Wednesday, December 31, 2008

I'm Back (Musical Tribute)

Seattle sees steep slide in home prices

"It looks like the Seattle market, which had been holding on through the early part of this year, is now beginning to buckle," said Lawrence Yun of the National Association of Realtors.

There is just no way I can remain silent after reading that. That's hitting a bit close to home, pun intended. I'm really starting to think I was being way too optimistic yet again. That's just so hard to believe. I'm about the most bearish person I know and have been since 2004. I started this blog thinking things would get very bad, but things got much worse than that though.

I never thought I'd see the day when the NAR admits that a market is beginning to buckle. By using the word "beginning" it implies that the NAR expects even more buckling. Wow. Do they not want their real estate agents to have any work here in Seattle? Who would buy a house if even more buckling is on the way?

Let me put this another way. The captain of the Titanic was not told the ship was "beginning to buckle" once the ship had already sunk and was resting on the ocean floor. Right? That would be a fairly useless warning. No, beginning to buckle is an early warning of what's to come. It is possible that hindsight will show that it was a false warning, but it is a warning just the same.

Seriously. I just can't get over it. Here's what my reaction would be if anyone ever told me something was beginning to buckle and I was even remotely near it.

I'd get the heck away from it!

It reminds me of Ghostbusters. We've finally reached the dogs and cats living together stage. Beginning to buckle is something I would expect a bear to say, not a pollyanna with a vested interest to put the most positive spin on the situation as was humanly possible. If the pollyannas are saying that the Seattle housing market is beginning to buckle, then what should the realists be saying? I hope it isn't...

This city is headed for a disaster of biblical proportions. - Dr. Peter Venkman

Human sacrifice, dogs and cats living together... mass hysteria! - Dr. Peter Venkman

Retail Standout Buckling Under To Recession

There are no guarantees, but teen apparel retailer Buckle (BKE) just might have put in a bottom. The stock buckled 70% in the two months through Nov. 20. It has since recouped up to 40% of that dive, although the stock has been sliding in recent weeks.

Slip sliding away
Slip sliding away
You know the nearer your destination

The more you're slip sliding away

And on that note...

Happy New Year!

2008 is finally behind us. 2009 here we come! Buckle up!

Friday, October 17, 2008

I'm Capitulating

Buffett: I'm buying stocks

"Fears regarding the long-term prosperity of the nation's many sound companies make no sense," wrote Buffett. "Most major companies will be setting new profit records 5, 10 and 20 years from now."

I started this blog on August 31, 2007.

The Dow was 13,357.74.
The S&P 500 was 1,473.99.
The Nasdaq was 2,596.36.

I'm suspending this blog on October 17, 2008.

The Dow is 8,972.33 (down 33%).
The S&P 500 is 947.87 (down 36%).
The Nasdaq is 1,734.47 (down 33%).

I'm taking the cowards way out and locking in my anti-prosperity thoughts while the locking in is good.

I guess that means I'm long-term prosperity neutral right now. I'd certainly never bet against Warren Buffett. I won't be buying stocks though. I'm fine with the real yields that TIPS currently offer. I will also continue to hoard toilet paper. Some habits may never die, lol.

That being said, I'm encouraged that commodities and oil have sold off, that real interest rates have risen (much to my surprise), that the euro and China have been discredited as superior safe havens (not to my surprise), that stock prices have come down to more reasonable levels (as opposed to hyperinflated), and most of all that
Caterpillar (a stock I sold in 2004) has seemingly finally ended its "sure thing" only goes up ride. I do think the situation is somewhat different now. I simply never bought into the idea that a commodity boom would be good for prosperity (much like it wasn't in the 1970s). That was a major reason for my bearishness.

Our country still faces many challenges, but so do all the other countries of the world. I continue to believe that things will get worse before they get better (perhaps much worse), but that's a definite improvement from what I once believed. Namely, that things might not ever get better.

Deep down, I think I saw this day coming. I haven't created charts in a long time. That's partly because I didn't think much new relevant "bearish" information could be offered. Sure, the charts would look ugly, but we kind of knew they would be. What's more important is what they will look like in the distant future, and I'm not all that convinced one way or another.

This global commodity selloff feels like the real deal to me. The reason I think it might be different this time (very scary to predict such things) is because real yields have risen so much. Higher real yields choke demand for hoarding commodities. That was not the case in previous selloffs. Here's the chart that I feel best shows that something might be different this time.

TIP vs. IEF (2 year chart)

Note that the two funds (inflation protected vs. no inflation protection) tracked each other very closely but then diverged recently, in a major way. You will also note that I was/am on the wrong side of that trade. Fortunately, the modest pain in recent days (especially compared to what stock investors were feeling) is offset by the pleasure over the last year . Higher inflation was generating high distributions to me, which is not reflected in the chart. Using hindsight, I would have done just as well in the past year simply burying that paper money in the backyard though. Go figure.

I will continue to monitor the comments section of this post for those who wish to continue to chit chat into the distant future. It has been a pleasure.

Also feel free to email me directly at

The blog is suspended. You will note that it is not deleted. I reserve the right to return even more bearish than ever in the future, should conditions warrant it. Don't even get me started on how we're planning to fund Social Security and Medicare.

Thursday, October 16, 2008

Stocks-Go-Round (Musical Tribute)

Using spreadsheets, tracking Wall Street
Bulls opt to buy, say bears crossed the line
Tightened our belts, forced to sell
No payday, bought canned goods for our shelves
On layaway, to our dismay
Stocks oversold, was time to buy yet again
They dropped too much, banks dropped too much
Sold in vain, bulls said

We're told it's the seventh inning
So they can end up winning
Bears sold right at the start
But then the bulls did outsmart

With cash pumped in today we're forced to buy
But what goes up might go down
I do not lie


You can't argue, bulls say with glee
The way charts move, the curve was easy to see
Using 20/20 hindsight
Deflation's downplayed, they're gonna prove they were right
Increase the leverage, increase the bets
Use last dimes, to buy land mines
Stocks dropped too much, banks dropped too much
It's time for fame, bulls said

We're told it's the seventh inning
So they can end up winning
Bears sold right at the start
But then the bulls did outsmart

With cash pumped in today we're forced to buy
But what goes up might go down
I do not lie


Using spreadsheets, tracking Wall Street
Bulls opt to buy, say bears crossed the line
Tightened our belts, forced to sell
No payday, bought canned goods for our shelves

With cash pumped in today we're forced to buy
But what goes up might go down
I do not lie

With cash pumped in today we're forced to buy, buy, buy, buy
But what goes up might go down
I do not lie, lie, lie, lie

Gold Old Yellered (Part 2)

Gold ends slightly lower amid market uncertainty

"People currently seem to prefer to sit on cash," said Jon Nadler, senior analyst at Kitco Bullion Dealers. "Another reason [gold isn't rising] is that investors are scrambling to meet margin calls," thus they have to sell even their gold investment.

When I listen to the deflationist camp I tend to nod in agreement. They've been accurately predicting bubbles and their crashes for nearly a decade. First it was the dotcom bubble and then there was the housing/credit bubble.

Deflation seems a perfectly good reason to sell gold.

Some analysts, however, said it's only a matter of time before gold rises.
"An extraordinary amount of liquidity has been pumped into the system this year," said Peter Grant, senior analyst at USAGOLD. "I anticipate further debasement of all currencies, including the dollar, which will ultimately drive gold prices higher."

When I listen to the inflationist camp I also tend to nod in agreement. They did accurately predict what an extraordinary amount of liquidity could do in the dotcom bubble's aftermath. They are now predicting what an extraordinary amount of liquidity could do in the housing/credit bubble's aftermath.

Inflation seems a perfectly good reason to buy gold.

Is it any wonder I'm seemingly stuck between the two camps, in some sort of twisted paper stagflationist long-term middleground neverending nightmare? It has been four full years since I turned bearish. Not only do I not see the light at the end of the tunnel, I can't even see the frickin' tunnel. I think we might have sold it to the Chinese, not that it is helping their economy right now, lol.

Gallows humor for the win (or lack thereof).

Gold Old Yellered

Gold is finally reacting to the deflationary credit crisis conditions.

Gold Falls in London as Investors Seek Cash Amid Bank Turmoil

I think the headline pretty much says it all.

It is apparently not the miracle metal that can protect you in both an inflationary environment and a deflationary environment.

The optimistic bulls had it easy. They could simply buy with conviction and know that all will work out fine (it didn't though). The pessimistic bears did not have it so easy. We had to decide between deflation and inflation. If serious deflation was coming, you'd want cash and long-term treasuries. If serious inflation is coming, that's the last thing you want. You'd want hard assets instead. I tried to ride the line between the two camps by being in paper inflation protected assets (TIPS). I just wasn't all that sure what we'd be getting. I'm still not all that sure.

What we have now is clearly a deflationary/disinflationary environment. Today's CPI came out flat. How long it lasts is anyone's guess. I think once it is over we'll probably be going back to more stagflation, but I certainly can't prove it.

The key to gold's drop as far as I'm concerned was watching the price of oil and the price of the other precious metals prices. Oil's dropping again today. Platinum is also down big again to $875. Keep in mind it was over $2,200 earlier this year. How could some deflationists possibly think that gold's price could rocket past platinum's price (a precious metal that's much rarer)? I never could understand that line of reasoning.

Then there's palladium. It peaked at just under $600 an ounce earlier this year. It's now just $165. No joke. That's a jaw dropping drop.

January 26, 2007

Gold and the K-Cycle

Those that thinks gold always acts as an inflation hedge are simply mistaken.

Yes, but what's the point? Those who thought real estate (at any price!) always acts as an inflation hedge were similarly mistaken. Yet, real estate is generally a pretty good inflation hedge. Too bad deflation is the word of the day.

One quick glance at the above chart should be proof enough.

This statement really got my goat. A quick glance at a chart is one of the things that got us into this mess in the first place. In 2000, a quick glance at stock charts showed stocks only go up. In 2005, a quick glance at housing charts showed that real estate only goes up. A quick glance at a chart should NEVER be proof of anything. Heaven help me if I ever start to believe any of my charts actually prove anything.

Did we experience inflation from 1980 to 2000? Did gold fall from over 800 to 250 anyway?

Once again, what's the point? Did gold rise during the massive inflation of the 1970s? Yes. Did people buy gold in the 1970s because they were concerned about that inflation? Yes. Did it enter a bubble? Yes. When inflation finally did recede to more normal levels did gold sell off? Yes. Unlike the 1970s, did real interest rates remain positive throughout the 1980s and 1990s? Yes. Were people happy to earn positive real returns on paper assets in the 1980s and 1990s? Yes. Are real interest rates positive right now? Yes. Is gold well off its highs right now? Yes.

Obviously the answer to both questions is yes, and that disproves the idea that gold is always some sort of inflation hedge.

This disproves nothing. Of course gold is not always some sort of inflation hedge though. It is certainly not proof that gold is therefore a deflation hedge. In my opinion, like every other hard asset what really matters is the price it was bought at. If bought low (say $250 an ounce several years ago), it has been an excellent inflation hedge. If bought high (say $1000 an ounce recently), well, not so much lately.

This usually brings up the question of Japan and gold and why gold fell when Japan went into deflation. The answer is that Japan was one season out of sync with the entire rest of the world. When Japan was in deflation (Winter) the rest of the world was pretty much in disinflation (Autumn). It was the rest of the world that dictated what happened to the price of gold, not Japan.

The entire world is in sync right now. The entire world is attempting to fend off deflation right now. Gold's world price is tanking right now. It is breaking under the weight of falling oil, platinum, palladium, and silver prices. I do not offer this as proof though. It is simply an observation. Should my money wish to chase hard assets again at some point, based on today's prices I'd probably chase silver and/or platinum over gold. I don't wish to chase them though. I'm content on the sidelines.

To see how gold shares might act in the upcoming credit crunch, please consider a chart of Homestake Mining in the 1930's courtesy of Gold Eagle.

I think it is safe to say that we've been experiencing a very serious credit crunch over the last three months. Expectations, meet realizations.

Barrick, Goldcorp, Newmont, Kinross, AngloGold

Wednesday, October 15, 2008

My First Blogging Day, Revisisted

The following was a post I did the first day I started this blog in August of 2007. It includes my very first economic chart (made a few years prior). One of the reasons I started this blog was to remind myself what I was thinking in the past and to see if my thinking would change over time. So far, my thinking has been fairly consistent.

Historical Dow

In the spirit of what ifs, what could cause the stock market to head back down to the green line? Where do I start?

1. Near record low unemployment. Bulls love it. I wonder what would happen if it reverts to the mean.
2. Near record profit margins. Bulls love it. I wonder what would happen if it reverts to the mean.
3. Credit crisis. Don't think many people love that, myself included.
4. Housing crisis. Let's see. Rising inventory, falling sales, falling prices, rising foreclosures, rising inventory, falling sales, um, I think I just fell into a feedback loop. Sorry about that.
5. Banks. Need I say more? Just how many do we really need?
6. Payday Loan Centers. Didn't I just cover this one as #5? Just how many do we really need? 20,000+? Seriously?
7. China. Just how many more paper dollars can we ship them in exchange for cheap goods? Let the grand experiment continue!

One of those? All of those? Probably not. It will probably be something I wasn't smart enough to think of....

So far, all of those appears to be the correct answer. Believe it or not, this is actually pretty surprising to me. I'm not sure what to make of it. There's really no way to prove that I know what I'm doing, but I think the same could be said of most investment advisors (and I most certainly do not consider myself to be one).

The market has a way of spanking those who begin to think that they know what will happen next. I'm reminded of two prize winning economists at Long Term Capital Management in particular. Fortunately, I'm not sure what will happen next nor am I making any risky bets one way or another. Hopefully that makes me somewhat spank-proof, lol.

I can say this though. I got my haircut today and I asked the guy who cuts my hair how many people have been telling him that they thought the economy would get better. He told me that nobody believes that. Not one. I then told him that contrarians would find that very comforting. Buy when there is panic in the streets they say. I told him that I do not find it comforting at all though. The herd continues to trample contrarians these days. For what it is worth, that got a laugh.

I want to take this one step further though. Let's assume for a moment that the herd is wrong. That does not necessarily mean that the contrarians are right to bet against them though. Picture this. What if the herd isn't too pessimistic. What if the herd simply isn't pessimistic enough? I wasn't pessimistic enough and I was even a bear. Imagine that.

I'm reminded that more money was lost attempting to bottom pick the Great Depression than was lost in the original crash. I bet there were a lot of contrarians then too. Further, if you believe that my chart above has any predictive powers whatsoever (highly questionable), then that green line worst case scenario is still a long ways away. I'd say we're fairly well lined up with the yellow line though, for what that's worth. The markets are certainly cheaper now. Of course, we were fairly well lined up with it in the mid-1960s too. How's that for scary? The next 15+ years weren't so great for stocks. What was seemingly fairly priced (once again in the grand scheme of things), just kept getting cheaper.

October 13, 2008
Grantham: Don't Get Back Into the Market Yet

Jeremy Grantham, chairman of institutional money manager GMO, says it's too early for investors to re-enter the equities market.

"After all this pain … the U.S. equity market is not even cheap," Grantham told Barron's.

"You would imagine that, given the amount of panic, that it would be," he said.

October 15, 2008
Grantham: Stocks Not This Cheap Since 1987

So, add Grantham to the list of sage investors who see this as a huge buying opportunity.

It went from "not even cheap" to "huge buying opportunity" in just two days? Call me somewhat skeptical. Based on my original chart, I could buy the argument that stocks are somewhat fairly priced though, in the ultra long-term scheme of things. That's assuming that past history can predict future returns though, which I am even more deeply skeptical of. Past returns did a lousy job predicting Japan's housing bubble turned bust.

I have a rather long list of reasons to remain bearish. I hope I'm wrong but I'm not willing to bet I am. Let's start with this mythical second half of year recovery that keeps getting postponed. If it wasn't so tragic, it would be funny. Let's discuss the massive amounts of spending and debt it took to create a mostly jobless recovery after the dotcom bust. That's not even remotely funny and it's even more tragic. Let's end with a nation of pessimists (realists?) heading into what could be one of the worst holiday Christmas seasons of the century.

This Age of Turbulence, as Greenspan puts it, does not make me wish to be a hero. I think I'll let others explore the mine field first.

Banking Bathwater and Financial Innovation

No talk of bathwater would be complete without first speaking of babies, so let's start there.

Raising your $299,000 baby

If you're self-employed, you can deduct 50% of your meals and entertainment, if business related. If your children refer clients or customers to you, you can deduct the cost of taking them to a restaurant if business is discussed.

Dad, how's business? Son, business stinks. Thanks for asking.

*Badum ching!*

Okay, now on to our regularly scheduled bathwater programming. The following article was written when the Dow was 10,325.38 (closing price on October 3, 2008). The Dow is now 8,577.91.
If you are a long time reader of this blog then surely you can feel the pent up hindsight sarcasm about to flow. I sure can. Oh yeah baby, here comes the bathwater!

October 5, 2008

Don’t throw the banks out with the bathwater

There is need for some calm reflection, however. Capitalism is not dead and banking is not a fundamentally evil and immoral business. Capitalism is not perfect, but it is still the only viable economic system - a view even China’s communist party is prepared to accept. Banking, as history shows, has been responsible for enormous growth in the global economy over the last few centuries.

Capitalism is not dead. Hurray! There won't be any need for the government that has the reserve currency of the world to start buying stakes in its top nine banks then. As a side note, it must really stink to be bank #10 right now. You simply weren't big enough to make the cut.

The problems we are facing today are not due to a fundamental flaw in banking, but to excesses that have arisen in particular parts of the system. The fact that sub-prime lending has been found to be lacking does not invalidate a wide range of other banking practices which are fundamental to the financing of a broad range of economic activities.

There's no fundamental flaw in banking. As with Vegas, what happens in sub-prime stays in sub-prime. Uh huh, right. There's nothing to see here. Please disperse.

The 19th and 20th centuries were further characterised by periodic banking crashes, the most notable of which occurred in the US, producing the Great Depression.

Banking crashes and Great Depressions seem to be something the US is rather good at.

These banking crashes and financial disturbances arose because of the permanent tension that exists between financial prudence and financial innovation.

Say what? Doesn't that imply that financial innovation is somewhat the opposite of financial prudence? Interesting. That's not quite what we've been told. If I didn't know any better, I'd start to suspect that financial innovation is another way to describe a financial scam. Surely there must be some example of what financial innovation might be and how it might help to prevent future problems though. I must be misunderstanding the concept entirely.

For example, it was a major financial innovation to move from the gold- and silver-based monetary system to a paper money and credit system. This metamorphosis of the monetary system enabled credit to become more freely available to a wide range of borrowers.

Financial innovation is falling off a gold standard in the 1970s because we could no longer afford to stay on one? Seriously? Wow, thanks for offering such a great example. So financial innovation really is a scam. Got it. I now have a much greater respect for its power of financial destruction. In fact, I can't wait to see how the hundreds of trillions of dollars in exponentially growing derivatives financial innovation plays out. They're what Warren Buffett calls financial weapons of mass destruction. One wonders if they are powerful enough to obliterate capitalism entirely. That's just crazy talk though, for crazy times.

This all makes sense now. This is not the death of capitalism at all. Not even close. This is innovation in action. As with the "major financial innovation" of falling off of the gold standard, we're simply falling off the capitalism standard because we can no longer afford to stay on it either. Brilliant!

Gold Standard

However, under the fiscal strain of the Vietnam War, President Richard Nixon eliminated the fixed gold price in 1971, causing the system to break down.

Major financial innovation for the win!

It could be worse I suppose. What if we find out that it isn't actually bathwater we've been drinking? I've seen dogs drink from another water source in the bathroom and I'll tell you this... it is not pretty.

Markets Hammered (Musical Tribute)

You can't sell this
You can't sell this
You can't sell this
You can't sell this
You can't sell this

My, my, my, my...

Housing hit us so hard
Makes me scream, "OMG!"
Thank you for shopping sprees
But a margin call and it repeats
It feels good? When your stocks are down?
A super bargain buy that turned facedown
And they ring the bell
Has bulls feelin' heat, but you can't sell

I sold your home boy (You can't sell this)
Yeah, that's where you're living and you know (You can't sell this)
Look at the buys, man (You can't sell this)
Yo, let me bust the f'd up housing (You can't sell this)

Fresh new cash, advance
You gotta like that, now you can refinance
So buy, before banks cheat
And lease pickups, don't be downbeat
While it's rolling, back up truck
Pump stocks a bit and sell them no, it's going up
Buy this, buy that
Sold in a heartbeat as they fall back
Sell them now, all is not well
And you're feeling beat, but you can't sell

Yo, I sold it (You can't sell this)
What you holding bagman? (You can't sell this)
Yo, rang the bell, market's not in, sucka (You can't sell this)

Banks sell debt, logarithms
But they sweat, as they are caving in now
Banks sold
You talking about hammered you just lookin' to borrow
That's hype, go light
Bankers are sweating so pass them a wipe
Check the tape, to learn
What's cash gonna take in the 70's to burn
The charts? Legit
You can't sell hard but you also can't quit

Absurd, because you're told...

You can't sell this
You can't sell this

Breaking now!
Stocks, hammer time!

Stocks in a funk, it is said
That if you can't prove earnings then you probably are dead
The Fed drop's cash from the air
Bust a few banks, fund investors in despair
This is "it", no more dinner
With no job and you're gonna get thinner
Quick, time to dump
Just for a minute let's all be like Donald Trump

Yeah (You can't sell this)
Took, man (You can't sell this)
You listened to hype, boy, before you sold (You can't sell this)
Rang the bell, market's back in (You can't sell this)

Breaking now!
Stocks, hammer time!

You can't sell this
You can't sell this
You can't sell this

Breaking now!
Stocks, hammer time!

Every time you buy them
They're hammered after hyped
Going to the floor if interest rates are hiked
Now why would they ever, pretend all is well
Banks are taking homes that really just won't sell
They're clogged around the world, from London to the Bay
It's hammered, got hammered, really hammered, yeah hammered
And the stocks were sold today

You can't sell this
You can't sell this
You can't sell this
You can't sell this
You can't sell this
You can't sell this
You can't sell this
You can't sell this

Tuesday, October 14, 2008

Cash in my Backyard (Musical Tribute)

If I could hoard cash in my backyard
The first central banking taboo
Is to save all my pay
Until hyperinflation decays
Just to hoard it with you

If I could dig these holes forever
If holes could make value hold true
I'd bury my pay like a treasure and then
Again, I would hoard it with you

But there always seems to be too much cash
Drops from helicopters flying by
Once you dig holes
I've looked at what we've borrowed
Stagflation might be the combo
Can't dismiss

If I had a vault just for silver
And deflation really comes true
The vault would be empty
Except for the money
All the trillions funded by you!

But there always seems to be too much cash
Drops from helicopters flying by
Once you dig holes
I've looked at what we've borrowed
Stagflation might be the combo
Can't dismiss

As Banking 'Fairy Tale' Ends, Iceland Looks Back to the Sea

Today, Iceland's swollen banks are ruined. In the space of a few days, practically the entire banking system has been seized by the government. The largest bank of all, Kaupthing Bank, was seized Thursday, and trading was suspended on the stock exchange until Monday. The krona has ceased functioning as a currency outside Iceland.

Inflation and debt payments are soaring, and trade has been crippled in a country heavily dependent on imports. The U.K. and Netherlands are suing over frozen deposits held by their citizens, while the government is trying to arrange more foreign loans to help stave off national bankruptcy.

Monday, October 13, 2008

Spend A Trillion (Musical Tribute)

This is the time of year, that we're forced to give
And the greatest gift is being forced to forgive
We will own the best valued banks that ever grew
When they forgive debt and we forgive too

We might wanna light a fire
Might try burning dollars
I believe it'll help us prolong
We'll still need fuel for our cars
All babies were thrown out, bathwater was too
I just wanna spend a trillion faster than you

It's so hard to believe
It was almost the end
Since all we think about is
Borrowing again
Whatever we lost, when it fell apart
It can drop from choppers in the dark

We might wanna light a fire
Might try burning dollars
I believe it'll help us prolong
We'll still need fuel for our cars
All babies were thrown out, bathwater was too
I just wanna spend a trillion faster than you

There's nothing more that I want to do
Than to "lie" here together
But spend cash much faster than you
Savings I just withdrew
So I could spend a trillion faster than you

We might wanna light a fire
Might try burning dollars
I believe it'll help us prolong
We'll still need fuel for our cars
All babies were thrown out, bathwater was too
I just wanna spend a trillion faster than you

We might wanna light a fire
Might try burning dollars
I believe it'll help us prolong
We'll still need fuel for our cars
All babies were thrown out, bathwater was too
I just wanna spend a trillion fast
I just wanna spend a trillion fast
I just wanna spend a trillion faster than you

The central bankers seem to have everything 'N Sync now. I think I'm getting all choked up.

That Fishy Smell Revisited

The market just called. It really, really wants its bathwater back, lol. I think the plan is to bottle it for retail sale at a premium... Essence de Liquidity.

October 13, 2008

Dow soars 936 in a rally for the ages

Stocks had their best day since the 1930s with the Dow Jones industrials gaining 936 points for the first time ever.

October 11, 2008
Something Smells Fishy

Everything is being sold. It seems like belief hysteria.

It's not just the babies and the bathwater at this point. They're selling the bathtubs, bathmats, bathrobes, and the bathhouses too.

October 10, 2008
Capitulation Abounds

The saying goes that if one must panic, panic early. I can't say much, but I can say that those panicking now are most certainly not panicking early. I do think things will get worse, but that doesn't mean they aren't already priced into the markets. Who knows?

That being said, if you must panic BACK into the market AFTER today's 11% rise, you are also probably not panicking early. Good luck on that one. 11% might not sound like much in the grand [ponzi] scheme of things, but it is roughly 60 years worth of "safe" interest on three month treasury bills (based on the recent 0.18% rate). Welcome to the age of turbulence.

Nobody is panicking into TIPS though. They continue to be sold off. You can now get a 2.97% real yield (after inflation) on the 10-Year TIPS. We haven't seen those kinds of real yields since near the peak of the dotcom bubble. Of course, nobody wanted safety then. Why lock in 3% or more after inflation when you can make so much more money elsewhere? Okay, I'm being sarcastic again, but it is the truth too.

Let's talk about a 3% real yield and 1% inflation. That's what the market is predicting based on TIPS spreads and yields for the next 10 years. That's my dream environment. That's not me attempting to ride something out in hopes for better days. That's me jumping up and down for the next 10 years while doing a Toyota dance. Seriously. If only I could be so lucky. As I have said before, any added inflation does not help me, even with the inflation protection TIPS offer. Low taxes (since the overall yield would be low)? High real return? You wouldn't see me complain in the slightest. Toyota dance I tell you.

Of course, most people do not know what TIPS are. I don't just throw that claim out there. First, buying treasuries directly from the government is not something Wall Street is generally going to tell you about. Second, I've asked quite a few people in the last 10 years if they knew the government offered inflation protected treasuries and I-Bonds. The vast majority do not. When is the last time you were at a bank and saw someone actually ask for an I-Bond form? (Not that I'd be buying I-Bonds right now, with their 0% real rate!)

Inflation is truly dead AND the stock market has its biggest rally since the 1930s? It smells fishier than ever to me. You want to know what really smells fishy to me though? NO! It isnt't the bathwater, although I must admit it does smell a bit off, lol. What really smells fishy to me is the following.

We've been telling our clients for months... - As heard on CNBC, nearly constantly

You'd think every client in the world would know exactly what is going on based on that often used line.

This is not investment advice.

Saturday, October 11, 2008

Something Smells Fishy

Everything is being sold. It seems like belief hysteria.

It's not just the babies and the bathwater at this point. They're selling the bathtubs, bathmats, bathrobes, and the bathhouses too.

The long-term deflationists should want long-term treasuries. Nope. That was sold.

The long-term inflationists should want long-term silver. Nope. That was sold.

How can you have an environment that displeases both the long-term inflationists AND the long-term deflationists?

I have but one answer. Short-term thinking abounds.

The long-term risk takers should want long-term stocks. Nope. That was sold.

The long-term safety seekers should want long-term TIPS. Nope. That was sold.

How can you have an environment that displeases both the long-term risk takers AND the long-term safety seekers?

I have but one answer. Short-term thinking abounds.

Cash is currently king. Load up on 0.18% three-month treasury bills? What if we run out of trees to make the paper? No way! Stuff the mattresses! Bury it in the backyard! It's not worth taking the risk for a mere 0.18%! (I say somewhat tongue-in-cheek.)

I now resume my previous activity. I'm rolling in all this short-term paper sidelines money. It feels really, really good. I think I'm starting to fall in love with it. I just licked the $5 bill! And don't it feel good!! *heavy sarcasm*

Should the helicopters arrive and drop even more paper money I plan to marry even more of it! Oops. Did I say marry? I meant bury! Freudian slip there I guess. As long as I have the fiat paper in my hands I simply can't lose though! That seems to be the thinking right now.

That being said, kudos to those who are on the sidelines in cash right now. Well done. I'd suggest not overstaying the welcome too long though. Something smells extremely fishy to me, if only from a value standpoint. In my opinion, money is just paper these days and it is backed by a belief system centered on the very same government that got us into this mess in the first place.

I guess that means I'm "still" a long-term stagflationist. It is certainly not easy these days though.

As a side note, I asked my girlfriend Thursday night what she thought the market would do on Friday. She pointed her thumb down. I said that I could see it tank in the morning as a continuation of Thursday's crash. However, I could also see it rally by the end of the day and end positive. That would be an encouraging sign.

To me, what happened was the worst of all worlds though. It crashed as we both expected. It rallied as I expected (a good 200 points in the green even). Something really bad happened next though. It was sold off just before the close, yet again. That's going to give people yet another weekend to look at red closing numbers and think about self-fulfilling prophecies.

The market is now continually repeating the expected, caught in a Groundhog Day loop. That's very dangerous. Day in and day out it is establishing "crash" expectations. Momentum players must be loving it. I'm not one. That's not what I'd bet on. My long-term bet continues to be stagflation and I've chosen to place my bet as a long-term safety seeker. That would be most unexpected at this point. Stagflation's had the rug pulled out from under it, literally. (The rug was taken back by the bank in a foreclosure.)

Markets are constantly in a state of uncertainty and flux and money is make by discounting the obvious and betting on the unexpected. - George Soros

Friday, October 10, 2008

Party Time!

We ended relatively flat. - Bob Pasani, CNBC (commenting on the Dow)

Down only a hundred points or so in the Dow is now the new benchmark of flatness. I guess that means I don't need to do another panic musical tribute. Hurray!

Anyone up for a 1978 style toga party?

Laugh now, because you clowns have been on double secret probation since the beginning of the semester. And that means one more slip up, one more mistake, and this fraternity of yours has had it.

Capitulation Abounds

Is it the end of the financial world?

Think about what happens when the end of the world doesn't come? People go, oh, gee, well, I'm still here. Maybe I outta buy some of the stuff that I was selling at such stupidly low prices just two weeks ago. The problem of course is telling when the end of the world is supposed to come and when it doesn't arrive. You really need to know when the spaceships are supposed to arrive and take everyone away from the mountaintop because otherwise you don't really know when it is all over.

You know I love sarcasm! Well done Jim Jubak!

I definitely believe that at least some things have been sold indiscriminately this week. At some point, I have to believe that people are going to look at all the paper fiat money in their hands and wonder, "Now what?" It reminds me a bit of when I turned bearish in 2004. I sold stocks. Within a day I realized that cash didn't look all that attractive either. Interest rates were just 1%. I ended up (at least partially) in gold and silver for a few years. Things are somewhat different now though. There's a 3% real yield on TIPS. Stocks are over 40% down from their peak. The market's having a half-price sale on oil.

If nothing else, just look how many Panic Musical Tributes I've had to create lately. It's reached daily routine mode. I can't speak for the market's selling, but I'm certainly nearing an exhaustion point.

The saying goes that if one must panic, panic early. I can't say much, but I can say that those panicking now are most certainly not panicking early. I do think things will get worse, but that doesn't mean they aren't already priced into the markets. Who knows?

Pulled Into the Deflationary Abyss

TIP vs. Stocks

Long time readers of this blog know that I like TIPS (Treasury Inflation Protected Securities). Much of them I bought directly from the government and will be holding until maturity. Some of my money is in TIP (a fund composed solely of TIPS). I'm certainly taking damage lately, just not as much as some.

As I see it, there are three reasons I'm taking collateral damage (pun intended). They are all somewhat related.

1. Real yields are rising dramatically. The Great Depression saw very high real yields. Buried cash yielded a good 10% as prices were falling at that rate. Deflation does that. These days, we're seeing asset prices fall quite dramatically as well. Oil and other commodities are well off their highs. Housing prices are down significantly. The malls are bracing for a horrible Christmas shopping season. The stock market has been seriously deflating lately. Too bad I couldn't have predicted the stock market meltdown. I was very bearish but I wasn't THAT bearish.

2. There's an unprecedented flight to liquidity/safety. Just look at the
VIX. Long-term TIPS are not all that liquid. The market price of them also generally tends to be quite volatile, which is especially true these days. No doubt some are being shaken free from the wild ride.

Inflation Expectations: How the Market Speaks

Second, TIPS yields contain a liquidity premium. While the market for TIPS is growing, it is still relatively small compared to the market for conventional Treasuries. Therefore, to the extent that TIPS are less liquid than Treasuries, investors would demand a liquidity premium for holding TIPS over conventional Treasuries.

3. The concept of "buy and hold" died, at least temporarily. I actually agree with some of the bulls on this one. Babies and bathwater are all the same these days. Everything must go! (Sounds like a Linens 'N Things economy to me.)

The U.S. Treasury's Inflation-Protected Securities : market reactions and policy effects - TIPS

In one sense, these securities should not be as liquid as conventional securities, because the Treasury's target market is the "buy and hold" investor.

I am a "buy and hold" investor. As my TIPS mature, I'll be buying more. My next purchase is planned for January's auction. If I liked TIPS with a 2% real yield, you can bet that I'll like them with a 3% real yield (over reported inflation). I'm not holding my breath that I'll be able to keep getting that rate for the rest of my life though. I think that at some point in the future, people will be kicking themselves for not locking in a rate like that (especially if the government's response to the crisis ends up fueling future inflation). I could be wrong of course. If I am, then the American taxpayers will be kicking themselves for paying me an excessive "safe" rate of return. In fact, they should be especially brutal with the kicks if we actually do enter a 0% inflationary environment (think Japan's deflationary mess) and I'm being paid 3% annually for the privilege.

Once again, this is not investment advice. For one thing, my goals are and have been capital preservation. I don't have a job. I can't afford to take on any additional risk. Investing in the full faith and credit of the United States Government through inflation protected securities, especially these days, is just about as much risk as I can stomach. Trust me on this. I can just barely stomach it. It simply seems somewhat better than many alternatives.

Thursday, October 9, 2008

The Thoughts of Andy Xie

October 17, 2005
Housing market: America's 'weakest link'

Morgan Stanley economist Andy Xie believes a global housing crash is a serious possibility.

"Either you have a big adjustment like a 20 percent or 30 percent decline, or you have a big recession, or you have a slow decline in property prices or several years of no growth," said Xie, based in Hong Kong.

Hindsight has been very kind.

October 12, 2006
Morgan Stanley Fallout From Andy Xie Costs More Jobs (Update1)

Xie, a Shanghai-born economist who worked at Morgan Stanley for nine years, sent the e-mail to his colleagues after attending the International Monetary Fund and World Bank annual meetings last month in the Southeast Asian island state. The economist questioned why Singapore was chosen to host the conference, and said delegates ``were competing with each other to praise Singapore as the success story of globalization.''

``Actually, Singapore's success came mostly from being the money laundering center for corrupt Indonesian businessmen and government officials,'' Xie wrote in the e-mail. ``Indonesia has no money. So Singapore isn't doing well.''

Based on the stock price of Morgan Stanley today, I'm guessing he's not all that upset over losing his job for speaking his mind in what was intended to be an internal e-mail. Call me silly but perhaps the entire "success story of globalization" is being called into question right now.

Apr 30, 2007
Andy Xie warns of China crash

"I think it's going to be bust very soon," Xie said, adding that a combination of excess liquidity, rising inflation and rich valuations would result in a global crash soon.

"People will be surprised. When the end comes, it's going to be pretty bad," Xie added.

I think it is safe to say, using hindsight, that most investors were surprised and it's been pretty bad.

So what's Andy Xie saying now?

October 8, 2008

Obama or McCain: The Dollar Will Weaken

The US property-cum-credit bubble results from a desire to maintain a living standard higher than its fundamentals could support. The bursting of the bubble should have made the US face up to reality. But it is not doing so. The current administration is using the central bank to lend to failing financial institutions to keep them alive. Unless political changes lead to a different approach, the US will likely stagnate, like Japan in the 1990s, and with the added problem of inflation.

Since my blog is named Illusion of Prosperity, it is probably not needing a huge leap of faith to guess where I stand on that prediction.

The policies that both Democrats and Republicans have promised in their campaigns are not really addressing the fundamental problems. One US politician recently asked me what I thought the US should do. I opined that the US should spend less and produce more. With the policy circle talking up another fiscal stimulus package, my idea took him by surprise. But the US got into the current situation by spending too much money – how can spending more solve the problem? Both parties are promising more money for healthcare and education, bailouts for delinquent mortgage borrowers, and tax cuts; exactly the opposite of what’s required.

As stagflation takes hold, the US will become much more defensive with regard to globalization. The Doha Round of free trade talks failed due to opposition from developing countries. The next US government won’t do anything to revive it. Further, it may back away from existing free trade arrangements, such as the North America Free Trade Agreement (NAFTA) between Canada, Mexico, and the US. The direction on free trade is clearly backwards.

Since stagflation is in my name as a seemingly permanent fixture, you can pretty much bet that I believe in that outlook as well.

Regardless of who wins, it will be extremely difficult to turn the economy around. The US has been living in a debt bubble. Greenspan kept interest rates continually low during his 18-year reign at the Fed, didn’t rigorously regulate derivatives, and tolerated the subprime surge. Wall Street concocted complex products with assumed, not real, reduction in risk, and sold them to credulous investors. But this bubble-conducive environment wouldn’t necessarily have led to a bubble unless American households were eager to borrow.

Once again, no big leap of faith needed.

The US economy is facing its biggest crisis since the Great Depression, one that will require considerable sacrifice to solve. But politicians are talking the other way and promising more goodies. The dollar is the fallback plan. Printing money spreads the pain for all dollar holders, and many are foreigners. This is the last tool that the US has to not pay the full cost on. Eventually, foreigners will realize this and run. When the dollar goes into free-fall, America will finally have to wake up to reality.

I suspected the American dream would soon become a nightmare when I started this blog late last summer. Want to bet that I've changed my mind? I'll give you 50 to 1 odds and I'll even allow you to use 30 to 1 leverage to sweeten the deal. I will need to see the money up front though. This is the New America. I don't want to assume any counterparty risk on the off chance you lose.

Revisiting the Stuckey Pecan Log Roll Nuttiness

Nuttier Than a Stuckey's Pecan Log Roll

To that end, he suggested buying American Express (AXP: 32.14, -3.20, -9.0%) , Capital One Financial (COF: 46.78, -4.64, -9.0%) and Discover Financial Services (DFS: 12.96, -0.82, -5.9%) , noting that of the three he is the most optimistic about the fortunes of American Express.

Oh what a difference a week makes. Here's an update on those falling prices.

AXP: 24.00, -25.3%
COF: 33.41, -28.6%
DFS: 9.63, -25.7%

That's in addition to the drop on that first day.

Anyone who recommends buying stock in a credit card company in this environment is nuttier than a Stuckey's pecan log roll. - TokyoPlumber

Another Optimist Capitulates

Who Killed Capitalism?

Jeremy Siegel, finance professor at the University of Pennsylvania´s Wharton School of Finance commented, “Two weeks ago was the first time in my life that I was worried about the very stability of the United States financial system.”

I guess the image finally made it to the rear view mirror. Welcome to the party, pal. No wonder I haven't been seeing as many of Jeremy Siegel's Wisdomtree commercials on TV these days. You know the ads. They're the ones that tell us of earnings and dividend weighted funds and attempt to make us feel somewhat stupid for not being wise to what should be common sense.

Something has gone horribly wrong though. Banks certainly once had a lot of earnings and dividends. They don't now though. Oops.

It's like a variant of the dotcom bubble gone bad. Investors were once burned by a lack of earnings but no future earnings either. Now they're being burned by huge past earnings but no future earnings. There's a common theme here. It's a lack of future earnings. This somewhat backs my theory that it will be increasingly difficult to make money off of money in the future.

Perhaps we should consider reliance on an authority greater than ourselves—an invisible hand that is both benevolent and omniscient. What the world needs now is a cool head, a commitment to move forward, and the character to temper our self-preservation instincts.

This kind of peace and resolution stems from only one source. Currency is merely a symbol of the value we imbue to our economic and political systems. So when our systems fail and our wealth becomes vapor, where can we turn for stability and assurance? Look no further than the pleasant phrase printed on every U.S. coin: “In God We Trust.”

I say the following only half-jokingly and somewhat tongue-in-cheek. If that's the plan to deal with vaporized wealth and the death of capitalism in America, then welcome to the financial apocalypse. I see four horsemen on the horizon and they want their prosperity back.

August 15, 2006
WisdomTree High-Yield ETF Stands Apart

DHS is loaded with mega-cap stocks like Bank of America (BAC Quote - Cramer on BAC - Stock Picks), at 6.8% of the fund, Citigroup (C Quote - Cramer on C - Stock Picks) at 6.4% and General Electric (GE Quote - Cramer on GE - Stock Picks) with a 6.2% weighting. The top 10 actually accounts for 44.5% of the fund, which may draw some criticism considering that SDY has 28.1% of its weight in its top 10 and DVY has just 26%. The issue here, if there is one, is that having top holdings with 6% weights instead of 3% makes DHS more susceptible to single-stock risk.

Single-stock risk? If only we could be so lucky. Try the entire financial sector.

December 4, 2007
The Downside of Fundamental Indexing

DHS, like most broad-based dividend-weighted ETFs, has a very large weight in the financial sector. DHS allocates 35.41% to financials, compared with just 18.66% for the S&P 500.

DHS Performance

Panic Thursday (Musical Tribute)

Sweet Thursday

We're selling all the stocks
We're selling all the houses
Also selling bonds
Great Depression for us

And so "it" just keeps tanking
It seems "they" couldn't help us
But Ben the dove is crying
As "they" offer tax breaks

We'll walk back to the 'burbs
No gallons... minivans

There's no jobs on Wall Street
There's no jobs at the malls
We'll pay just like forefathers
Back in 1929

And so we stopped our driving
We had no oil to fuel them
The dust bowl it reminds us
Of Hoover's plans before us

Just short a trillion
Dollars will be spent

Sweet Thursday's repoing my new backed up margin truck
Backed up margin truck

As bankers started hedging
"They" took the house "they" loaned me
Foreclosure kept reminding
Of pages in history

Sweet Thursday's repoing my new backed up margin truck
Backed up margin truck

Wednesday, October 8, 2008

Panic Wednesday (Musical Tribute)

Wednesday Soundstage '03 Live in Chicago

Nothing much to fear
Stocks are dropping far down somewhat foolish
There's "still" some work to be done

Just a margin call
Not so silent banking of our pensions
Call it tankin' on a Wednesday

Cash is dropped from year to year
With secrets Ben's been keeping
Seems he's got a central banking plan

Seems we are spiraling
For very different reasons
But one day there's no more cash to lend

Is tapped the wallet
I left on the nightstand
I start the day
In the usual way
Then think, well why not
And stop at a Starbucks
Then begin to recall
I just can't pay

Market found the floor?
Pure prosperity? Perhaps illusion?
I agree with this in part

Something has harmed us
I can't put my finger on
This overleveraged crisis on a Wednesday

So cash drops from year to year
With secrets Ben's been keeping
Seems he's got a central banking plan

So they often tell us to cheer up
We suspect they're underwater
Because there's still no more cash to lend

Is tapped the wallet
I left on the nightstand
I start the day
In the usual way
Then think, well why not
And stop at a Starbucks
Then begin to recall
I just can't pay

Who bought with courage?
And bust they lost again
Fed starts humming, "When doves cry"

Can someone help us?
I think that we've lost here
Lost in a place called Cramerica

Contrarians Trampled by Herd

Poll: 60% say depression 'likely'

And Banerji said that the increasingly grim view of the economy will by itself lead to cutbacks in spending by both consumers and businesses. That in turn will result in greater job losses and more economic pain.

"The fact that the majority of people believe we are going into a depression ensures that the recession will get worse," Banerji said.

The public herd continues to trample the contrarians.

December 2, 2007
Contrarians Make a Case for Gains in the Recent Turmoil

DON’T be too upset by the stock market’s recent decline. It may have been painful, but it’s probably just a stumble by a bull market that still has room to run.

That, at least, is the message that comes from contrarian analysis of investor sentiment — an approach to market timing that relies on the propensity of the average investor to get the market’s near-term direction dead wrong most of the time.

The DJIA closed at 13,371.72 on Friday, November 30, 2007. It is now 9,258.10. That's a 30% loss.

Tuesday, October 7, 2008

Panic Tuesday (Musical Tribute)

Til Tuesday - Voices Carry

They've got a loss, they'd like to read Ben's mind
Banks are frightened of the cash they can't find
Oh, are there more bailouts he's thinking of
To fund them today-a-ay?
Does he still think that inflation's the rub?
Why does he say-a-ay?

Flush flush, can't drop cash now, trades don't carry
Flush flush, can't drop cash now, trades don't carry
Oh oh

We try so hard not to dump assets
Even though we may have some future regrets
But he tells us risks are to the downside
It's something we hear, oh yes
So we try so hard to sell as it slides
And there's so much fear

Flush flush, can't drop cash now, trades don't carry
Flush flush, can't drop cash now, trades don't carry
Oh oh

He drops cash, but only part of the time
He drops cash, but just to keep "it" in line

Rush rush, he might drop some, the trades carry!
Rush rush, he might drop some, the trades carry!
Rush rush, as banks fail, the trades carry!
Rush rush, choppers flying overhead!
Rush rush, the trades carry!
He screams, "DROP NOW!!!"
He screams, "DROP NOW!!!"
The trades carry!
Oh yes! The trades carry!

How we wish he could drop some more!

The Capitulation Stages of an Optimist

Stage 1: Lean Towards Safety

September 4, 2007
"Safe" is a happy word

"Safe" is a happy word.

Stage 2: Consider Panicking

August 19, 2008

Don't Panic

First, panic! No, just kidding. First, don't panic.

So, again, don't panic.

Do not panic if your overseas investments tank for a time.

Eighth. Panic. Oops. I did it again. Nope, don't panic.

Then, panic! Ooops. I did it again.

Stage 3: Admit Defeat

October 6, 2008

How to Ruin the U.S. Economy

There, that should do it.

Sorry Ben, but deep down you probably knew it was coming. As seen in that first stage...

I love following the stock market. In the very long run it's a beautiful thing, at least in the postwar world, and I hope it doesn't turn around and bite my head off the way it did in the tech crash. - Ben Stein, September 4, 2007

Friday, October 3, 2008

The Markets Kopprasch'd! (Musical Tribute)

The 300 point "relief" rally in the DJIA faded today and it ended down 150 points.

I used acoustic guitars as a tribute for Monday's crash. I released the electric guitars during yesterday's crash. As promised, I'm now releasing the tubas (both electric and acoustic) from the Strategic Musical Tribute Reserves (SMTR).

The following video is for those who think we've finally found a market bottom and are looking to celebrate.

Electric Tuba: Kopprasch #56

This next one is for those who think we're continuing to slide into the next Great Depression.

Acoustic Tuba: Kopprasch #56

And lastly, here's one for those who are "still" believers in the second half of year recovery. There's not much tuba in it though.

Kudos to Art Cashin and Rick Santelli

I watched Art Cashin offer three scenarios for the markets earlier today. It was pointed out that all three of them were bad.

Needless to say, one of his scenarios played out.

Cashin's Comments On Bailout Bill

Would the negative vote and following vicious selloff be the worst scenario? Traders have another thought. Suppose the bill passes easily and a rally quickly erupts in the stock market. What if that rally were to roll over and then turn negative? That, traders fear, would be the worst scenario. Will it happen? Who knows. But as Pasteur said – "Chance favors the prepared mind."

Hello worst scenario.

There are a few people on CNBC that always get my attention. One is Art Cashin. The other is Rick Santelli. In my opinion, they are both quick to call a spade a spade.

Here's Rick Santelli in action a month ago. I'd say hindsight is being extremely kind to him especially as it regards commodities, the near-term future of interest rates, and the dollar.

Here's another video from January.


Employment Situation Summary

The unemployment rate (6.1 percent) was unchanged in September, following a 0.4 percentage point rise in August.

The rate was 6.05% in August. The rate is now 6.12%. Behold the power of rounding.

The number of unemployed persons was little changed at 9.5 million.

The number of unemployed persons was 9.376 million in August.
The number of unemployed persons is 9.477 million in September.

That little change is over one hundred thousand people. Should the trend continue that little change will add up to an extra million people in ten months.

Manufacturing employment fell by 51,000 over the month, bringing the decline in factory jobs to 442,000 over the past 12 months.

Construction lost 35,000 jobs over the month.

Employment in retail trade dropped by 40,000 in September and by 250,000 over the last 12 months. Department stores lost 11,000 jobs in September and 70,000 over the last 12 months.

Employment in transportation and warehousing declined by 16,000 in September and by 57,000 since its peak 12 months earlier.

In September, employment in financial activities fell by 17,000, with nearly half of the decline occurring in securities and investment firms. The financial activities industry has lost 172,000 jobs since its employment peak in December 2006.

Employment in professional and business services continued to trend down over the month (-27,000), largely reflecting further job cuts in employment services.

Health care and government both expanded though. Too bad we can't figure out a way to pay for either of them.

Thursday, October 2, 2008

Nuttier Than a Stuckey's Pecan Log Roll

Six financial stocks that still rate a buy

I have but one simple question. What is that "still" word doing there? The stocks either rate a buy or they don't. That's the kind of disclaimer the captain of a ship might say after hitting an iceberg. She's "still" floating!

To that end, he suggested buying American Express (AXP: 32.14, -3.20, -9.0%) , Capital One Financial (COF: 46.78, -4.64, -9.0%) and Discover Financial Services (DFS: 12.96, -0.82, -5.9%) , noting that of the three he is the most optimistic about the fortunes of American Express.

Yeah, American Express was only down 9% today. Nice timing. So what explains my headline? Someone left a comment on the news site.

Anyone who recommends buying stock in a credit card company in this environment is nuttier than a Stuckey's pecan log roll. - TokyoPlumber

For the record, TokyoPlumber seemingly got his comment in BEFORE the stock crashed today. Well done!

This is enough to make me want to write a book about looking for keywords when investing. I'm absolutely amazed at the power of that word "still." There must be some part of the brain that is forced to use it when things don't quite seem right. I'm dead serious. I've been watching that word a lot in the last four years and it rarely disappoints (unless you are an investor). I offer one example out of many.

September 15, 2008

Still was much more important than strong in that headline, using the power of hindsight. Wouldn't you agree?

Or how about the following gem...

January 24, 2003

Bush's Backing, Still Strong, Shows Steady Decline

It just doesn't get any better than that! Seriously, it doesn't get any better.

The Hint of Red October (Musical Tribute)

Didn't I already do a stock market crash tribute this week?

Ambassador Andrei Lysenko: There is another matter... one I'm reluctant to...

Dr. Jeffrey Pelt: Please.

Ambassador Andrei Lysenko: One of our submarines, an Alfa, was last reported in the area of the Grand Banks. We have not heard from her for some time.

Dr. Jeffrey Pelt: Andrei, you've lost another submarine?

Oh well, I'm sure Congress can FIXX it.

Red Ink

Red ink's a fright
Oh no... oh no no no no no no no
Red ink's a fright
Oh no... oh no no no no no no no

Should have taken warning
It's just savers mourning
Bank runs... hiding loss
We can't find... a safe place to go

So it's...

Red ink's a fright
Oh no... oh no no

Should have taken warning
It's just savers mourning
Bank runs... hiding loss
We can't find... a safe place to go

So it's...

Red ink's a fright
Oh no... oh no no no no no no no
Red ink's a fright
Oh no... oh no no

Congress is taking over
And it looks like they're spending
Just for you
Someone said we could be broke by morning
Someone cries, "Oh no!"


Red ink's a fright
Red ink's a fright
Oh no... oh no no no no no no no

Red ink's a fright
Oh no... oh no no no no no no no
Red ink's a fright
Oh no... oh no no no no no no no

I'm glad I kept the electric guitars in reserve. I know what you might be thinking. I must be completely out of ammunition now. No worries. I've got electric tubas lined up in case there's a Red Storm Rising tomorrow. I'm trying to stay ahead of this credit crisis as best I can. It isn't easy though. Nobody really knows what might be coming out of the prosperity spigot next.

Monday, September 29, 2008

Panic Monday (Musical Tribute)

Let's go acoustic. Electric guitars would be overkill.

Six o'clock already
I was just in the middle of a dream
I was sellin' J.P. Morgan
With a crystal bluetooth headset scream
But I sold too late
And it seems that I just won't get paid
These are the days
When I knew my bed was already made

It's just another panic Monday
I wish it was Sunday
'Cause that's my pun day
My lack of bank run day
It's just another panic Monday

Have to catch an early train
Got to be laid off by nine
And I just bought an air-o-plane
Still can't make the payments on time
I've been leveraged so long
Hard to figure out what I'm gonna swear
Blame it on the game
But the loss is already there

It's just another panic Monday
I wish it was Sunday
'Cause that's my pun day
My lack of bank run day
It's just another panic Monday

Reality bites
Why did my broker have to buy last night?
It tanked down
Doesn't it matter?
That he is fooling the both of us
Employment's down
He sells me with his banking voice
"C'mon sonny, you should buy the dips"
Cash it goes so fast
It's quite worrisome

It's just another panic Monday
I wish it was Sunday
'Cause that's my pun day
My lack of bank run day
It's just another panic Monday

Wall Street panic hits New Yorkers hard

A flood of somber, dejected-looking bankers and investors poured out of the Stock Exchange Monday after a Congressional bailout plan failed, sinking the Dow Jones industrials to historic lows.

Hope Revisited

Last Thursday I said the following as it relates to the bailout plan.

If, and this is a big if, the pricing in the market has hit an illiquid wall and the government's intent is to merely unclog the system, I do think there is some hope.

Hope was clearly not warranted at that point. It seems Congress wants the clog to fester.

US Congress rejects billion dollar rescue deal

In the US, House Republicans blamed a partisan speech by Speaker Nancy Pelosi, a Democrat, for the bill’s failure.

So let me get this straight. The contents of the bill were apparently acceptable, but the Democrat's speech wasn't? I didn't realize the speech was being voted on. I was under the assumption that speeches from the opposing party could generally be safely ignored. Shame on the Democrats for verbally poking the beast. Shame on the Republicans for being the beast.

Sticks and stones may break bones but words will hurt arrogant self-serving congressional elitist egos and quite possibly send our country into another Great Depression? Fantastic. How bad could it get?

US Treasury Secretary Hank Paulson went down on one knee at one point to plead with Democrats not to say anything to the media which would harm the chances of a deal.

That should be some indication.

Invest an Hour

Invest an hour and boost trading confidence

That was in my inbox. It was from ETrade. Their stock was down 25% today and now trades at $2.60.

This is great news. Financial institutions are now willing to accept "time" deposits in leu of actual cash it seems. You invest an hour of your time and you'll be ready to take on Nobel Prize winning economists, professional day traders, umpteen hundred hedge fund managers, and a variety of high level management types with reams of insider information. With this boost in trading confidence, you simply can't lose!

That being said, I can boost your confidence right now. Why wait an hour? Behold the power of the Internet! If you are at a dinner party, someone asks you the meaning of a phrase such as in leu of, and you aren't quite sure of the exact definition, just say, "I think it has something to do with foreclosures." If you do this a few times you'll really start to feel more confident. You'll be making a great impression on those around you. You might even get a promotion.

Search the web for "in leu of"

First Hit: "Deed in leu of foreclosure??"

See how it works? Let's try again. If asked what the US Department of Housing and Urban Development was doing these days then I'd simply respond, "Foreclosures?"

Search the news for "US Department of Housing and Urban Development"

First Hit: United Way and HUD start foreclosure hotline

Don't believe me? Come on. It works every time. Ask me about Michigan election officials. Not knowing anything about that I'd simply say, "I'm fairly sure it has something to do with foreclosures."

Search News for "Michigan Election Officials

First Hit: Michigan officials: Foreclosure can't stop votes

That's how I generally run this blog, only the rules are changing. In the past I'd say it has something to do with illusions and prosperity. One must keep up with the times though if one intends to appear smart. Now I'd say it has something to do with foreclosures. Genius I tell you!

Beware the curve ball though. Once someone realizes what you are doing and that maybe, just maybe, you aren't quite as smart as you appear, then you'll want to switch from foreclosure to bankruptcy. For example, if someone was to ask you about "creative loafing" that's a clear indicator they are catching on. That's the time to switch! You'd respond, "That's not foreclosure! That's bankrupty thanks to our economy tanking!" Then do a hearty chuckle and wink to the ladies. You simply cannot lose at that point!

Search News for "creative loafing"

First Hit: Creative Loafing files for bankruptcy protection

“This is not a management issue. It’s strictly the economy tanking.”

Stock Market Down 12 Years

Oops. I really should try harder on my headlines. It was not my intent to imply that the stock market has been a lousy investment over the last 12 years. I'm just talking about today.

The S&P 500 is currently down about 6%.
The 3-month treasury bill currently yields a mere 1/2%.

Therefore, at today's 3-month treasury bill rate, it will take roughly 12 years of interest to "safely" recoup the losses for those who are selling stocks right now.

Of course, I'm not factoring in inflation over the next 12 years for those concerned about future purchasing power. Hence my quotes around the "safely" word.

Let's be an optimist though and assume that there won't be any inflation going forward. It makes the math so much easier (to stomach).

Friday, September 26, 2008

Record Failure (Musical Tribute)

WaMu Seized by U.S., Assets Sold to JPMorgan in Record Failure

Sept. 26 (Bloomberg) -- Washington Mutual Inc. was seized by government regulators and its branches and assets sold to JPMorgan Chase & Co. in the biggest U.S. bank failure in history.

Record failure? I guess this means Washington Mutual won't be putting out a Greatest Hits album.

Thursday, September 25, 2008

Hold-to-Maturity = Mark-to-Myth?

The big bailout is unlikely to work

LONDON: The U.S. "hold-to-maturity" bailout plan is really just the new "mark-to-myth," and even its heroic proportions are not likely to paper over solvency problems in the banking system.

I've been thinking about this idea for a few days and how it applies to my own personal finances. I believe I have a new appreciation for what the banking system is going through.

As you may recall, I participated in the 20-Year TIPS (treasury inflation protected securities) auction in January. For the record, I put roughly 10% of my overall net worth in it. The yield ended up being
1.81% (above reported CPI inflation).

The yield today on the 20-Year TIPS is

If I was forced to sell my 20-Year TIPS today I'd experience a loss of roughly 12% (0.61% times 19 1/2 years). Needless to say, I'm glad nobody is forcing me to sell. It gives me some small feeling of what the investment banks must be going through though as they are forced to sell. I'm in reasonably safe government backed TIPS. Just imagine what it would be like if it was subprime mortgage debt instead.

What does it really mean to me though? How much worse off will I be over the next 19 1/2 years? I know this might seem hard to believe, but I'll actually be somewhat better off. Here is my reasoning.

First, I'll still be earning 1.81% over reported inflation (technically 1.75% since I bought at a discount as part of the auction process). That doesn't change. In 19 1/2 years I'll be getting my inflation adjusted principal back. That doesn't change either. Therefore it is very hard to say that I could be any worse off in the long-term.

Second, the market is saying that inflation isn't going to be as big of a problem as I feared. That means that it is less likely I'll be earning 10% or more per year (say 8% inflation with 2% real yield) and being fully taxed on that 10%. That actually helps me. I may have overpaid for the inflation protection, but under no circumstances was I ever rooting for extra inflation. All it could do is hurt me (it would just hurt me less than people without inflation protection). I was also never rooting for a complete stock market and financial institution collapse. How could that possibly help me long-term? No, I'd be better off in the long run if the prosperity machine continued to fire on all cylinders (or at least appears to be firing on all cylinders). I might not do as well as my risk-taking neighbors by taking the safer path, but I'd still be doing okay.

Third, in 19 1/2 years I'll need to reinvest. Should these real yields hold up I'll be one happy camper at that point. That's a very good thing. My worst fear is that real yields turn negative, inflation skyrockets higher, and I'm left with no safe way to protect my nest egg without resorting to hoarding even more hard assets. Currently, the markets are saying my worst fear will not come to pass.

Fourth, I have more TIPS maturing soon (the next several years). It is in my best "interests" to root for higher real yields as I reinvest that money back into more TIPS.

Yet, here I am with a 12% loss on paper. It is a real loss and I'm certainly not trying to argue that it isn't, but it is simply an opportunity cost loss. The odds of depleting my nest egg have not gone up. Sure, had I waited I would have done better. That being said, in 19 1/2 years, based on what the markets are currently telling me (lower inflation going forward), I will still be doing better than I originally expected though. Ideally, at least as it applies to me, I'd be rooting for zero percent inflation and be getting paid a mere 1.81%. My taxes would be next to nothing. So how could I complain? The market is telling me that I'm somewhat getting my wish (just wish I could believe the market, it can tend to get very confused from time to time).

In summary, I have a 12% real loss, but it is the kind of real loss that lets me sleep better. I continue to "hold-to-maturity" and somewhat sigh in relief. It honestly doesn't concern me much what the market is willing to pay for what I own. I never intend to sell it, nor is it likely that I'll be forced to sell it. I guess that's what separates my risk from that of an investment bank.

This is the exact same mindset I have towards my toilet paper hoard. I have no doubts that the market would not pay me full price for it either (on eBay for instance). That also doesn't bother me though. I never intend to sell it either. Go figure. Further, if the market determines that I overpaid for my toilet paper hoard at some point in the future that's just fine too. It will simply be another opporunity cost loss. In fact, I'd root for it too. First, someday in the distant future I'll no doubt NEED to buy more. I will certainly not complain if it ends up being even cheaper. Second, even cheaper toilet paper means that hyperinflation did not wipe out my entire nest egg.

So is "hold-to-maturity" a "mark-to-myth"? As it relates to my personal finances, I don't see the myth in my reasoning. Perhaps there's some glimmer of hope that the same could be said of the government's plan. Oh my, I said something optimistic again. I better not make a habit of this. I think that's the second time I've done it since starting this blog, lol.

If, and this is a big if, the pricing in the market has hit an illiquid wall and the government's intent is to merely unclog the system, I do think there is some hope. Unfortunately, that's a reasonably big if. There are SO many problems and this is but one of them. For example, should the entire global economy begin to bounce back and billions of workers world wide think driving cars is in their future while simultaneously helping us to exponentially grow our trade deficit, well, I'll no doubt be back to my old pessimistic (realistic and stagflationistic?) self in no time. Of that I assure you.

Monday, September 22, 2008

The Importance of Proper Economic Darkness Wording

With markets on edge, journalists watch their words

So in most of the news, stocks have "slid" and markets "gyrated" but not "crashed." Companies have "tottered" and "struggled" rather than moved toward failure and bankruptcy.

One must not speak of crashes, failures, and bankruptcy.

"We're very careful not to throw words around like 'meltdown' and 'free fall,' " said Ali Velshi, senior business correspondent at CNN. "If someone wants to say the markets are in free fall, we'll discuss it first," he said, and the outcome is most likely to be a change in wording.

One must not speak of meltdowns and free falls.

" 'Crash,' 'panic,' 'pandemonium,' 'apocalypse,' those are the words we're staying away from," said Robert Christie, a spokesman for The Wall Street Journal, now part of the News Corporation.

One must not speak of crash, panic, pandemonium, and apocalypse.

At the same time, no one wants to be seen as minimizing the danger. The Journal's front page has called this the worst financial crisis since the Depression, and each day last week it carried banner headlines the entire width of the page — the first such headlines since September 2001.

Oh oh. I've been saying those words. Why do I suddenly feel like I've summoned an Army of Darkness?

Wiseman: When you removed the book from the cradle, did you speak the words?
Ash: Yeah, basically.
Wiseman: Did you speak the exact words?
Ash: Look, maybe I didn't say every single little tiny syllable, no. But basically I said them, yeah.

Oh yeah, that's why.