognizably changed given this is a monthly chart.

I've put up a few posts over the last few months stating market volatility is going to increase. As most everything else I post on here, it's based on some type of data point(s). What really is volatility as it pertains to markets? Well, without getting into mundane topics, it's simply large moves or wild and woolly market action. Volatility could mean a blast higher, a blast lower, both, yoyo-ing or whatever. It is applicable to any market be it bonds, stocks, commodities, real estate or derivations of those markets.

Below is a chart of the S&P 500 over the last seventeen years. Overlaid on the chart is a volatility measurement. Volatility is now the lowest in a very, very long time. When volatility falls below the horizontal line on the chart, that means something big is likely brewing. How do I know that? Because even though each new generation on Wall Street believes to the contrary, markets cannot be controlled and they eventually regurgitate on low volatility.

One of my favorite quotes is "Periods of stability create instability". There are many derivations of the same quote from Hyman Minsky. But, what does it really mean? Ultimately man's hubris and arrogance always fails in any attempt to control his surroundings, nature or markets. Forces of the universe always find a way to confound those who believe they have tamed the beast. Or as is recently believed by perma-bulls, reincarnated the once dead, still dead and always and forever dead Goldilocks. Just ask the PhDs and Nobel Laureates at Long Term Capital Management whose collapse nearly took the global financial system with it. Or the market professionals who felt invincible buying portfolio insurance right before a total collapse in 1987. The list goes on and on. The road is littered with once brilliant has-beens who never learned to respect markets. Maybe that is because they are usually playing with other people's money.

While financial innovation is constructive, true genius is to respect risk, honor the beast and realize it can never be tamed. With that respect and realization comes forth strategies that take into account unexpected events and a recognition that limits should be placed on size and leverage. Especially when everyone is playing the same game. Oft this is contrary to the generally accepted thoughts of the day. Today's hedge funds and quantitative investment firms believe they have again tamed the beast with many statistical and mathematical strategies meant to "control" the markets. Here's the problem. Science is not fact. Science is simply the extent of man's knowledge at a point in time. Much of that knowledge and science is constantly being proven as inaccurate, a fallacy or incomplete. These strategies are therefore not based on fact but man's imperfect ability to apply what he may know at a point in time. And we all know that state changes over time. The current strategies involve more and more leverage (read RISK) with more and more money (read RISK) yielding lower and lower returns and producing an environment of lower and lower volatility. They too will soon perish as many before them who, for a moment in time, believed they too had tamed the beast.

In the end, it doesn't matter what causes the volatility, what really matters is the realization the shackles will be broken and the beast will be unleashed.

posted by TimingLogic at 12:53 PM

Saturday, August 04, 2007

Tips On How To Beat The Bear

This post goes hand in hand with my last post. As this video shows, it is possible to beat the bear. Personally, I prefer this approach to the wailing exhibited in the last video. The key tactic is deception. Sun Tzu would be proud.

posted by TimingLogic at 5:23 PM


Talk about inciting a panic. I have never seen anything like this video. I expect it will be taken down at some point and I might have to re-link to Youtube. This from someone who was telling investors within the last few weeks that the bull market was great, tech is back and buy the dips to paraphrase a few themes. Do I take it that we shouldn't be buying the dips any more?

Thank goodness the Fed Chairman, the Chairman of the Senate Banking Committee, the Senate Financial Services committee and others aren't on TV responding in this fashion. Oh, and contrary to the statements made the Feds and Congress are closely monitoring the situation. Who has been saying the markets are not pricing in risk for quite some time? The European Central Bank and the Federal Reserve.

So, here's the question in my mind. Unless the markets seize up and cannot work themselves out in a fashion that is detrimental to long term stability of the system, is it the responsibility of taxpayers to bail out mistakes made by those who are pocking tens to hundreds of millions to billions of dollars creating the foolish, risky schemes that caused this mess? Oh, then in the end allow said people to walk away with that money while we as a society are left holding the bag?

By the way, how about an impassioned plea for those Americans who have lost their jobs to offshoring because of Wall Street's pressure on companies to do so?

If I were using sentiment as an indicator, I'd be calling a temporary bottom based on this. Okay, so watch for Monday to start down. Then watch for Monday afternoon or Tuesday to be a reversal off of a down start. A temporary bottom may be in based on this type of panic.
posted by TimingLogic at 9:25 AM

Friday, August 03, 2007

Nearly 90% Of Americans Don't Like The Mainstream News Media?

"A survey conducted by the Pew Research Center for People & the Press said Thursday that 87% of respondents believe celebrity scandals get way too much ink and airtime. Only 8% think the media get the balance between celebrity and serious news right, while 2% told the surveyors that there wasn't enough celebrity scandal coverage."

Do ya think? Is the state of news an attempt by elitists to dumb down the general population as has been done time and again throughout history? Well, it doesn't appear Americans are buying it.
posted by TimingLogic at 1:02 PM

Thursday, August 02, 2007

Buckle Up

One final post this week and a quick comment. First the comment. As the market yo-yo's back and forth, one needs to remember to respect risk. That is something the current crop of financial professionals truly does not understand. Nor do most global investors. Old sages aren't typically found jumping for joy in this market. They've seen this act before. Now there are substantial messes across a wide variety of global markets. I can assure you that those who created the messes have little or no clue how to clean it up. More likely is that most will get eaten alive at some point. In other words markets love to punish stupidity. We've got that in spades.

Many traders and black box or mechanical trading methods so common in hedge funds use oscillators and short term conditions to determine trading points in the markets. The U.S. equities markets are about as oversold as they can get on a short term basis with ten day and McClellan oscillators falling off of a cliff. Rewards have been given by taking positions when we've historically hit these types of levels. But, I can assure you that those who believe the market is due a rally have no idea what they are talking about. The market it not due anything. Nor does the market owe idiots anything. A large number of hedge funds today are run by, well quite frankly, idiots as we are finding out. Now, I preface that by saying there are many brilliant people on Wall Street as there are in any profession or industry.

A rally may come or it may not. While circumstances haven't unfolded yet to support such a position of such, there are many data points which offer the potential hard and very fast blow lower. Here's a dirty little secret: bull markets with the characteristics of this cycle usually end quite violently and rapidly. Oh, and that doesn't mean we start another bull market in three months either.

Think this particular storm has passed and ready to dip your toe in the water as encouraged by some goofs on TV? (By the way, expect more storms.) Frankly, it hasn't even begun. Here's a comment made today by the CEO of IndyMac:

…our industry and Indymac have to be prudent and assume that this present disruption, which appears broader and more serious, might take longer to correct itself. As a result, we have seen just since yesterday, many major mortgage lenders announce additional product cutbacks…some leaving subprime, Alt-a, and other products altogether or restricting some products to only their own retail channel (and possibly wholesale) and significant, additional price widening.

While we have very strong liquidity, a good amount of excess capital and there are no realistic scenarios that I can foresee that would impair Indymac’s viability, as I said on the earnings conference call yesterday…we cannot continue to fund $80 to $100 billion of loans through a $33 billion balance sheet….unless we know we can sell a significant portion of these loans into the secondary market…and right now, other than the GSEs and Ginnie Mae….the private secondary market is not functioning.

My interpretation? If you can, get the hell out of Dodge!

posted by TimingLogic at 8:06 PM

Factory Orders Out Today

Weak orders, weak durables, weak technology, weak capital equipment. Need I say more? Is the continued weakness in capital equipment that is consistent with the trend since 2000 enough to quiet those saying we are going to see a pick up again? You can wish for anything but you'd be better off wishing for the winning lottery ticket. FYI, I've tried that. As much as I would prefer otherwise, it doesn't work.
posted by TimingLogic at 10:25 AM