Wednesday, January 30, 2008

No Takers On The Outcome To The Game?

No comments on the outcome to the game in the second to last post?
posted by TimingLogic at 1:14 PM

Monday, January 28, 2008


I thought I'd post this as a follow up to my past two posts regarding a rally. Obviously, I have a different perspective on this market than most prognosticators. I believe this is one of the most dangerous economic environments we have ever seen. I'm not particularly interested in toying with the idea of a rally when some of the fundamental data I'm looking at is telling me to be very, very cautious. Now, I look at alot of market data and don't really use this as part of any kind of trading system but I thought it might be of interest to market technicians because I've never seen any work like it. And, no you can't have the code. But, I'm going to tell you what it is if you want to develop something similar.

For those of you that are technically inclined, the closest thing I can compare this to is Welles Wilder's ADX. Welles Wilder was a brilliant engineer and market technician. So, I hocked his work. Sort of. This isn't really based on price as his work was but instead it's based on volume. In a volatile market like this, traders are looking for a new trend to develop and volume is a key to not being chopped to pieces. The red line is negative volume and the green line is positive volume. Whichever volume is above the zero line is the dominant trend. The blue line is a signal line. When the blue line and green line are rising and above zero it tells me a positive move up might be developing. In this case, I am looking for a market bottom. Then I would look at my trading system to watch for a buy to develop. Notice when the market was making all time highs in June, stocks were breaking down and negative volume was the dominant trend. Therefore the majority of stocks were not participating in the move to new stock market highs. Anticipating a rally here is not a high probability trade. Will it develop into one at this price range? Maybe. But, not likely.
posted by TimingLogic at 6:19 PM

Sunday, January 27, 2008

There Was No Reason To Panic. After All, They Were Hedged.

I posted a link to this video back in 2006. Let's look at it again in relation to yesterday's post. This might shed a little more light on some of the arcane comments I made.

First, let's remember Long Term Capital Management was run by twenty of the most brilliant people on earth. Two were Nobel Prize winners. Come to find out they were brilliant but had a blind spot. One of many that we all have. How many times do we have to experience these types of situations before people realize Wall Street doesn't know how to quantify risk and money needs oversight and regulation? This is not an anti-free market statement. In fact, it is in support of free markets. The problem isn't Ben Bernanke. It's Wall Street. These problems have been around since the beginning of banking. The outcomes are always the same. Money leads to avarice. Avarice leads to foolishness. Wall Street is often taking severe risks when fundamentals least support it. That is where we are today. Fundamentals never supported their avarice.

Listen very carefully to the commentary in this video. In fact, if you want to play the game, you might want to listen to it a few times. Think about much of the commentary in reference to today's environment.

After watching this video, we can play a game. A quick game. A game involving the Socratic method and Socratic questioning. Here goes. What if an environment existed where there was significant leverage in many assets and very large bets across all assets. And, let's say some of those assets are more liquid than others. And, that some assets are actually quite illiquid. By that I mean there is not a clearinghouse or large auction market with substantial players to trade that asset. A piece of art may be an example of an illiquid asset. And, let's say any one of those bets turns against one of the players or many players. And, let's say one day players have to recognize that bad bet(s). In doing so, the players have to recover a stable financial position. In other words, they need to raise capital to remain liquid and stay in the game. Or, in a bank's case, remain solvent. And, let's say it has become impossible to raise that capital through the sale of semi-liquid or illiquid assets. And, in a worst case scenario, let's say the illiquid assets are the ones that have turned against those players. What are the players forced to do? And what are the consequences for the players and for the asset markets they've invested in? Both short term and long term?

What did we say back in June of last year? "Liquidity shocks you say? But, we are awash in liquidity. And? They will come at some point." Back to the question posed in Saturday's post. Is the market going to rally? Fundamentals will determine the answer. You remember fundamentals? That passé view of the world before Wall Street brought us quantitative investment models.

posted by TimingLogic at 1:11 PM

Saturday, January 26, 2008

Will We Rally? Maybe The More Appropriate Question Is Will I Win The Lottery?

I had much of this written in a post for next week but I'm going to break this minor topic out and simplify it. In the comments section of a post I made a few days ago, I remarked of this topic but I want to expand on it a little. There is a general feeling that a rally has started here. All we've done so far is stabilized within a wide band for a handful of days. And, not very convincingly, might I add. It was a reflex rally to a technical condition that most short term traders would take. There is a more compelling perspective based on fundamentals that we have simply seen a minor abatement of selling that will continue.

Looking at ratios, surveys, how many stocks are oversold, the VIX or whatever is anecdotal at best. They are not independent variables. Using three, four or five of these tools is really looking at the same data.. Plus, you can't back test any of these measurements over the last one hundred years and gain any type of trading system that wouldn't bankrupt you first. It is ironic that some of the sentiment surveys have actually improved off of one positive day's pricing action. No respect for this market. As I've said before, sentiment is all contained in the stock(s). To extend this discussion beyond stocks, it's all contained in the asset itself. Ultimately, assets reflect fundamentals or as Ben Graham expressed this very fact, the market is a voting machine in the short term and a weighing machine in the long term. In other words, gamblers determine much of pricing action on a shorter term basis. Or, as I have said, just because a trader can, doesn't make it a reflection of reality.

Let me give you something to noodle over. Bear market rallies happen when Wall Street is in control. Not when bulls are in control. When Wall Street is in control. There are many angles to that remark. Maybe you know some of them, maybe more than me. This is not the 2000-2003 decline that many are using as a template to anticipate a rally. The fundamentals are not even close. And, because technical analysis is simply a function of fundamentals, don't expect a repeat of that type of decline. And, don't expect the technical tools that worked in that decline to yield similar results in this one. Time will come and time will go but there is a universal truth that is completely missing on most of Wall Street. Models are only as good as the fundamentals they reflect.

It's quite clear to me this current generation of quantitative genius on Wall Street has proven they have little if any concept of this reality. Quantitative and technical analysis if a function of fundamentals and not the other way around. The failure to understand this simple truth always leads to massive losses. In 2000 it was $13 trillion. From 2007 on we will likely see more than double or triple that amount across a wide spectrum of global assets. Will we rally? It's probably safer to play the lottery.
posted by TimingLogic at 3:26 PM

Friday, January 25, 2008

How about a light post today. A video of an amazingly talented parcour.

posted by TimingLogic at 9:32 AM

Thursday, January 24, 2008

The Markets Do What Politicians Don't. They Work.

Back in December we talked of the unintended consequences of Presidential candidate plans to fiddle with the housing market with foolish interest rate mandates.

If the powers that be would just sit tight and allow the markets to work, would some of this take care of itself? Would the markets accomplish what their fiddling is attempting to accomplish? Reduced demand and falling prices would translate into a free market response that would end up with..................lower rates. And, wouldn't that also help other home owners who would be given an opportunity to refinance at lower rates? What are central planners trying to do? Impact that same outcome.

Today, we see that mortgage interest rates are at their lowest level in four years. The market worked fine without the unintended consequences and meddling of politicians. What mortgage rate resets? The two year note is less than 2%. I've never written on here about mortgage rate resets that are the premise of so many bearish positions. That is because we have always talked of deflation. And while the Presidential candidates were yapping about what they were going to do some time before the end of humankind, the markets solved the problem of interest rates on its own. Quite quickly in fact. Next, I expect to hear from said politicos that the market adjusted because it was afraid of the consequences should they be elected.
posted by TimingLogic at 12:22 PM

Wednesday, January 23, 2008

When Was The Last Time An Oil Company Was On The 52 Week Low List?

The above chart is of energy behemoth Valero. One of my favorite stocks this cycle. One that is also extremely overvalued. Arguably a bubble. One I have written very negatively of in the last few years. Now, one that is hitting new one year price lows.
posted by TimingLogic at 11:37 AM

Monday, January 21, 2008

If You Are Going To Panic, Panic Early.

I was typing this up as a response to a comment in one of the last posts but thought I would move it to the front page. I believe in the motto stated in the title of this post. Panic early. (Update: by early, I mean before everyone else.) You don't want to be left holding assets on a murderous descent. Especially one that may not recover for years.

I wrote last week that if the markets couldn't rally soon, we may see a panic develop. Well, the stock market futures are showing what has the potential to be the largest one day percentage decline since 1987. International markets were routed today down anywhere from 5-9% in nearly every market. That means many stocks were likely down double or triple that amount given how indices are calculated. Now, one day does not a panic make, but we are looking at a very dangerous economic environment.

We've had a handful of panics over the last few hundred years. All of the requirements are in place for one to develop. Sometimes fundamentals surrounding those panics materialize and sometimes they don't. But, in a panic, it doesn't matter. In today's environment, that panic is a result of a rapidly developing reality. A reality we have been writing about for some time. Quite frankly, I believe this panic is warranted unless we see a miraculous change in fundamentals.

The latest potential catastrophe is now building in Russia. And, it appears to be gaining momentum. Let me stick my foot in my mouth and say I would put the potential for a blow up in Russia near the top of a "next" shoe to drop list. If this comes to pass, isn't it ironic that Time magazine just named Putin "Person of the Year"? What does that make Time magazine?
posted by TimingLogic at 4:51 PM

Sunday, January 20, 2008

Martin Luther King Day

On Monday we celebrate Martin Luther King Day. Once or twice in a generation the world delivers a great leader of human rights. Most recent names like King, Anthony, Gandhi, Walesa, Tutu and Mandela. People who risk their lives for the betterment of humanity. For the basic dignities that are our right. Each and every person reading this today owes much to those before them who risked their lives for the freedoms we now enjoy. Most every right and dignity gained by humanity has been delivered through those considered to be radicals. Threats to the establishment. Martin Luther King was indeed a radical. A radical for change. For the betterment of humanity. For dignity. For opportunity. For equality. The fight for human rights and civil liberties is far from over. The assault on humanity's freedom is endless. As Thomas Jefferson, another radical, told us, there is something within man that seeks to dominate and even enslave his fellow man when given unchecked and uncontrolled power. Do you believe your freedoms are guaranteed? Will you allow your freedoms to be taken from you? Or will you defend them? Even for those you disagree with?

We now live in an era where we can watch one of the greatest speeches on human rights.

posted by TimingLogic at 1:15 PM

Friday, January 18, 2008

Fertilizer or Bullshit?

Chart of fertilizer maker Potash courtesy of the always marvelous Click on the chart for a larger view.

We believe the demand for agricultural.......industrial.......commodities will see massive demand growth over the next twenty years because.......blah, blah, blah.

It's rather hilarious to listen to the prognosticators rattle on about commodities this cycle. How many actually know anything about commodities? Or agriculture? Or the oil industry? Most have never even seen a cow let alone understand the global dynamics that drive its demand or lack thereof. I don't believe many bullish prognosticators understand the dynamics of what is driving this cycle of commodity demand or the probabilities of its sustainability or lack thereof. And how to quantify the true risk of those probabilities. What they are is quantitative trend traders driving stocks into the stratosphere without any regard for future fundamentals or risk. I would be on suicide watch if I thought about holding commodities in this environment's unfolding fundamentals. Unless, that is I was a buyer in the 2000-20002 bear market or earlier. Most were not. The cumulative consciousness of plowing into momentum stocks and commodities as hedge funds and bank trading desks are doing (that we've written ominously as parallels to stock pools in 1929) might make fast money rich but is it based on reality? Invariably, most will stay well beyond what they should and that will likely create an avalanche of falling prices as many attempt to unwind and exit simultaneously. This environment of unregulated capital is not good for the health of economy or the finance industry. That is, unless you like what happened after 1929. But how often do we beat that drum?

If Potash, Deere, Freeport, Valero, U.S. Steel, Schlumberger and all of the other commodity stocks and commodities are truly reflecting fundamentals, then I'd like someone to answer a simple question. Would anyone like to tell me how many years of future earnings, future cash flow and future revenue growth are being discounted in these stock valuations? Could today's commodity-related asset prices be discounting twenty years of positive fundamentals? More? Is that really so unbelievable? We have seen twenty plus years of price gains in a few years. It was less than a decade ago Wall Street told us Sonera, 724 Solutions, EMC, Intel, Cisco, Digital Island, Exodus, Sun, Microsoft, Ariba and other technology stocks had achieved a new level of enlightenment with their valuations. They too were discounting twenty plus years of anticipated fundamentals. Fundamentals that never materialized. Analysis that was completely wrong. Given technology stocks are still decade(s) away from recovering their losses and many of the prognosticators' favorite technology stocks aren't even in business anymore, why would anyone believe such massive pricing action in commodity investments and companies such as Apple, Google, RIMM, Baidu are any different?

The above chart is of Potash, a fertilizer producer whose stock traded between $3 to $10 dollars for decades. We are now told the new world wealth is increasing demand for its goods. Demand and profits are indeed up. Although, that in itself is a very interesting topic with depth beyond the obvious. Potash's pricing action is indicative of commodity stocks, commodities and companies benefiting from commodities this cycle. These investments have achieved gains in a few years that are significantly in excess of gains seen in the stocks over the last twenty to forty years. Gains based on supply & demand metrics or on Wall Street's vision of the future? A vision based on reality? A vision discounting any and every major risk factor? There is substantial quantitative evidence to support a position that we could be in the process of setting the ultimate peak in many or all commodity-related assets for the next ten to twenty years. But, we are told to expect a twenty to thirty year bull market in commodities by nearly every single investment professional. My position remains that we are in a bubble and that we are more likely to see massive volatility in commodities rather than continued upward pricing for twenty or thirty years. Volatility that will break most investors who are not adept at trading mechanics. That being 90+% of investors. Including professionals. That includes your pension fund, that is if you haven't already had yours taken from you, that has likely invested in this scheme Wall Street has been selling.

Would you bet your future that Wall Street is right? That we mindlessly invest in commodities with an expectation of a twenty plus year bull market simply because someone with no sense of reality has decreed it so? Do any of those making their recommendations have quantitative work based on fundamentals and risks to back those statements up? Work that passes the test of reality? Or, are they simply regurgitating what everyone else is saying based on a foregone conclusion that global growth will remain robust for twenty years? From people that generally know nothing about the economics of these products or their markets? Or economics period. Or have generally missed calling every recession since the advent of such a term? From those who brought you the bubbles of 1929 and 2000 and many messes in between? From those who are bringing you this credit crisis? From those who have proven time and again to have no concept of risk? Just something to think about.

A month or so ago I saw a comment from a hedge fund manager that I like personally but has shown a lack of appreciation for topics that should be at the forefront of his skill set. He made comment that we are all looking at the same data but the bulls are just smarter. Really? You mean like in 1929 or 2000? What data were the bulls looking at then? The same data as today? Is that why everyone was given the same set of rules and Albert Einstein got extra credit on his high school science project? Or is that why we all took the same test comprised of the same data and some people got a failing grade and others got a perfect score? Everyone is not looking at the same data. It's a little like that science project. Your science project might be better than mine. Maybe it's more accurate. Maybe it's more sophisticated. Maybe you understand science better than I do. As I've said before, just because I can't or you can't doesn't mean it is so.

So, on that note is the global economy going to buy enough fertilizer to sustain a positive return in Potash's stock price from these levels over the next twenty years? Or is Wall Street selling us more bullshit? Take it from a farm boy. The best form of fertilizer is in fact bullshit. And we have an excessive supply of it. Economics 101 tells us excessive supply of bullshit...........
posted by TimingLogic at 11:10 AM

Thursday, January 17, 2008

Buy The Banks?

"If there was ever a time in the last thirty years to steer clear of financial institutions as investments, I believe today is that time." -- TimingLogic Blog, October 2006

Yesterday I heard plenty of prognosticators for the umteenth time telling us it was time to buy the banks. Even a prominent technical analysis firm and some bears have told us to watch for "the bottom" and to buy the banks here. As I write this, we are at oversold levels that have resulted in some type of rally every single instance in the last ten years. Obviously there are bulls attempting to rally the market yesterday. As they also attempted to do last week. They too are likely watching the same data. If a rally does not materialize soon we must consider a reality that the market may panic.

I want to make a final comment. None of the people who are telling us to buy the banks were telling us to stay away from the banks before this unfolding situation. In other words, they clearly did not and do not understand what the risks to the economy or the market are.

Update 30 Minutes Before Market Close: This morning right around the market open I put up this post. Now, at the end of day Citigroup is down another 5% and Merrill another 9% as two examples. In one day. That is an average year's return for financial stocks over the last century lost in a single day. And, in today's environment, that is over two years of risk free return lost in one day. Now, they have to make three years of risk free return to get that money back from one day's loss. Markets love to punish greed and stupidity. In today's world it appears both are a prerequisite to work on Wall Street. People buying here are clearly showing no appreciation of risk. The market is giving them their due reward.
posted by TimingLogic at 9:40 AM

Tuesday, January 15, 2008

The Grinch Stole Christmas. Next He Steals Global Growth.

We've highlighted problems with retail sales for the last year. They have typically been shrugged off until a handful of months ago when retail related stocks started trading lower. Now they are substantially lower. Today retail sales are reported to be what is probably the worst Christmas sales numbers in decades if not longer. At a time when many retailers make the majority of their annual profits. A week or so ago when individual retailers were reporting sales I actually heard a floor trader on Wall Street remark that a major reason sales were weak is that there is nothing new for consumers to buy. Do I live on Mars? The only people who believe that graduated from the school of clueless. Why don't they interview moms and dads and ask why they actually cut back Christmas spending? I'm sorry, that would indeed be confused with journalism.

Retail weakness extends well beyond store sales. Home sales are a retail data point everyone knows is weak and continuing to weaken. Ford has reported annual sales of 690,000 pickup trucks versus sales consistently at or over one million units in a healthy economy. Nissan's pickup sales are so weak that there are rumors it is going to cancel its recently launched full size pickup truck. We had a post about the pickup truck economy and how many important economic sectors rely on that data point for economic vibrancy. We've already talked about trucking company weakness. And, a contact I have in the rail industry said loads have dropped faster than at any time in the last thirty five years.

I haven't really talked about it alot recently but a major theme of 2006's posts was that the entire world was ramping up industrial production to shove more and more garbage down the American consumer's gullet. That included those actually making the product as well as those providing the raw material to build out the infrastructure to make the product. And, how all of this excess capacity was going to have a deflationary impact and a bust for that emerging market supply chain. The industrial supply chain causes many of the largest recessionary shocks in a normal economic slow down. And what function does emerging markets now play? The industrial supply chain for American consumers. In effect, the U.S. has outsourced many of the shocks associated with significant recessionary forces. Not that I agree or disagree with that strategy but who cares what I think anyway? And, where is all of the incremental demand for basic materials, commodities and energy going? That massive overinvestment and overindustrialization in.......emerging markets.

Few if any of these countries have addressed any type of serious economic and political reforms allowing for sustainable wealth creation and growth of their own economies. How many times did I rhetorically ask what any of these countries actually did to create the explosion they were experiencing? And, what is the answer? The answer is not alot. It was primarily the American economy and American monies driving their economic booms. Monies through outsourced investment, through direct economic investment and through asset investment. It has been a projection of our wealth and our stupidity. We've seen this story to a certain extent but on a smaller scale. It was Thailand. It's not a coincidence I posted a video on here about Thailand and the empty buildings and busted economy that still remains in that country. A quote from that post is, "I think it's important to remember that Asia has had many chances over the decades to prove itself as a place where progressive economic change, democratic change and true capitalist reforms could take hold.......I've incessantly ranted about my concerns over China and emerging markets since starting this blog. For those of you who believe the next century is the Asian century, you might want to watch this short video highlighting the economic devastation that still looms over Thailand ten years after their crisis. Was Thailand in 1997-98 the equivalent of China today in terms of economic reform, transparency and capitalism?"

It never ceases to amaze me that people simply take everything at face value without any thought. They see China growth and immediately add in 1.3 billion people and extrapolate to infinite. Yet, China has had all of modernity to develop its economy. Yet it only started to succeed when it begain receiving foreign investment. Now, people have written books on China's greatness, the Asian century, the demise of the U.S., people moving to China and on and on and on. As I've said before, I hope for success for China's citizens but I also don't confuse hope with reality.

Let's look at this in very simple terms. I'm sure everyone has read or heard this great little piece of wisdom, "Give a man a fish and feed him for a day. Teach a man to fish and feed him for a lifetime.". Primarily, the U.S. and to a lesser extent, other democracies have given emerging markets plenty of fish. But, in effect, they have simply enabled destructive economic and political institutions, governance and behavior that has kept these countries in the "emerging" category for decades or centuries. Unfortunately, long term wealth is only achieved by teaching them to fish. More appropriately, that they teach themselves to fish. As I wrote before, these markets are reliant on the kindness of strangers.

Emerging markets are feeding off of the wealth created by rising assets this cycle. Feeding off of inflation. What happens if that dynamic no longer exists? And if the American business and/or consumers no longer supports these markets with the intensity of the past decade? It's as obvious as obvious can be that emerging markets are experiencing massive inflation. The crowd clearly recognizes this point. That is one reason why they keep yammering that the Fed should not cut rates. They say we are importing inflation. And, we are. But, what insidious dirty little problems exist that the crowd doesn't recognize? The U.S.'s deflation is fueling emerging market inflation. A fact that not a single person rolled out for public opinion has brought up. It's highly likely emerging markets and their inflation party will end for reasons most do not understand and they too will join the U.S. in a global deflation.

American consumers are tiring from their shopping sprees as we said they likely would in 2006. And, so too are businesses likely to pull back on international investment. That will cause tremendous shocks in emerging markets. To date the macro pieces I have written about continue to fall into place. It could all blow up in my face but I would recognize much has changed before hand through quantitative work. Instead, as time passes there is even more evidence of the ultimate outcome for this cycle. That outcome, if it comes to pass, means nearly everything the media and Wall Street told you would come to pass at the height of their hubris in fact resolved itself in exactly the opposite fashion in the final outcome. Their "black swan". Their unpredictable outcome. Conditioning---here and here---is a powerful force.
posted by TimingLogic at 9:02 AM

Thursday, January 10, 2008

China's Space Program Launches Moon Shot

Will they make it? I'd give them an 'A' for effort. Still no sell signal but gawd this is worrisome. I don't know if any of you have seen the recent economic data showing China is more of a paper tiger than a dragon but their economy is now anticipated to be about half as large as the fearmongers had everyone believing. Realistically, it is likely half again as large as the experts believe using a basis of sustainability. There is so much overinvestment and building for the sake of insanity that there is a high probability we will see their economy shrink by double digits in the aftermath of their bubble popping. And their own banking crisis waiting in the wings. Additionally, we now find out Chinese corporate profits are actually about half of what pundits originally thought. So, we have a Chinese equity market with valuations of 3-5x what the U.S. was in 1929 and an associated financial system built on toothpicks. It's hard to get a handle on reality because we have to wade through communist party propaganda instead of real data in an opaque society.

What does a repressive society do when they are already experiencing chronic unemployment and underopportunity for 1.3 billion people and the economy starts shrinking by double digits? And, how does a repressed society react? An interesting perspective that might be applied to this situation is found in one of my favorite books, "The True Believer", written by a vagrant hobo by the name of Eric Hoffer. Might I add one brilliant vagrant hobo. His writings are timeless. It's hard to find and seldom available from regular sources but the last time I checked, Amazon does have it.

Wall Street is headlong invested in China. So are many international companies. And, many of their investments are not liquid. In other words, they will take the same bath Chinese society takes when this bubble pops. And, they will be exposed to the same uncertainties and volatility that develops in Chinese society. That is, unless we have a graceful exit from the crisis building in China and we all discuss it calmly over tea and crumpets. China is definitely one of the big turds floating in the pool.
posted by TimingLogic at 4:47 PM

Wednesday, January 09, 2008

Ramblings About Wall Street And The Economy

"It's interesting that the industry (Banks) has invented new ways to lose money when the old ways seemed to work just fine."
--Wells Fargo president John Stumpf

I have been quite critical of Wall Street on this blog. It is not without reason as we are now witnessing. Mind you, the party is just starting. But, no one who has read this blog should be surprised. I've probably written the words "risk management", "repricing of risk" and "risk" on this blog more than has been uttered on all of Wall Street in the last decade. And, when it was uttered, it was in the context of risk-based models that typically have major flaws as we are now witnessing. Amongst other critical factors, it is a nearly universal disregard for risk on Wall Street that has led us to this point. Although as we have discussed, the global economy is dealing with many more fundamental issues than Wall Street's foolishness. The very disconcerting fact is that all of the issues will come to fruition comparatively simultaneously. But, it couldn't be any other way because the entirety of most issues are a function of the same fundamentals. That may sound bizarre to the hopeful or bullish but I don't model hope. Nor do I care about opinions.

Let me digress a minute. I do realize the majority working in the financial industry are truly capable, brilliant and hard working people as is the case with most people everywhere. And, our capital markets are the envy of the world. Although it seems many believe the tail wags the dog when people lose site of the fact that the reasons for this statement are because of fundamentals associated with our society as opposed to Wall Street itself. I do realize there are many people on Wall Street able to think and act outside of the herd but because of many timeless dynamics associated with this industry, the herd has and always will rule on Wall Street. That is why I try to stay far away from the deafening roar of their mind altering messages. Because, I too am human and the propaganda is all consuming. This very fact is a major reason why most who work in the money machine and the media covering the machine have such a disconnected and false sense of reality. They have literally been brainwashed by the system in which they operate. And, because most people don't actively re-assess their belief system on a continual basis, the outcomes are consistent.

The very disturbing fact isn't that Wall Street is simply bullish on stocks this time around. It is that they are or were bullish on every investment imaginable: emerging markets, corporate bonds, all forms of debt, alternative investments, income producing investments, commodities, commercial real estate, dividend focused stocks, Brazil, China, India, Russia, energy, the Middle East, residential real estate (already cracked) and on and on and on. What have they not been bullish on? The dollar and yen. What are two of the investments I said I would own if forced to like something at this point in time? Dollars and yen. What went up yesterday when the market cracked? Dollars and Yen. The speculators are still trying to crack the dollar but I believe they will fail. More on the dollar in a later post.

When FrankenFinance creator and former head of Goldman, "Mr. Paulson goes to Washington", and the entire Presidential economic team gave an unprecedented live interview in late July of 2007 on CNBC just to hang ten and tell us everything was great, I knew it was likely because some institution(s) were insolvent or some equivalently ominous problem. I am quite confident Paulson and team's fabricated fun with Dick and Jane was meant to maintain confidence. Funny thing about fabrications. They also have unintended consequences. I wrote about the significance of that interview on July 3oth and the parallels to 1929 when Paulson's predecessor also attempted to maintain confidence. What was needed to maintain confidence isn't talk. And, that opportunity was lost long ago. Now, it seems everywhere I turn the President or Paulson is on television attempting to instill confidence. As I have said many times, while I don't like gold as an investment, it is telling us something. I still believe it is telling us to prepare for deflation and associated risks. We'll talk more quantitatively about deflation in early 2008 as well. That said, I still expect gold will collapse as money evaporates. But, it could then rise substantially again at some point. It depends on future events I am not comfortable anticipating right now. In other words, it is data dependent and I need to see the future data.

Back to today. While Wall Street was chattering about Pax Globalia and other deafeningly bullish messages, we were talking about this likely going down as the biggest asset bubble in history. And we wrote about moving our money out of unsafe banks in late 2006. Not banking stocks. Banks. And writing so in the face of the deafening roar of bullishness about the great global expansion seemingly guaranteed to last decades, bullishness about the unstoppable Asian century, bullishness about Wall Street's new genius of quantitative analysis, a booming stock market, massive profit growth and the biggest global economic boom in history. But whoever was actually recommending people own the underlying bank stocks at that time or any time since has fallen prey to the drone of Big Brother's indoctrination. Needless to say, that was nearly everyone.

In an incredibly unbelievable false reality, we see a money manager survey conducted by CNBC titled the "Trillion Dollar Survey" released last week. Amazingly in that survey only 9% of money managers believe the market will be lower in 2008. 98% saw the odds of a recession at less than 50% and zero, that's right, zero placed the odds of a recession at 100%. This at a time when my models were and are flashing the highest levels of risk at any time in modern history. As I've written many times, recession is a foregone conclusion. The only question is how these risks will resolve themselves. But, regardless, the complete lack of risk awareness by money managers surveyed shows an utter lack of appreciation for a topic they are paid very handsomely to understand in detail. Remember the Indiana Jones movie where they were searching for the Holy Grail? In his desirous moment of greed, a man believed the most beautiful grail must be the true Grail. He filled it with water and began to drink believing he would achieve immortality. And he died a violent death. Then Indiana drank from an imperfect, undesirable cup of a carpenter and it was indeed the Grail. The Knights Templar, who was there to protect the Grail, wryly said, "You have chosen wisely.". As it is this cycle. The greedy seeking riches have chosen to believe immortality lies in commodities, Chinese stocks and all of the other asset bubbles we have incessantly written of. But the Holy Grail could very well be undesirable Dollars and Yen. This very fact that money managers don't realize what is going on very likely means they too have not "chosen wisely".

This reminds me of the post I put up some time ago about a famous finance professor confidently telling us stocks were cheap and to buy dividend paying stocks. At that time we were talking about a bubble in dividend paying stocks. Given banks comprise the largest dividend paying category and most banks are down 40-50% and some up to 90% since that post, I guess the good professor might need a refresher course in risk management. REITs and dividend focused mutual funds have followed banks substantially lower as will other high yield investments. Given the macro factors developing, there is no reason to believe that won't include a current Wall Street favorite, utilities.

On July 10th before this crisis unfolded I wrote, "From what I model, we are at a very heightened risk of a credit crunch developing in many economies over the coming months. Actually, I expect there is a reasonable probability for some bizarre events to come to pass in the credit markets as I intimated last year.". Today, those models are deteriorating to levels that are very ominous. While that may change, I cannot conceive of any events rectifying what ails the global economy in the foreseeable future.

This confirms a major point that everyone must never forget. The world's greatest investors realize Wall Street is a mob and one can improve their investing prowess significantly by accepting this never ending truth. There are times to run with the bulls and feast with the bears. But, in any event, determining those times has nothing to do with the mood of Wall Street. Wall Street will do what Wall Street will do. And, in those times that they wake up to realize they've been completely wrong and underlying fundamentals don't support their beliefs, look out below. As I wrote last year, I believe the market is now acting rationally to underlying fundamentals that have been with us for many years. In a truth seldom understood by most on Wall Street, fundamentals do matter more than how they feel. While many on Wall Street are now panicked, as I wrote before this is not a contrary indication. It is a realization of the Frankenstein they have created and that fundamentals never supported their quantitative models of insanity and lack of disregard for risk. And just as the original Frankenstein went the way of the dodo bird, so will this incarnation of fright.

So, what about the star of Wall Street? How is it again that Goldman lost so much of investor's money but they have gained this aura of invincibility recently as many believe they have weathered the the mounting storm unscathed? Again, the charlatans and gorgons are luring fools to their death. This credit crunch was not caused by subprime and won't end with subprime. Economic vitality is not just around the corner with the recognition of subprime-related assets. Actually, Goldman's flagship hedge fund appears to have lost even more than the 60% quoted in the above article yet they recently reported strong earnings. Did Goldman miss the crisis? Not if their leading hedge fund returns are any indication of what we can expect in the future. Many cover stories have recently been written that Goldman brilliantly missed what now ails many banks. Not likely. Any ticking obligations outside of the company? Failing investments in hedge funds? Any other liabilities? Derivatives risk? Investments in China? The Middle East? Asset valuation risks? Caustic underwriting still left to shovel on an unsuspecting buyer? Investments in private equity? Commercial real estate? Acquisitions? Off balance sheet shenanigans? Goldman was an originator of modern FrankenFinance. The chance that they will navigate this storm given the investments they have made that I am aware of is almost an impossibility. But, let's let unfolding facts speak for themselves.

We already see the Goldman cracks starting to show. One of my favorite financial journalists, Paul Farrell wrote, "New York Attorney General Andrew Cuomo has already subpoenaed Wall Street. Next: Congress, the SEC and other state regulators will demand answers, such as why was Goldman shorting the SIVs they were selling, many of which quickly went into default? What did they fail to disclose? Sounds like a massive conflict of interest with major liabilities."

One thing is true of betting or gambling with other people's money. It's hard to beat the house (Mr. Market) on a consistent basis. And, when levered to the hilt as Goldman is, it is nearly impossible. Warren Buffett told us this a long time ago. Remember this fact. It is your opportunity to profit from Wall Street's foolishness.

When I read the following article, I thought of the above quote I had recently read from John Stumpf. Bloomberg's article is titled Arab Stocks Lure BlackRock, Goldman, Blair as Europe, U.S. Fall. The basis for Wall Street's enthusiasm in Middle Eastern markets is what? Their economies are booming while the U.S., Japan and Europe are faltering? These are the same companies that created the mess we are now witnessing and I believe this shines clearly of more Wall Street incompetence and complete disregard for risk. This at a time when these oil-based economies might be peaking not just for this cycle but could very well be in the process of peaking until substantial reforms are undertaken as discussed late in 2007. Psst, you might have considered investing in these countries ten years ago when oil was $12 a barrel and sell now after such a massive rise in perceived wealth and the associated economic benefits. This is yesterday's news and rear view mirror investing.

On this topic here's a question. What fundamentals create long term wealth in an economy or society? Wealth that gives an informed investor the confidence to make long term investments? And, by investor I'm not talking about stocks per se. I'm talking about investment. Real investment. Business investment. Economic investment. It isn't oil or being resource rich. There is an argument to be made that can have just the opposite impact. And, it isn't cheap labor or cheap currencies as in China. And, it surely isn't a large population as many are now convinced is a major driver in China's future. And, it isn't building booms that people have become so enamored with in this cycle. (Wow, look at those big buildings. Their economy is booming. Not!) Have any of these companies investing shareholder and investor money in China and OPEC countries ever thought through this simple question? It appears not. Why? I would guesstimate primarily because it isn't their money.

We talked a little about the Middle East stock market bubbles in 2006. And about their bubbles of magnificence they are building in booming real estate schemes. Many of these stock market bubbles popped a few years ago after running up 600-800% very rapidly. The same shenanigans about people day trading their grandmother's retirement were happening in these markets as was the case in the U.S. into 2000 and China and India today. To date, these markets have rallied somewhat to recapture some of their gains. But, are Goldman, Morgan and others buying near significant tops? And doing it with investor and shareholder money? More crises for the gristmill of mean Mr. Market (the house) to pulverize to shreds?
posted by TimingLogic at 7:36 AM

Saturday, January 05, 2008

Maintaining The Diversity Of Press And Media

The very word secrecy is repugnant in a free and open society. And we are as a people inherently and historically opposed to secret societies, to secret oaths and to secret proceedings. We decided long ago that the dangers of excessive and unwarranted concealment of pertinent facts far outweigh the dangers which are cited to justify it. Even today there is little value in opposing the threat of a secret society by imitating its arbitrary restrictions. Even today there is little value in ensuring the survival of our nation if our traditions do not survive with it. And there is very grave danger that an announced need for increased security will be seized upon by those anxious to expand its meaning to the very limits of official censorship and concealment. That I do not intend to permit to the extent that it is within my control..........

And that is our obligation to inform and alert the American people. To make certain that they possess all the facts that they need and understand them as well. The perils, the prospects, the purposes of our programs and the choices that we face. No President should fear public
scrutiny of his program. For from that scrutiny comes understanding. And from that understanding comes support and opposition. And both are necessary..........

Without debate and without criticism no administration and no country can survive.........that is why the Athenian lawmaker Solon decreed it a crime for any citizen to shrink from controversy. And that is why our press is protected by the First Amendments. The only
business in America specifically protected by the Constitution. Not primarily to amuse and entertain. Not to emphasize the trivial and the sentimental. Not to simply give the public what it wants. But to inform. To arouse. To reflect. To state our dangers and our opportunities. To indicate our crises and our choices. To lead, mold, educate and sometimes even anger public opinion......And it means finally that government at all levels must meet its obligation to provide you with the fullest possible obligation..........

--John F. Kennedy April 27, 1961 speech to the American Newspaper Publisher Association

The Wall Street Journal has a story about appointed politicians at FCC meddling with media ownership in the U.S. that I would encourage everyone to read. Concentration of media ownership allows for potential abuses, manipulation of news, less diversity of opinion and a restriction on its ability to educate society. Facts that were very important to those who created this country. Extreme concentration of media is nothing more than propaganda as history and countries where government controls media has taught us. Media shapes our thought processes and many of societies values every day. The less diversity of media ownership, the more media shaping can diverge from the diverse debate of reality to, well.......effectively indoctrination.

It concerns me that appointed politicians at the FCC are attempting to rewrite the current media ownership rules again. Even many media moguls are not supportive of such concentration of media power as the potential for abuses and manipulation are limitless. Are there any reasons why politicians would be tinkering with media ownership rules than to assuage corporate lobbyists? Now, I may be pro free markets but concentration of power, opaque corporate lobbying and monopolistic practices of large corporations are not representative of free markets. That is why founders of this country provided checks in the system to disallow any such concentration of power. That is why we have laws prohibiting concentration of business power. Law that have been repeatedly abused by lax government enforcement as we discussed two years ago. Capitalism and the free flow of markets should prohibit monopolistic practices and concentrated power in the markets. Such practices stifle the free flow of markets and even other freedoms. These aberrations are bad for society, for democracy and for the economy.

This is an issue that has potential ramifications for everyone. This is an issue of freedoms and the press's role of education so important to our founding fathers. This brings up an important issue. As a society it is our responsibility to engage our Congresspersons or Congressional leadership on issues that are important to us. There is a likely battle brewing between the FCC and Congress over this issue. The more Congressional leaders hear from their constituents, the more likely they will fight this attempted change in media ownership rules. And with the internet email addresses and names of Congressional representatives may be found at and Correspondence doesn't need to be lengthy or eloquent. It could be a simple sentence. In this case it could be something as simple as "Dear Congressperson, I would like you to stop the FCC's attempt at changing media ownership rules.".

Two recent polls by Pew and Harvard showed nearly every American is very unhappy with news coverage in this country. This is a very important issue. If nearly 90% of Americans are unhappy with news coverage, is the media focusing on the news Americans want to hear or is it force feeding us mindless and worthless nonsense? Or what media and even what government might wants us to hear? Or what marketing people believe will increase ratings so that advertisers will pad their pockets with profits? Given the current lax rules on media ownership, I would venture to say much of the unhappiness with media is a result of already concentrated media control or media controlled by corporations with business conflicts attempting to feed us what they want us to be watching, reading or listening to for less than savory reasons. This is our world and our responsibility to make it the world we want it to be. Small actions by many can and does change the world be it this issue or any other.

Advertisements contain the only truths to be relied on in a newspaper.
--Thomas Jefferson

Two hundred years ago, newspapers were obviously the only media. In today's world, this quote would surely be amended to include television, magazines, radio and other forms of media. And, with media being controlled by global companies with tremendous conflicts of interest, it is even more important to maintain the diversity of media. Frankly, it is important to maintain the independence of media but that appears to have been completely lost.

And, how does our society's rejection of secrecy make you feel about public company's opaque efforts at masking their actions, mistakes and losses from shareholders aka banks? Is that really any different? Is the media complicit in this effort by generally not reporting the seriousness of the issue? Could that possibly be because much of media is owned by companies doing business with these institutions or even have financial interests in these institutions? We shall see.
posted by TimingLogic at 11:45 AM