thinking upside down

we've moved

2007-08-21T09:07:00.000-07:00

Thinking upside down will no longer have new posts, but I am going to leave up what I've written to date. I have started a new blog. The new URL is www.nelsonyuthinking.blogspot.com. It is set up for invited readers. If you're a client who hasn't yet read my last post, and you would like to begin reading the new blog, email me, and we'll get you set up with a Google account, which is free, and an invite, and then you'll be able to log in.

important notice (or not): heading underground

2007-08-17T19:15:00.000-07:00

I've been thinking for months about limiting readership of the blog to just my clients and a few others, and now I've decided to do it. I don't actually know that more than three people, if that, are reading, but to some extent the financial markets are a competitive zero sum game, and I've decided I'm no longer interested in sharing my thoughts with potential competition. I rarely mention any of my holdings, and when I do, I don't know if it helps them or hurts them, but my suspicions based upon my knowledge of markets and the Street's use of order flow makes me think that it's more likely to hurt them than help them, particularly in short run time frames.

To provide future readers with access, I'm going to need to send you an invitation email, and you're going to need to sign up for a Google account, which is free. And then you'll be able to set up a log in and password, and you will have to log in when reading.

For client readers: Please email me to let me know that you're reading and you'd like to continue doing so.
And please enter the subject of the email as: thinking upside down. I'll then include you when I send out the invitation emails.

For everybody else: If you're reading, and not a client, but are interested in continuing as a reader, you can email me, and I'll consider it. And if you can provide a good or humorous reason why you ought to be a reader, that'll help. And please title the subject of the email as: thinking upside down.

I'm going to leave this blog up for the next week or two, so less frequent readers see it. I will hold off on any new blogs for awhile so this one can be read. And I think this is a reasonable time to do this as I expect the market to settle down into a decent rally right now, although we're still likely to see some volatility as all those troubled funds out there are still having to square positions, cut leverage, or liquidate trades. If you're a regular reader, I'm probably going to leave this up through Labor Day. For anxious client readers, you guys or gals can always call or email me, and I'll be sending out the newsletter like usual at the beginning of next month.

read your history

2007-08-17T12:41:00.000-07:00

Anyone who has studied the history of financial markets knows the result of a liquidity crisis, and the aggressive intervention of central bankers to solve the crisis. The story is the same, every time. Something in the financial markets lock up, this time it was the mortgage and collateralized debt markets, the bankers step in, and step in some more, and finally the markets respond to the medicine, and begin to recover. The rallies off the bottom are always big and tradable. So is it different this time? Bears like to use that line whenever they're describing the conditions for a major top, and they're usually right, but the "is it different this time" applies equally for bull cases. So is it different this time, or did we just embark on a big and tradable rally? It's never different this time. I'm neither bull nor bear as anyone who reads my stuff or watches me invest can attest to. As an investor, I'm just looking for opportunity while managing risk, and right now, the opportunity is on the long side.

more mistakes

2007-08-17T08:16:00.000-07:00

Now that the market has gotten into a deeply oversold state, now that there has been substantial liquidation in lots of long positions, now that short sellers have started to really feel their oats and some dumb money has chased this correction down, and most importantly, now that the Fed has changed the direction of monetary policy, what I'm hearing as the markets correct the big upside opening is lots and lots and lots of doubt. Most of these doubters thought that we were going to 16,000 when we reached 14,000, now they're scared to peek out from under their desks. With all the short interest still out there, and there's plenty of it, will the market actually be so easy on those guys and give them another huge dip after what the Fed has done? I doubt it. And what would happen if the market were to plunge from here, based most likely on more freeze up problems in the banking system? Well, that's obvious now, isn't it? The Fed would move even more aggressively. I have been waiting for the market to put in the preconditions for a powerful counter rally. Those are in place. Selling into the market now is the fool's game, just as buying the market in mid July at all time highs was. I don't see how people can keep missing the picture time and again. The market is on a big short term buy signal right now.

Fed cuts!

2007-08-17T05:18:00.000-07:00

A discount rate cut of 50 basis points. I can't help but think that the Fed watched what happened to Asia and the yen overnight. The banking system needs to "function", and it has had big trouble doing that over the last week plus. This is exactly when the Fed needs to act. Giddy up!

double sake, please

2007-08-16T22:40:00.000-07:00

I'm catching snapshots of what's happening in Asia overnight, and it's not pretty . . . unless you're a bear, of course. Both Japan and Hong Kong look down huge, Japan more 700 points, Hong Kong more than 600, and other markets are down 2-4% across the board. Working off the idea that we've entered a bear market, and that the greatest beneficiaries of the recent bull were the overseas markets, and companies that sell equipment and materials into those markets, perhaps those are still the most populated trades, employing the most leverage, and thus most in need of a long and deep unwinding.

After today's powerful rebound in the US markets, the logical progression would have been for Asia to have a good session, and the fact that it's having a terrible session must be saying something about how much and where there's still some significant forced liquidation left to go. Looking at what happened in our own market today, with the yen up big as carry trades were unwound, and with the biggest winners of recent years, the deep cyclicals, including materials, mining, and equipment stocks getting dumped unmercifully in the morning, and with what's happening in Asia now, maybe that's from where the biggest "yen carry traders" had chosen their long bets. And maybe boring, basic US blue chips, or stocks that seem far removed from a "theme" that yen carry trades would logically grasp hold of, are going to be the safest and most profitable (or least losing) places to be going forward.

Tomorrow's going to be interesting. I guess I'm glad I kept the cash that I pulled out of my hedges.

finally, some sanity

2007-08-16T16:30:00.000-07:00

It looks like the judge in the Whole Foods merger case blocked the FTC's injunction on the deal. The FTC can appeal, but for what reason, to prove how stupid and ridiculous they are? How the hell a 200 store grocer merging with a 100 store grocer in a nation of 10,000 grocery stores could be an antitrust threat is baffling. I don't know if someone inside the Bush administration doesn't like John Mackey, and all his "green" thinking, but I can see no other logical reason for this wild goose chase. Bravo to a judge who got it right.

schwing batter

2007-08-16T15:25:00.000-07:00

The market's wild ride today sure looked like a temporary low. I pulled in a good portion of our market hedges. There were nearly three billion shares traded on the NYSE, with 7 new highs and 1132 new lows. That's the biggest new low number I've ever seen. I wasn't in the business in 1987, but that many new lows means that one in every three stocks made a new 52 week low today. That's extraordinary. Over the last 20 trading sessions, July 20-August 16, the a/d line was .376, which is two standard deviations oversold, which is a very rare occurence for a single ten day period, much less a twenty day stretch. The progression of that long a stretch is more a geometric progression of unlikelihood than an arithmetic one, i.e. it's not double rare, it's quadruple rare. The comeback was impressive, led by the most maligned sector, financials, which turned earlier than the market, and basic led it out of the abyss.

This market decline was unusual in that I don't ever remember so many parts of the financial system collapsing on themselves, with what happened in mortgage lending, and ultimate spreading all the way into money market funds. The truth is that many markets stopped working almost entirely, and the reality is that that type of situation simply can't persist for very long before officials step in to grease the skids. Despite the fact that Bernanke didn't officially lower the Fed funds rate, he did everything but that, and basically provided whatever liquidity the major banks needed to work past the crisis. Yes, there were some casualties and plenty more near casualties, but there should have been considering all the recklessness. I'm so far a big fan of Ben Bernanke, and think his less interventionist approach, particularly as compared to his predecessor, the Mess-stro (creating one mess after another), is the perfect role for the Fed to play.

We're likely going up from here in the short run, but there remains a portfolio of rotting real estate development loans on the books of nearly every major bank. The hedge funds have certainly found some religion, but perhaps more importantly, their customers have come to realize that they aren't actually masters of the universe, but merely some fast talkers who like to gamble big with client money because of a perverse compensation structure. I'd be surprised if we haven't seen some sort of peak in both hedge fund and private equity formation, and we've also seen the peak in LBO dealmaking. There are a lot of rotting carcasses still smelling up the financial system, and credit is not likely to get back to where it reached recently for many years, and the curtailment of easy money is going to make things tougher for the economy going forward. I think we've seen a short term bottom, but I don't think we've seen "the" bottom. So party up for awhile, but don't plan on staying too long.

Newtonian physics, for stocks

2007-08-15T15:43:00.000-07:00

Law #1 is that bodies in motion will stay in motion until acted upon by an outside force. The market is "in motion" right now, and the "outside force" that everyone is waiting for is the Fed. Unless or until the Fed steps in, this waterfall decline looks like it will continue. Maybe tomorrow will be another "Black Thursday". For value investors, often the outside force doesn't have to be the Fed, it can be other smart, deep pocketed value investors.

Law #3 is that to every action there is an equal and opposite reaction. The size of each boom is typically met with a comparable bust. This idiot lending/excess leverage/hedge fund craze made the Milken era, or the Long Term Capital era, or even in some respects the tech bubble, look minor in proportion. The aftermath and unwinding should be comparable to the buildup, so to think this is over in one month is a silly notion. Obviously some areas started down much earlier, and thus are farther along in the process, and closer to bottom. The group that isn't true for is the hedge funds, Wall Street banks, and public exchanges, all of which hit peaks in popularity in the last couple of months, or even more recent than that. They had a great run, and now it looks like they should be headed for a great fall. I don't want to cut off my nose to spite my face, but it wouldn't break my heart if more hedge funds failed and a major Wall Street Bank had to file bankruptcy papers.

so much for the rally

2007-08-15T13:05:00.000-07:00

Ok, I'm wrong about the short term rally, but it's looking like I'm getting closer on the bear market prediction. The truth is that plenty of stocks are looking cheap to me, although not the ones that others are thinking. I like the stuff that underperformed before this whole thing started, because if you can find those businesses with good fundamentals, those are under owned right now, and have the chance to be good coming out the other side of the abyss. The stuff that they're dumping now for all the right reasons, that stuff I have zero interest in, and think that many of them have just recently put in multi year tops - think Goldman, exchanges, cyclicals.

no way out, where are there still bubbles to pop?

2007-08-14T17:36:00.000-07:00

Sentinel, a manager of short term cash for trading firms on the commodity exchanges, today told its clients that they can't have their money back. What they thought was invested in "cash equivalents" was in something else, something that couldn't get a bid for in today's liquidity challenged environment. Sentinel is said to have only about $1.5billion under management in these short term funds, but after the news from AXA the other day that one of their money market funds saw a 25% drop in net asset value, it's got to make you wonder how bad this can get if money market funds can't sell their paper.

The news out of Thornburg Mortgage, that they're having a very difficult time rolling over their commitments from lenders, preventing them from funding mortgages, tells you that there is a serious liquidity crisis out there. It almost makes you happy to own common stocks, which it looks like you can at least get a bid for, even though it may not be the bid you want.

The news out of Sentinel and Thornburg, and all the problems that have cropped up in hedge fund land, makes one wonder, if there was a bubble in lending, and a bubble in borrowing for trading purposes, and the exchanges like CME and ICE are based on levered players borrowing at 10-1, or even higher ratios in treasury and eurodollar trading, and the stock prices of ICE and CME, and some of their other brethren, are trading at 50 times and above, based on the prospects of huge continued growth in trading activity, and the prospects for more mergers in the sector, what might happen to stocks like those if the frenetic trading of hedge funds actually falls away over the next few years? And if the prospect of merger/takeover activity falls off because of difficulty of financing deals? Seats on exchanges have gone up and down for more than a hundred years based on bull and bear markets, and with seat prices, and now publicly traded exchange prices at all time highs, up ten, twenty, thirty fold or more over the last five years, mostly due to the mushroom cloud growth of hedge funds, many of which will be going out of business soon, what will happen to those valuations when the trading stops, when hundreds of hedge funds simply disappear, and are no longer around to generate volume? The prices of these exchanges are based purely on the speculative appetite of hedge funds, and bank and Wall Street trading desks, and it seems this appetite may wane. In today's lousy session, unlike the other big down days the last few weeks, volume was down noticeably. When everyone's losing piles of money, eventually the trading slows way down, and so should the profits of the public exchanges. If you think they look expensive today, wait till their earnings start falling.

another shot

2007-08-14T08:10:00.000-07:00

Ok, I wouldn't define this as a rally . . . yet. There are still some major shots to absorb in the mortgage market looking at Thornburg Mortgage the last couple of days. Goldman is also leading the financials lower today. The market is also reacting to earnings news from Wal-mart and Home Depot today. I must be a glutton for punishment, because I'm continuing to nibble on Home Depot today. They've got the $10billion loan commitment, they've got $3billion in cash, and they generate plenty of cash. I don't know how this supply business sale is going to play out, but I'd rather they keep and run it rather than give it away. In any event, they've got plenty of ability to buy back a ton of stock, and the lower the price, the more they can buy back. The housing recession is going to last awhile, but home improvement is going to be a solidly profitable business from now until judgment day, and if you're going to invest in the sector, does it make more sense to buy during a downturn, when the stock prices are depressed and ultimately poised to rebound, or while everything is going great and the stock price is high? HD didn't see margin expansion during the boom the way homebuilders, or sheetrockers, or roofing tile companies did, and thus they're going to experience much more stable margins as the business heads south.

As for the market, I don't know if there's going to be a total breakdown from these levels, and that's certainly a possibility, but this looks more like a normal aftershock/retest. One trade that I find fascinating is the "buy tech, sell financial trade" that has become the current soup of the day on CNBC's commentator menu. Do financial companies use computers? How about hedge funds? Do loan reps and real estate agents use cell phones and PDAs? If jobs are going to contract in the mortgage business, the real estate agent business, the appraisal business, the title insurance business, the hedge fund business, the trading desk business, how are tech sales going to do? Now that tech is mature, is it immune from an economic downturn? John Chambers, in full pom-pom and short skirt regalia, just said that "this is the strongest global economy I've ever seen". Does anyone remember the stuff Chambers was saying back in early 2000? Same stuff. Go Johnny, go! Pump and dump! Keep issuing yourself and your employees stock options, use shareholder cash to buy back the stock so you and your fellow employees can sell into the price support! Hell of a food stamp program.

great time for risk arb

2007-08-13T09:56:00.000-07:00

Stock prices have become completely disjointed from any fundamentals. Despite the fact that the averages have quieted down, there's all sorts of hard to explain volatility in individual stock prices, day to day, even hour to hour. As all the leverage is being squeezed out, stocks are moving purely on who wants out of a particular position, both long and short. At times like this, you almost have to ignore prices entirely, except to potentially exploit them. We're seeing record spreads in a number of prominent arb situations, which tells you that a number of leveraged arb players are also being squeezed. This would be hell of a good time to put a couple billion into arbitrage, which I suspect Buffett is probably doing. It still feels to me like stocks are trying to find their footing, and should rally once we get past all the forced liquidation, and I think we're well along in that process.

look ahead

2007-08-12T18:14:00.000-07:00

Fox News has a series of financial news programs on Saturday mornings, maybe some of you have seen them. I DVR three of the four, but it usually only takes me ten minutes to get through three thirty minute shows because they spend most of their time debating political wedge issues that have nothing to do with markets or finance. Surprising coming from Fox. But anyway, this weekend they had a two hour special with Neal Cavuto moderating, responding to the turmoil in the financial markets. It looks and feels to me like the finger nail chewing has reached a crescendo. I don't know if there are going to be a bunch more hedge funds who are going to tamp down the potential for a rally, because they still need to unwind more losing positions, but it feels to me like we're going to have a big couple of weeks to upside right now. I'm not covering my shorts because I think we're in for more trouble farther out, but I think the fear meter is just too high right now, and the bears too happy. Maybe I'm crazy, but I think we're going up, and up pretty big in the next week or two.

I think the Iowa straw poll results in the Republican field were fairly interesting this weekend. Romney won, but I think he spent something like twice as much money as all the other contenders combined, but he only got 32% of the vote. I regard this as an early loss for him, and it shows there is plenty of lingering distrust out there. The tough thing for Romney, even though I think he's an able guy, is that all his newly discovered positions, all conveniently pandering to the right wing base, seem so easily attackable. Whether it's his flip on choice, or guns, or immigration most recently, there's just way too much political convenience being displayed, and I think that's going to be hard to swallow for lots of voters. The bigger news from the straw poll was Mike Huckabee's runner up finish, with 18% of the vote. I've actually mispelled Huckabee's name in past blogs, which goes to show you how little media attention he's gotten up to now. Huckabee, unlike Romney, spent hardly anything in Iowa, mostly because he hasn't been able to raise much so far, but his second place shows that his answers during the early debates are starting to resonate with real Americans, as they have with me. Maybe this will give his campaign a jump start. As I wrote in my last blog mentioning politics, I like what Mike Huckabee is saying, and now it may be worth rooting for him. Despite Huckabee being a "Christian conservative", and actually a former preacher, that's not a problem for me because of the way he approaches it. Unlike Bush and Rove, who used religion as a way to divide Americans, Huckabee seems much more interested in uniting us. He may be too good a person, talking too much sense, for the hard line right wingers like Fatso Limbaugh, Ann Coultergeist, or Sean Ins-Hannity to support him, and it's hard to imagine a Republican winning without the support of those wacko conservative radioheads.

Global Alpo

2007-08-11T15:09:00.000-07:00

Goldman Sachs, a few years ago, introduced a flagship hedge fund, and with typical Wall Street hubris, named it "Global Alpha". Alpha is supposed to be something like "excess return above the market without commensurate risk", or something along the lines of return without volatility. And the fund had a terrific 2005, up some 40% after fees. But last year it was down 6%, and it's reportedly down some 26% so far this year. This fund is also supposedly leveraged five or six times its capital. So what's up with the "alpha"? No return, lots of volatility, and previous returns generated only while employing generous amounts of leverage. Making 40% in any year is pretty good, but with five or six times leverage, it's not exactly the second coming of Warren Buffett. And now, of course, leverage is working its magic in the opposite direction. Can this fund survive? Hard to know, but I don't see them having an easy time unwinding trades, and they're likely to lose even more money in the process. Maybe Goldman steps up and gives the fund an equity infusion so it doesn't have to sell everything in a hurry, but I imagine Goldman, the firm, is starting to confront its own capital issues considering it came into this decline leveraged some 30 times its capital. Calling this fund "Alpo" is probably an insult to the dog food. Chew your food Goldman, chew it.

the week redux

2007-08-10T21:45:00.000-07:00

Ben Bernanke, facing his first financial market crisis, decided to inject enough reserves to keep Fed funds at 5.25%, and by the end of the day it looks like he may have done more than enough, with Fed funds down around 5%. Will this be enough? We don't know yet. I personally am enjoying watching the mad scramble in hedge fund land, and it wouldn't bother me a bit, and I don't think it'd do any permanent damage to the well being of America if a bunch of funds failed and the too cool for school managers had to consider downsizing from their three story townhouses on the Upper East Side and their palatial summer estates out in the Hamptons. The problem is that there's a recession developing in the real economy, no matter what the Fed, or Hank Paulson, or any other idiot Wall Streeter or politico is telling you. And that's the question, will saving the economy take precedence over teaching the idiot hedge funds and Wall Street trading desks a lesson? I think Bernanke is going to try to delay it as long as he can so as to eliminate as much speculation and moral hazard from the markets as possible.

The casualties are really starting to pile up. Jim Simons, the hyperactive, fast trading, quant manager, who's produced an enviable long term record, but get this, charges his clients something like 5% of assets plus 44% of profits in his flagship fund, hit the skids this week, announcing that his quant strategies had gone haywire, and his fund was down 7% for the year. My custodian, Charles Schwab, scheduled an "emergency conference call" to discuss problems in some of their quant equity funds that rely on "Schwab's Equity Rating" system. It appears the funds have sustained some significant, and it appears unexpected losses. There have been plenty of others. Perhaps the most disturbing was news of a European money market fund run by AXA that had lost 25% of its net asset value. A money market fund? Yes. A fund that was supposed to be a cash equivalent? Yes. I don't think there's any way that AXA won't have to make good on those losses, and reimburse shareholders fully. The really scary part is that if it happens anywhere else in money market land, and if so, the sponsors are going to have to bail them out, and how much will that cost? And if they don't bail them out, that might be the start of a genuine bank run type event.

What's happened in markets over the last few days mostly isn't explainable by any fundamental developments in underlying businesses. What's transpired is that leveraged funds out there have all sorts of positions that have gone off the reservation in terms of "modeling". These quant guys develop these elaborate algorithms encompassing all sorts of data that are supposed to cause movement in particular securities. And for awhile, these models work. But over time, there's a lot of super greedy guys with good brains for math, and access to high powered computers, and it's inevitable that "arbitrage" profits based on these models disappear. Or worse, what's happening now, the markets get disrupted, and the models stop working altogether, and in many cases start working 180 degrees in the other direction. The truth about investing, it helps to understand math, but math alone isn't enough (and if truth be told, successful value investing doesn't take anything more than some basic arithmetic). Investing, over the long haul, is more art than science, because the participants can blow up any models, and then you get one of those "six sigma" events, and a fund like Long Term Capital loses all its money in a matter of weeks, or you see something like the crash of 1987, where a whole bunch of margined players lose most or all of their money.

I normally don't share a lot of individual investment ideas on this site, fewer as time passes. Good investment ideas aren't that common, and they're valuable to the right person, and my goal on this site isn't to enrich randomn readers at the expense of my clients, but I'm going to share an idea with you that I put on this week, just for illustration purposes of how stupid and irrational markets get from time to time. And how market forces often drive security prices to levels that bear zero relationship to the underlying business.

-There is a company, Mueller Water, that makes all sorts of products for water infrastructure, things like pipes and valves, fire hydrants, and all sorts of other stuff. This company is a spin off from Walter Industries, that was a hodge podge of homebuilding, coal mining, a few other things, and Mueller. Part of Mueller's business in tied to residential real estate development projects, and in the current environment, that business is soft. But they also supply stuff for the municipal infrastructure arena, and all across the country, that stuff is really old, and is badly in need of replacement, to the tune of hundreds of billions of dollars, maybe more. Recent evidence of this need was the bridge collapse in Minnesota and the burst steam pipe in New York. In my own city, Seattle, we recently had a big water main pipe break, causing a big traffic jam for hours. Most of the water infrastructure in the country is 70 years old or older. But here's where the story gets even more interesting. Mueller has two classes of stock, A and B. These are identical securities, representing identical percentage ownership stakes in Mueller, except for one thing - the B shares get 8 votes on company matters, while the A shares only get one. Which makes the B shares a superior security. Right now, with what's going on in the markets, there are lots of funds, both mutual and hedge, that are devoted to "arbitrage", i.e. capturing an apparently easy gain from a security mispricing, based on publicly available information. The most common example today, is that with all the takeover deals, you can buy a stock that is supposedly being taken over, but that trades at a discount to the ultimate, agreed upon, takeover price. Many of these arbitrage funds, like other hedge funds, use leverage. And in the current environment, the market is trading against leveraged players, causing them much consternation and lots of margin calls, attempting to force them to liquidate trades that would otherwise make perfect sense. A few weeks ago, Mueller was put into a major stock market index, and with the A shares the anointed security because there's more of them and they're more liquid, the price of the As spiked up, well above the Bs. But the B is actually a superior security, and worth, at minimum, the same as the A. So arbitrageurs, spotting this seemingly illogical disparity, went out and bought Bs and sold short As. But some of those arbitrageurs have seen numerous other of their positions go against them in the current wacky market environment, and if they're too leveraged, the prime brokers who custody for them are asking them for more collateral, or looking for them to liquidate trades. And of course those prime brokers know what the trades are, and they're relaying (illegally, but try to catch them) that information to other market operators, who are then going out and moving those positions deeper into the red, putting even more pressure on the fund to liquidate. So the other day, the Mueller B was trading just over $12, while the A was over $15. A three dollar spread in what is essentially an inferior security, but nevertheless from a business owner's standpoint, a perfect substitute. A 20% price difference for the exact same ownership stake. It'd be like you had two one ounce bars of gold, same weight, same karat, and one was priced at $600, and the other $750, sitting right next to each other. That's incredible. Mueller also has a book value of over $11/share. So I went out and bought some Bs. And a number of insiders were buying B shares a day before I did, which I didn't know at the time. I didn't try to arbitrage it, and use leverage, because I don't want to be in the same position as the troubled fund manager. I like the company's prospects, and so I'm happy just owning the stock, and even happier that I can buy the B a dollar over book value, and three dollars less than the A. Over time, one of two things should happen - either more owners of A should sell it and buy B, closing the gap, or the company could create an exchange where B shareholders would be able to swap for A. Now why am I not "arb-ing" it? Because I have no idea when the spread will close, and it would be complicated for my clients to think about. And I like the company at the current price, and am just happy owning it. Before this irrational disparity existed, I had actually traded the A shares twice for nice profits.

material misrepresentation

2007-08-10T08:39:00.000-07:00

When this credit/subprime/CDO/hedge fund collapse is over, there are going to be giant losses in instruments that were marketed by Wall Street snake oil salesmen as safe and stable. There are going to be all sorts of public pension funds, college endowments, and other people with large megaphones, who are going to be very unhappy with their Wall Street salesman. The lawsuits are coming, and it's hard to believe that there won't be significant settlements. The broker stocks have been fighting a volatile tug of war because of building short interest that is creating strange market dynamics, but the ultimate resolution is going to be bad for these firms, and their stocks are likely to settle at significantly lower levels.

politics and payoffs

2007-08-07T17:52:00.000-07:00

Fannie and Freddie
Un-freaking-believable! Chris Dodd and Chuck Schumer are both proposing to raise the limits for Freddie and Fannie, both in terms of the types of mortgages they can buy and the degree to which they can stretch their capital bases. Does everyone know who's on the hook when Fannie or Freddie fail? You and me, and everybody who pays taxes in America. For years, Fannie has been a pet project of the Democratic party, with such prominent Democrats as Jim Johnson and Franklin Raines running the place. These two organizations are already playing by a different set of rules than other large financial institutions, in terms of their implicit government guarantee, which lowers their borrowing costs, and the amount of leverage they can deploy, which is already greater than any other large financial institution in the country (although that's changing rapidly with the use of "off balance sheet"derivatives). This wouldn't be a problem for me except for the fact that over the last few years we've found out that massive financial chicanery was going on inside of both Fannie and Freddie, particularly Fannie, designed to enrich the executives for performance that didn't actually happen. I still don't know why Frank Raines didn't go to jail other than because of who he is, and who he knows. The worst thing about this story is that these freaking politicians are couching this effort in trying to help out the little guy who can't pay his mortgage, when what it actually is is an effort to use a crisis to enact legislation that's a favor to rich friends, who have both been giving them money already and will now be encouraged to keep the contributions coming. This is just as bad as the stuff Bush and Cheney do, using fear to get policies enacted that are a financial favor to cronies, and ultimately putting the US taxpayer in harm's way.

This may sound hard ass, but if people took out mortgages that they couldn't handle, then those loans should be allowed to fail, those people should go find appropriate housing, and the creative destruction that helps capitalism work should be allowed to function. If the goverment comes in to prop up these mortgages that make no sense, to the tune of hundreds of billions of dollars, it's going to be the taxpayer who ultimately foots the bill, and we'll have a housing hangover that will last more than a decade instead of the few years it should take to clear.

The campaign
I've been reserving judgment and commentary to some extent on the current political debates. But I watched the recent Republican debate in Iowa and tonight's Democratic debate, and I think things are starting to sort themselves out in my mind. On the Republican side, McCain is clearly done. He's old, he's not good enough, and he should hang it up. If you can't manage the finances for a $20million campaign, how the hell are you going to run the country? Rudy sounds fine on lots of points, but there's something a little too cute by half. It's all those Yankee games when he's sitting in those box seats, posing like some idiot who sees he's on tv. In a time when America needs more unity, and we need to make friends in the world, my gut tells me that Rudy is a phony, and the wrong guy. It's like he's trying to ingratiate himself with voters before he shows what a dick he really is. Except for the fact that he's flip flopped on just about every plank position of the Republican party, I actually think Mitt Romney would be a very good executive, and while I have no idea what he actually stands for, I'm not sure that means he'd make bad decisions if he were in the White House. We're just getting done with 8 years of neo-conservative ideology, and I'm not sure pragmatism isn't a much better and more sensible alternative. Romney's faith bothers me not at all because anyone running for President is more beholden to their own ambition than to any God, despite what they may say. The guy on the Republican side I really like, but he probably has no chance is Mike Huckaby. Yes, I know he's one of the guys who raised his hand when they asked "who doesn't believe in evolution", but again, I don't really care about these guys' religion, and in terms of talking policy and priorities for the country, almost everything that isn't about God that Huckaby says makes sense to me. I think he's a moderate despite his branding himself as a charter member of the religious right.

As far as the Democrats, John Edwards is a clear no go. He, like Rudy, seems like a phony. And the fact that he's a trial lawyer, and that that's his biggest constituency in terms of contributions, well that's another huge knock. And his brand of populism would be lousy for the economy, and thus the country. It's clear that Hillary is hitting her stride in the debates, and that Obama has often sounded young and inexperienced, but I think everybody needs to be careful about being charmed or entertained by good talking points or punch lines. To a large extent, talking points and some crazy Christians are all that got Bush elected twice. And it's interesting to me how all of the candidates, both Republican and Democrat, have come out attacking Obama after his speech about foreign policy that made a point about possibly acting unilaterally in Pakistan to get to Al Qaeda. The unanimity of opinion against him on this issue tells me that Obama's view is almost certainly the right one. I read the transcript of that speech and there was nothing in it that didn't make sense to me. The Bush administration has coddled Musharraf, and the fact is that Musharraf is basically running a militarily supported, authoritarian regime in Pakistan, but one that's too cautious about taking on Muslim radicals. In the wake of the National Intelligence Estimate describing Al Qaeda's resurgence in Pakistan, I've been reading up on the country some. Appearances aren't all what they seem. Those people are basically the same people who populate India, except that they're predominantly Muslim instead of Hindu. And like the people of India, there is a large moderate middle in the country. Even if Musharraf were toppled, it is highly unlikely that the country would fall into the hands of radicals Islamic fundamentalists. In fact, Musharraf is currently trying to build an alliance with the ex Prime Minister Bhutto, who is a moderate. Anyway, I think Obama's shortcomings in the debates seem much more about a lack of experience debating on the national stage than a lack of a thoughtful approach to foreign policy. Hillary Clinton may well be a terrific future President, but there is no question that she is much more beholden to entrenched special interests in Washington than is Obama. And she represents to a large extent old politics, and the old ways of doing things, and the status quo in terms of Washington. I think it's time for a change in the status quo in Washington, because frankly, the government sucks right now, and no one in the race from either side of the aisle represents a better opportunity for change than Obama. I remember a passage from the great economist John Kenneth Galbraith, when describing the maturation of John Kennedy - Galbraith described how intelligent Kennedy was, and said that when he first started advising him, Kennedy asked his advice on nearly everything, but soon Kennedy was telling Galbraith what he thought merely to find holes in his own argument, and then he eventually stopped asking his advice altogether because he already knew the answers. In observing Obama, I think he's got that type of raw intelligence, and maybe even more importantly, the curiosity to look for the right answers. Intelligence and curiosity, possibly two important characteristics for a good decision maker?

The market
Yesterday's rally, in terms of the a/d line or up volume/down volume, was pretty much puke. The market is getting worse in terms of the narrowness of leadership. And like a game of musical chairs, as the game goes on, there are fewer chairs in place, and investors are pouring money into those fewer chairs. That's not the condition of a healthy market. During the correction in the summer of 2006, after the sharp decline in May, we had lots of volatility in June, but a few of the up days were punctuated by 10-1 up volume days, with 4-1 advances to declines. We're going to need to see that same type of broad based rally to believe that the bull market can continue from here. If all they're buying is a few favorite tech and industrial stocks, often driven by short busters, it's going to look a lot like the summer rally of 2000, and y'all know how that went once the rally was exhausted. I actually sold a couple of small positions today.

conventional wisdom right, and wrong

2007-08-07T11:32:00.000-07:00

The consensus had it right today, that the Fed was going to stand pat. They didn't even move off their inflation bias. But the conventional wisdom, that the Fed is clearly part and parcel to, that the economy is fine, that is not wise at all. We are quickly slipping into a consumer credit recession and the Fed did nothing to alleviate that today. This is bad news, and the credit markets are unlikely to heal themselves. Maybe they can hold the markets together here, or even rally them if the short interest dynamics are right, but that will be a gift for the bulls. If we get a big rally here, I will in all likelihood be selling that rally aggressively.

not what it looked like

2007-08-06T16:09:00.000-07:00

Today's market rally looked ok on the surface, and the higher volume may have signaled an important reversal, but the underlying numbers were not very good - 1793 advances, 1570 declines on the NYSE, 1453 advances, 1617 declines on the Nasdaq. 33 new highs, 659 new lows on the NYSE, 35 new highs, 480 new lows on Nasdaq. Mid cap averages went up much less than large, and small were barely up at all. The price advance was mostly fed by marking up specific stocks with high market capitalizations. If the Fed gives the markets no help at all tomorrow, my guess is that the next few weeks are going to continue to be choppy, and perhaps even violently enough to the downside that it will bring in the Fed intra-meeting. I think the Fed should observe the old saying "a stitch in time saves nine."

are you kidding me?

2007-08-06T14:56:00.000-07:00

The WSJ reported today that Fannie and Freddie, and possibly JPMorgan have asked their regulatory bodies for approval to purchase more loans in the present environment. This essentially is a request to use more leverage and participate in markets where they previously hadn't. The notion of granting these financial institutions, which are already working with incredible amounts of leverage, and have committed serious regulatory infractions in the not so distant past, in the case of Fannie, doctoring their earnings statements so top executives could get enhanced bonuses, well, this frankly strikes me as utterly ridiculous. The markets will sort out the current problems without regulators loosening the restrictions on banks and financial institutions. Lax regulation and oversight is what has gotten us to this point in the first place.

There's all this economic theory out there that "the free market" is the best mechanism in all cases, for all things, serving all people. But the history of "deregulation" in this country is not so pretty. In every case where a major industry has been deregulated, whether it was the airlines, or the savings and loans, or the telecommunications companies, there's always been a subsequent financial crisis, or a series of bankruptcies, rampant fraud and self dealing, or just utter incompetence on the part of managers, and worse than mediocre returns for shareholders in many of the enterprises. Sure there have been success stories, but not ones built as much on wealth creation as wealth redistribution, mostly from the ignorant shareholding public to the financial engineers on Wall Street. Has this been good for the country or just good for a few rich guys who got richer?

Ultimately, for the banking system in this country, for the utility grid, for water rights, and a few other functions, the soundness and reliability of these industries are essential to the well being of the general public, and we really don't want to wake up one day and not have these services because someone tried too hard to make an extra buck or two. Because if that happens, it's you and me, taxpayers, who have to pay to fix the problems when the government has to step in and intervene. And God help us if the government at that moment is an incompetent administration like the present one, who barely understands the problems, much less how to fix them.

Capitalism is a wonderful system, but at its foundation are still laws and regulations, like property rights, and punishment for fraud and negligence. Without checks or limits, without fairness and honesty, you have no system, you have anarchy. There is a place for regulation, and one of those places should be in how much of other people's money that banks and hedge funds are allowed to gamble, i.e. how much leverage they should be allowed to use, so they can reach an incentive bonus or performance fee. That's what most of these guys are doing, gambling with other people's money, because if they win, they get paid, and if they lose, it's not their money.

it's downhill already

2007-08-05T18:27:00.000-07:00

Ok, I was right the first time. According to the Federal Reserve website, they meet Tuesday. The WSJ has an article on its online site right now that says it's a two day meeting Wednesday and Thursday. Rupert Murdoch hasn't even taken title yet, and there are already factual errors showing up in the reporting. I sure hope it doesn't go the way of the New York Post and Fox News, that would be the end of one of greatest journalistic franchises ever.

losing all sense of time

2007-08-05T16:43:00.000-07:00

In my recent posts, I had the date of the Fed meeting wrong. It's Thursday that they'll announce any change to policy, or not, not Tuesday, which will give the market that much more time to tell the Fed its story, good or bad. And I thought I was writing on Thursday when it was actually Wednesday, last week. I think my brain was slipping in all the market confusion.

Friday's statistics knocked the ten day arms over 1.5, often an important threshold point in the past. The one day arms reading reached its highest mark of any day during the decline. In watching all the Saturday morning cable financial news shows on Fox, all but a few talking heads were bullish, and saying this is just another passing storm. And they were saying it with such vitriol that I'm increasingly doubtful they're right. That said, the most if not all of the pieces of the puzzle are in place for a rally, but what may ultimately provide the biggest surprise is what might happen after a decent counter rally.

a game of chicken

2007-08-03T13:36:00.000-07:00

Picture a kid and his dad. The kid is troubled, has a serious drug problem. The dad has tried to talk to his son, but it's been of no use. On the pretense of "getting a thrill", the dad talks the son into going skydiving. The son is an adrenaline junkie, so he's automatically up for it, except he's not sure about spending more time being lectured to by his dad. He decides to go.

Dad is an expert skydiver, and they're going to do a duel jump, attached to each other, with dad in charge of the ripcord. So they jump, and they're tumbling, and the son's having a great time, and they're picking up speed, falling faster and faster. But all of sudden, the thrill is getting a little scary, and dad hasn't pulled the cord. He starts talking to his son about his drug use, and he's looking for him to stop, and he wants a promise. Son is saying "ok, quit joking around dad, pull the cord". But his dad wants more, he wants a commitment. Now it's getting really scary, and dad is saying "my job in life is to take care of you, but you're not taking care of yourself, and I'm not going to pull this cord until I'm sure you're serious about quitting." The kid has now wet himself, and he's totally freaked out, crying, thinking he's going to die. He begs and begs, and finally his dad pulls the chute. The landing is a little bumpy, but they're fine.

Two weeks later, the kid is back on drugs.

This is the Wall Street banks and the Fed. The Fed is the dad. And this is what the market is going through now. And the thing is, the Fed has to pull the cord to save itself too. But after it's all said and done, the banks will be back to their same old antics, using all the juice they can, addicted to trying to grab every greedy little dollar bill.

We're quickly approaching the point where the longer the Fed waits, the less likely they'll be able to engineer a soft landing, and the greater the risk of permanent injury or worse.

Despite the fact that they're marking my portfolios down, I hope the markets are even worse on Monday. If we do have a big down Monday, I expect the markets will spend Tuesday in suspended animation until we hear from the Fed. Make no mistake, we're approaching a financial crisis, but it won't be the end of world either way, it'll just be really bad for the banks. I think the odds are now about 50/50 that the Fed is going to ease on Tuesday, despite all the naysayers saying there's no chance they'll ease.

risk,or quote risk?

2007-08-03T10:48:00.000-07:00

They keep leaning on sectors and stocks, but in times like this, don't even worry about the quotes, unless you're playing close to edge in terms of using borrowed money. They are simply putting pressure where they can, wanting more people to choke up stock near a low. Think about the businesses, and not even the current quarter, but the longer term prognosis. Business is inherently cyclical or volatile, no matter how much Wall Street's managed earnings mechanism doesn't want it to be. If the companies you own are highly dependent on easy credit, then you may have a problem, depending on how much the stock is down, and whether or not the temporary removal of credit availability is going to do permanent damage to their business. Ultimately, it always comes back to what you own, and what they're going to look like coming out the other side. On that note, I'm having no trouble sleeping these days.

an unholy alliance

2007-08-03T09:37:00.000-07:00

I've been reading some of Michael Gerson's op ed columns in the Washington Post recently. Gerson was Bush's chief speech writer until about the last year. He's the one that penned all that high minded rhetoric about "spreading democracy" and "freedom being the Almighty's gift to mankind", and other bullsh*t Bush has tried to use to justify our misadventure in Iraq. In today's column, he pointed out that people of faith were behind the civil rights movement of Martin Luther King, a favorite misappropriation of facts maneuver of today's Christian conservatives. I've seen Richard Land, Pat Robertson, Pat Buchanan, and many others of the conservative ilk try to pull off this bait and switch, and it makes me throw up every time I see it. The truth is that "white" organizations like the Southern Baptist Convention and Jerry Fallwell's people before they were the "moral majority" were vehement segregationists, opposing Dr. King, opposing interracial marriage, opposing civil rights. But today's Christian conservatives love to take claim to Dr. King's legacy to make their abortion arguments. And the Republican party of today, post the 1964 civil rights act shepherded by Dr. King, devised their "Southern strategy", which basically consisted of aligning themselves with Southern Democrats like Jesse Helms and Strom Thurmond, and more recently Zell Miller, to court the votes of white people who frankly don't like black people. Even the location of Ronald Reagan's 1980 campaign launch was the symbolically chosen Philadelphia, Mississippi, the venue of the actual "Mississippi Burning", where three civil rights activists were murdered, signaling in no uncertain terms to white Southerners: vote for us, we're on your side about the "colored". The latest iteration is the vehement anti immigration stance taken by the conservative right, that amounts to nothing more than another round of trying to keep "colored" people down, or in this case, out.

One of the strangest ironies of the abortion movement is that in one way it seems antithetical to the ultimate goal of Christians - to reach heaven to be with God. I grew up Presbytarian, read my bible, memorized the verses, and what they told me was that those who never had a chance to be saved, to accept Christ into their lives, i.e. infants who die, would automatically get the golden ticket to heaven anyway. Which means they wouldn't have to put up with the pagan, hedonist, pleasure loving den of sin that is our world. So if unborn fetuses from conception are actually humans, and abortion prevents them from having a chance to accept Christ, sending them straight to heaven, why would Christians be so forcefully opposed to abortion? As a side note, the bible doesn't ever mention abortion, which tells you that the fight is a modern convention of today's religious right to have another wedge issue with which they can stir up people, raise money, and garner votes.

Before I leave you, let me provide some contrast between today's "religious conservatives", and the father of the real conservative movement, that was about civil liberties, low taxes, smaller government, and a strong national defense, but one that didn't go running all over the world trying to inject itself militarily into stupid fights that weren't in our national interest. Two days after the 9/11 tragedy, Jerry "how many chins can I eat myself to" Fallwell, founder of the Moral Majority, looking to make political points or find a villain, said this in a television interview: I really believe that the pagans, and the abortionists, and the feminists, and the gays and lesbians, who are actively trying to make that an alternate lifestyle, the ACLU, the People For the American Way, all of them who tried to secularize America, I point my finger in their face and say you helped this happen." Ironic, considering if anyone is to blame, it's the religious conservatives who are so supportive of our policies in the Middle East, or it's another group of religious fanatics, the Islamic fundamentalists, but in either case it's all about a holy war, and us poor secularists would just as soon see both groups go find some other remote land and fight it out amongst themselves, and the rest of us can be at peace, and try to make a buck and live our lives.

In the wake of Ronald Reagan's first victory in 1980, partially aided by the religious conservative movement, which included Triple Chin Fallwell's Moral Majority, established in 1979, the father of the original conservative movement, Senator Barry Goldwater, on 9/16/81 said this: There is no position on which people are so immovable as their religious beliefs. There is no more powerful ally one can claim in a debate than Jesus Christ, or God, or Allah, or whatever one calls this supreme being. But like any powerful weapon, the use of God's name on one's behalf should be used sparingly. The religious factions that are growing throughout our land are not using their religious clout with wisdom. They are trying to force government leaders into following their position 100 percent. If you disagree with these religious groups on a particular moral issue, they complain, they threaten you with a loss of money or votes or both. I'm frankly sick and tired of the political preachers across this country telling me as a citizen that if I want to be a moral person, I must believe in "A", "B", "C", and "D". Just who do they think they are? And from where do they presume to claim the right to dictate their moral beliefs to me? And I am even more angry as a legislator who must endure the threats of every religious group who thinks it has some God granted right to control my vote on every roll call in the Senate. I am warning them today: I will fight them every step of the way if they try to dictate their moral convictions to all Americans in the name of "conservatism". What would poor Senator Goldwater think today?

Tuesday surprise?

2007-08-01T22:08:00.001-07:00

Two and a half trading sessions out from the Fed meeting, with a general freeze up happening in the mortgage market, evidenced by American Home Mortgage's crash, and inability to supply funding for mortgages already pledged, will the Fed throw the markets for a complete loop, and actually ease the Fed funds rate? Besides their inflation mandate, they are responsible for the banking system, and with what's happening with CDOs, and considering how deep the banks are into those instruments, it's not inconceivable that they could ease a quarter point. I know I've argued against this in the recent past, but the damage seems to be piling up in banking and mortgage land. And now that the markets have gotten some religion, would it really be that dangerous for them to take Fed funds to 5%? The entire treasury curve, in a flight to safety trade, has seen its yield drop under that level, while spreads to everything else have widened like Moses parting the Red Sea. Ironically, if you're like me, and you've been buying stocks during this tumble, you may actually want the markets to get worse over the next two days, tomorrow and Monday, with more news of hedge fund and money center banking problems, because that may be just the push that Bernanke and crew need.

c'mon, is that all you got?

2007-08-01T06:34:00.000-07:00

No follow through from Asia? Out of stock to sell? Wimps. Seriously though, the question during any decline is where is the teeter totter in terms of whether or not the delictability of buying a low for the value crowd and trading crowd eventually overwhelms the margin call/fear liquidation. No one knows where that point is, which is why I try to rely on oversold statistics. They're not perfect, but what is?

stay calm, because no one else will be

2007-07-31T22:05:00.000-07:00

It looks like I may have spent some money a little early. Asia is getting pounded overnight, with the newest revelations from Bear Stearns Asset Mismanagement, and news of one of Macquarie's hedge funds in trouble in Australia. There's also a WSJ article about Harvard U. losing some $350million in the collapse of the Sowood hedge fund. Financial markets have never had so much leverage in them, and have never been so linked together, which sets up major potential domino effects. One margin call begets another, and they're starting to tumble. Maybe we're going to be lower before we get the bear market rally, and tomorrow could be really ugly. If the pain's coming, I'd just as soon see it tomorrow rather than dragging on for weeks, so bring it on, tip em over, and let's see where everything lands. Could we set a record, down 600-700 or more? I wonder how the exchanges would handle that tape, and how hard it'd be to buy stocks near the close. Use limits.

could it happen?

2007-07-31T20:31:00.000-07:00

Looking at the landscape of what's happening in mortgages, could this possibly reach into the solvency of Freddie and Fannie? There are no lenders with balance sheets supported by smaller slivers of equity relative to portfolio size. Could it all go wrong? And how would the prospect of failure for Fannie or Freddie ripple through the rest of the banking system? Of course the Fed would have to come in at that point, but how much lower would markets be by then? By that time, the major mortgage insurers would already likely be insolvent, and there would certainly be some money center banks or brokers in a heap of trouble. Haven't all the Wall Street strategists been telling us that this subprime problem was "contained"? Maybe we ought to ask Bear Stearns about that, who now is refusing to give clients their money back. Maybe they can go to Mr. Potter in Bedford Falls and get fifty cents on the dollar for their shares?

mm mm good

2007-07-31T12:51:00.000-07:00

No, not Campbell's Soup, July statements. I call this the statement markdown trade, hopefully wigging out clients, creating another swath of selling. Stats look good again today, with another day of the arms above 2. Hopefully we can finish close to these lows.

They're going to trade where they're going to trade, no point getting wigged out. It only matters if you're wrong in the long run or if you need to raise cash now. And that's another reason they're going down, 'cause there's definitely some funds out there desperately trying to raise some cash. One of the biggest mistakes you can make here from a trading standpoint is to sell things that make sense, and hold onto things that don't.

communicable diseases

2007-07-30T08:17:00.000-07:00

Fear and greed. Everyone acknowledges them, agrees that they move markets, understands the concept of fading them, but when things are going good, or bad, they somehow start thinking "it's different this time". It was less than two weeks ago that investors were celebrating Dow 14,000, and the talking heads on CNBC were pointing out all the positives that were going to keep the party going. Today, after a big swath of selling has moved it's way through the market over the last six or so trading sessions, it's all wailing and gnashing of teeth, so deeply uncertain after being so certain. How can it change this fast? Because fear and greed in markets are highly contagious, and they are so because people have such weak immune systems to them.

What gives an investor immunity from fear and greed? Knowledge and equanimity. You first have to know what you own and why you own it. If you don't understand operationally how a company makes money and why they should or shouldn't make more or less money in the future, then you're done, end of lesson, and don't buy stocks. The next level up is understanding the economic stability of a business, which is primarily dependent on three factors besides management - the strength of the balance sheet, the volatility of demand for the company's products, which affects both units and margins, and the volitility of input costs, which affects margins.

In the present eviroment, if you have a company whose income is highly dependent on easy and low cost credit, and its stock price is still betting on easy credit, then you're going to have a problem. On the other hand, if the market or the price of an individual stock reach a level that accounts for a tighter credit environment, then you may or may not have a problem. Most stocks had done little or no discounting of a significantly tighter credit environment prior to the decline, ergo, when it became more obvious that credit was cinching up, the market got pounded. This is where things go deeper in terms of knowledge - you have be able to reasonably approximate what is and isn't in a stock price, i.e. is the bad or good news discounted already. I don't know any way of learning this except for time in the trenches

So why don't knowledge and understanding of businesses prevent investors from contracting the diseases of fear and greed? One of two reasons. Either their understanding of the business is superficial because they haven't actually thought it through themselves, they've just borrowed the story from someone else's analysis, or despite having a reasonable understanding, they still can't prevent their emotions from getting in the way of their reason.

Despite all my prognostications, I don't "know" where the market or an individual stock are going. What we're trying to do is assess risk and return potential, and there are times when both for the market or for a stock, risks are up or down, potential returns are big or small. And in an ideal world, you'd like to buy companies where the risks are low and the return potential fair to high. And you'd like to buy the market when it's much more likely to go up than down. These times don't happen everyday, they're in fact rare occurrences, once or twice, maybe three times over the course of a year, sometimes less. Right now looks very much like one of those times to me, precisely because so many have gone from oblivious to risk to certainty of the fulfillment of all risks. When everyone "knows" something, they don't know anything, and when everyone's scared of "something" happening, something has already happened.

fully invested

2007-07-27T17:30:00.000-07:00

I just watched the first half of "Fast Money" on CNBC, and all four panelists were short term bears. Today, in a rare event, I listened to the first five or so minutes of idiot Booyah Boy, and he's bearish too, except telling us to buy consumer staples like Pepsi and Kellogg. When the market has gotten pounded to the extent it has over the last six or so trading sessions, it's not time to become a coward. If these people weren't bears when the S&P hit 1553, a new high, what makes people want to listen to them now? Any regular reader of this blog knows that I have little to no ideological bias when it comes to stocks, other than I like to buy real companies, in real businesses, at low valuations, and I don't want to follow the crowd.

Most "investors" today are now long term bullish, and short term chickensh*t. I'm the opposite right now. I'm extremely bullish in the short term, and think it's time to get fully invested, and I'm very cautious past the next rally, but we're much more likely than not to get that rally. Investing is not about certainty, it's about being on the right side of probability, and the probabilities are now heavily tipped in favor of a rally. The ten day a/d line is the lowest it's been since the bear market in 2002. The arms has been over 1.6 four times in the last six days, with two of the those days over 2 in the last five. Yesterday and Tuesday saw less than one stock in ten up, a rare event at any time. This is more of a "trading" call, but it's a table pounding one. It's time to buy in the short term.

ok, let's go

2007-07-27T09:41:00.000-07:00

Well, that was it. I put most of the free cash to work over the last 30 minutes. Maybe they're going to carry me out this time, but if you can't buy at times like this, you shouldn't be doing it.

the ultimate resolution

2007-07-26T17:59:00.000-07:00

Don't mistake my short term bullishness. Yes, I expect a rally. But my thinking is (and "I might be wrong, but I doubt it", borrowing from Charles Barkley) that we've entered a bear market. We're also in a consumer recession in the country that's almost certain to spread and get worse. I think within the next six months, major stock averages will be meaningfully lower, the economy will be visibly worse, and ultimately that will bring in the Fed. Credit markets, or any markets for that matter, don't go from a huge pendulum swing of excess, begin swinging back, and stop in the middle. They always swing past middle, toward the other extreme, and before the current trend in credit is finished, we're likely to see some serious trouble in the banking system. I don't own any banks or brokers currently, and just have a trace of financials. That's intentional. Some are pointing to their "statistical cheapness". Those people are more likely wrong. There have been long and recurrent stretches of time when banks and brokers got pounded to or below book value, and most of them are nowhere near those levels today.

While the Fed will ultimately lower rates, they are unlikely to come in any time soon, before much more damage has been done in markets, because they are very wary of creating moral hazard by bailing out Wall Street again. This time, I agree wholeheartedly with the Fed. Wall Street has had it really good for awhile, to the point where they've gotten very greedy and careless, and the situation with those Bear Stearns hedge funds are a good example. I heard today that Bear Stearns is going to buy all those troubled mortgage bonds from their bankrupt funds. I wonder if they'll give themselves a good deal? Maybe they'll write their own "fairness opinion"? This is another example of the Street stealing from their clients. The SEC should seriously look at this.

yowza!

2007-07-26T16:07:00.001-07:00

Today, the ten day a/d line level went below the lowest level during the summer decline in 2006. We're about 2 1/2 standard deviations oversold on a ten day basis, which is an incredibly high number. It reached worse levels during the 2000-2002 bear market a couple of times, but it looks like we're awfully close here. We also saw over 800 new lows on the NYSE today, which again, is an extraordinarily high number. During the worst of the July 2002 decline, which was actually the "internal" low for the market, i.e. not the low print on the index, but the maximum internal damage, we went over 1000 new lows, but the fact that we are anywhere near those levels tells you things are pretty bad out there. One characteristic of the declines during the last couple of years is that instead of a point, they've been more like a wave, where they rotate from one sector to another, stock after stock, over a longer stretch of time than just one day.

I expect that we're very close to a decent rally here, possibly starting as soon as tomorrow morning. In fact, we may have seen the lows intraday today. My bigger concern is that what we're in right now is like an April 2000 situation, where this is the first big move down, but we're going to get much more pain over the next few months, after we get a rally in the very near term.

qqqq-cillin?

2007-07-26T11:15:00.000-07:00

If the consumer is going to be in a recession spending mode after stocks decline in the wake of what's happened to home prices, and now credit availability, will everybody and their third cousin go out and buy new I-macs, a new library of books from Amazon, and a new Blackberry account for RIMM? Are these companies trading at 46, 142, and 58 times earnings immune? Maybe, but maybe not. Is AMZN going up for any other reason than the trading dynamics of the stock, i.e. troubled short interest or option schemes? Maybe I'm stupid, but at over a hundred times earnings, selling books, I think the stock looks high.

sing it, Stevie

2007-07-26T09:52:00.000-07:00

Whenever stuff's going on in the market, songs go through my mind. Today, as I watch the market in freefall, I'm hearing "Isn't She Lovely", by Stevie Wonder. I don't know what it is about down markets, but they're so much fun to watch. Just about everything's down today except for some positive earnings stories, and the new three muskateers of the Nasdaq - Amazon, Apple, and Research In Motion. Maybe before this market bottoms, even those trading darlings have to buckle.

This is not the time to start thinking about what you own and why you own it, you should have been doing that a while ago, but when the market's really leaning on you, it's most important to think about the business, not the stock quote. If you're going to think about the stock price, do it in the context of whether the business is still doing fine, should do fine in the future, and whether you should be buying some more stock. If the business is wrong, sell it, and move the money over to something that makes more sense, but you should have been thinking about this stuff before. But besides that, watch and fun have, these kind of declines don't happen everyday, and they're a kick to watch.

from bad to worse

2007-07-26T05:47:00.000-07:00

Looking at futures this morning, the fallout from the failed financing of a number of LBO deals is going to do some further pounding to the market. If we get a huge down day today, like two days ago, we're likely to reach two standard deviations of oversold, which is approximately where the markets reached during the worst of the decline in 2006, but there's no saying that it has to stop there. That decline was a decent pounding, but nothing compared to a serious bear market. So it's still time to be careful, while at the margin, nibbling on value ideas that make increasing sense as they trade that much cheaper. Despite the anticipated action in Apple today, and things like Amazon yesterday, I think it's time to start getting away from those things that have worked the best recently, because that's where the "fast money", and likely the leveraged money is at.

holding my nose, and buying

2007-07-25T16:14:00.000-07:00

Looking at the short term statistics, the market is now the most oversold it's been since early March, when the Dow had the one big 400 point down day, and then a couple ugly follow up days right after. So in the very short run, the market is a buy.

Underneath, there are more anecdotal signs of a major top being put in place. You've got the market makers working in cahoots to squeeze all life out of the shorts in Amazon and Apple following earnings. It's amazing watching those stocks tick up in the aftermarket, as market makers trade stock back and forth, inching the prices up as they go, making it appear that's someone's actually coming in, with an endless appetite for stock, not waiting for a downtick, not caring what they pay. Does anyone really buy stock like this unless they're trying to manipulate a market? No . . . they don't. They maybe be able to get both squeezes marked up lots higher, but there's an eventual collapse coming when you see action like this.

Besides the few manipulated leaders, new lows have picked up dramatically during this decline, and are much higher than they were back in early March. This is also worrisome to me, and likely represents another major divergence in the market, and one that is much more likely to be resolved to the downside.

So I'm holding on for now, and actually added small amounts of stock to a few positions in a few accounts, but whatever rally we get here, I don't see it reaching to the end of August at the latest, and I hope I'll get the opportunity to sell a few more things before then.

best guess

2007-07-24T20:31:00.000-07:00

Looking at today's stats, and over the last couple of weeks, the NYSE ten day a/d line reached oversold territory today. And it was pretty much a washout by day's end. The seeds are being sown, or have been planted (is that the same thing, I think so?) for bigger problems down the road, but we're likely close to a point where we're going to get a counter rally.

Amazon reported what looked like a good number after the close, and the market certainly reacted positively, with the stock up 20% in the aftermarket. Does anyone think Amazon is in the retail business, houses inventory, and has profit margins in the 3-4% range? Amazon is now worth more than Costco, with less than a quarter of its sales and profits. Is over a hundred times earnings expensive for a retailer, even one that can grow 25% for awhile? I wonder how long they'll grow at that pace? I buy all my books from Overstock.com, where they're cheaper and I don't have to pay sales tax, so I don't understand the lure of the Amazon. The funny thing about Amazon, like other "tech" titans, their share count keeps going up every year despite its purported "buybacks". If your share count keeps going up because you're handing shares out to employees, are you really buying your stock back? It basically translates into all the cash produced by the business being given to employees. How's that for the long term return to shareholders? I think Karl Marx would be a fan of the "silicon valley" profit model illusion. But of course Amazon is another one of those "trading sardines, not an eating sardine". And it's certainly a tough nut to crack for the short sellers. It's going to be hella fun for all the officers and insiders the next couple of months as they exercise and sell every option that's vested. It's funny that shareholders don't think about that as their money, I guess as long as the stock keeps heading to the moon.

what a week

2007-07-20T16:25:00.000-07:00

Michael Vick. Defenders of this guy, I have no idea what they're thinking. The guy's a great athlete, no question, but forget about the dog fighting, he's a sub par quarterback, who can't read defenses or hit his receivers half the time. It's a tragedy what's likely to happen to him, but a fate no worse than those poor dogs suffered. You would think if they were paying you $10million/year to play QB, and the endorsements were pouring in, you could find a less repulsive, or at least a non criminal way to spend your free time.

The FBI is investigating an NBA referee, suspected of fixing games he was reffing and betting on at the same time. The guy supposedly owed money to some mobsters, which leads to the probable conclusion that he had a gambling problem. The bigger question is - is this guy the only one, is this going on in all major sports on which Vegas makes a book?

I've been accused many times of being too cynical or skeptical or negative, of being a "conspiracy theorist", but in just about any walk of life, the more the money, the least ethical the behavior, and that's true in sports, or markets, or politics, or religion. Just trying to apply Ben Graham's "margin of safety" principle to life, sometimes it's better to come in with low expectations, because it's always nicer to be pleasantly surprised. Which happens to me often enough that I'm still an optimist, despite being constantly on guard.

As for the markets, a day after A NEW ALL TIME HIGH, DOW 14,000!, we woke up again the the looming credit problems developing in the markets. Sub prime was just the tip of the iceberg. Now we've had hedge fund failures, and today Citigroup told us they were stuck with a bunch of LBO bridge loans. According to the Wall Street Journal, there's some $85billion in LBO deal debt that hasn't been placed, and that doesn't count the Cerebus deal to buy Chrysler. Considering the market is starting to choke on all this debt, and the losses from sub prime have lessened the appetite for all the other crappy paper Wall Street wants to stuff through the channel, and the investment banks are all levered up 25-30 to 1, the potential for the equity markets to get killed are rising.

The logical conclusion from this choking on deal debt is that the interest rates that deals pay have to rise, but many deals are being done at cash flow to interest cost ratios that leave no room for higher rates, which means deals are not going to get done, or they're going to end up producing terrible long term returns (or losses). This is going to hurt the prospects for private equity firms, for hedge funds, for merchant banks, and this all translates back toward tougher markets.

Despite my concerns, which are many, I bought a new position today, one that has corrected about a third over the last three trading sessions. This goes back to my the theory that there are stocks and there are markets, and you don't want to let cognitive dissonance make you do something stupid, or prevent you from doing something smart. Don't conflate two unrelated ideas. I don't know if today's buy ends up wrong or premature, but you have to seize opportunity when it shows itself, and the fact that I was a buyer today tells you that I really am an optimist, as long as I can find something to be optimistic about.

the exogenous event

2007-07-18T23:56:00.000-07:00

Pakistan, with the acknowledgement that Al Qaeda has set up shop there, aided by the Taliban, is teetering toward an Islamic fundamentalist revolution. If Musharraf falls, and a fundamentalist government takes hold, given Pakistan's nuclear arsenal, it's going to be almost imperative that the US take some sort of military action, or provide military assistance. The problem is that we're tied down in Iraq, and we'll barely have the manpower for any strategy. Pakistan's market is down big overnight.

We're also meeting increased resistance in Afghanistan, with a resurgent Taliban, another result of getting distracted in Iraq. Maybe nothing happens, but this may pose the biggest geopolitical risk on the radar, and it isn't an event that the markets have "discounted".

heavy lifting

2007-07-18T10:52:00.000-07:00

While today's decline looks like there's some selling going on, with the arms at only 0.82 as I'm blogging, all the pressure is coming in from the buy side. What that means to me is that the longs, the trading desks, the Wall Street machinery, is doing all it can to hold things together. This is another prima facie example of "tape painting". Whether or not they can get it done this time around, the reasons for selling are building up, and eventually the damn is going to break. Anyone who remembers back to 2000, remembers the huge comeback the Nasdaq made from the May low to the late August high, and then things started to break apart. It accelerated after the election, bottomed in early January, rallied big for another month, and then the selling really started picking up. If we're heading for a bear market, which I think is the case, and which I would define as at least a 20% decline in the big averages, particularly the S&P500 and Nasdaq, it's not going to be a straight line, and there will still be plenty of frustration and second guessing for the bears.

someone better watch where the bonds go

2007-07-17T17:44:00.000-07:00

Bear Stearns is now telling its clients in two hedge funds that about $1.5billion is asset value has gone up in a poof of smoke, and now they are going to "orderly liquidate" the funds. Clearly all those bonds aren't worth zero, and the reason the funds are worth zero is because of leverage. The question now is what are those bonds worth, and who's going to determine to whom and for how much they are sold? Bear Stearns? The guys that stuck their clients with these losses? It wouldn't surprise me one bit if Bear Stearns ended selling these bonds to themselves at big discounts from fair value or to their Wall Street friends for sweetheart prices, even with handshake buyback deals. These Wall Street guys are nothing but scumbags, and if they can pad their own pockets, who cares about the clients! I hope there is serious investigation of this whole proceeding, and a concerted watch on the liquidation process, and all the attached emails. A bunch of people should end up in jail for this, but that's probably not going to happen. You know lawyers are going to get involved in this, but all they do is muck it up some more, and only get money for themselves, while the clients end up with pennies in their pocket, while both Bear and the lawyers make money. It's a sick world we live in at times, caveat emptor.

did they get a clock radio?

2007-07-17T15:02:00.001-07:00

It appears that Bear Stearns two mortgage bond hedge funds are "virtually worthless". These two funds supposedly made money every month . . . until they actually had to go out and get bids for the bonds. And then, surprise, surprise, the funds weren't worth what Bear was telling people. But up until that time, how much in performance fees did Bear scalp from those funds, and were there ever any gains, or was it just Bear saying what those bonds were supposedly worth? Amazing how stable a fund can be when you can set the prices of the holdings yourself at the end of every day's trading. These same risks exist in the pricing of every derivative portfolio in Wall Street, which consists almost purely of "over the counter" trades, with little or no actual "mark to market", because there is no market, particularly when you're trying to get out.

they better be good

2007-07-17T09:06:00.000-07:00

Coke, J&J, Merrill, all reported above expectations, all opened up, and all are down on the day. You don't want to make too much of any one day's action, or much less intraday action, but all happening on the same day looks like a manifestation of market fatigue. They're still able to manipulate the averages up today, but there are more earnings reports coming, and in cases where the stocks have been rising, the reports better be good. The corollary of this is that stocks that are already down, that haven't participated, or have even pre announced bad numbers, those reports are going to have to be pretty bad for those stocks to trade much lower.

the 9th

2007-07-13T20:53:00.000-07:00

The S&P500 cleared its all time intraday high today, trading above 1553, and then closing just below it. I thought we might get there, and now that we've passed that landmark, the talking heads are talking about clear sailing. All that was missing listening to Maria Bartiromo during the last hour today was the cheerleader outfit and pom-poms. A Merrill Lynch strategist today was on CNBC talking about some $450billion in S&P500 short interest, and that being a big driver for further market gains. Perhaps.

It looks pretty simple right now - the world is in the midst of a boom, and that's driving the price of everything raw material to sky high levels, and it's all creating massive amounts of wealth, and that wealth is getting invested in the financial markets and more industrial development, and the virtuous circle goes around and around. I don't argue with any of that, but at every top, things always look amazingly good, otherwise the markets would have never gotten to where they did.

The bullishness is palpable at the top, and that's sure what it's starting to feel like. And with just two big up days, neither of which saw impressive volume. It looks to me like the bullishness is a mile wide and an inch deep, i.e. it may shift much faster than people believe. What happened to the subprime problem? What happened to the growing consumer debt burden, that is showing up in higher default rates on mortgages, car loans, and credit cards? What about central banks raising rates all around the world? What about the dollar free fall? What about rising long term interest rates? What about record margin levels? What about the leverage in hedge funds and the yen carry trade? Is there no gasoline price level that will crimp the US consumer?

We may very well be in a melt up phase in the markets for the next five or six weeks that takes the big averages and today's favorites on parabolic rides, but that will only sow the seeds of a much greater and painful downturn when it shows up. So it looks to me like this is one of those "you can pay me now or pay me later, but the bill isn't going to disappear" scenarios. And it also looks to me like exuberance levels are very high already. It would not surprise me given the recent action if earnings season was a disappointment for markets, not a boon, and earnings start early next week. Buckle up.

not so bad

2007-07-13T08:41:00.000-07:00

Doing some more reflecting on this flap about John Mackey at Whole Foods, I think it's noteworthy that Mackey is taking a $1 salary, and doesn't take additional compensation in the form of stock options the way John Chambers did at Cisco while the stock was down. Chambers effort was all about appearances because shareholders were still paying him a buttload in options. And Mackey is a big owner of stock.

Is doing the idiotic stuff that Mackey did worse than managing your earnings? In his last few years at GE, Jack Welch was doctoring the books so much that it's taken Jeff Immelt seven years, and he's still cleaning up Welch's messes. Yet Welch is a corporate titan because of "appearances". Is backdating stock options worse, and more dishonest, than what Mackey was doing on a message board? Both of these transgressions are much more material, more dishonest, and more larcenous to the well being of a business than what Mackey did.

If investors wanted a reason to sell Whole Foods, they've certainly had one in the last couple of days, and how bad has it been? Not that bad. As I wrote the other day, I think a lot of sellers are out of the stock already, and it's usually not a terrible sign when a stock gets news that people think should drive it down a bunch, and it barely goes down, or even goes up, as Whole Foods is today. Ultimately it comes down to the business, and Whole Foods has a hell of a good store format, and they're busy making money

fighting the tape

2007-07-12T18:34:00.000-07:00

Back in 1999/2000, we were in a "new era", where earnings or p/e's didn't matter. "It is different this time." It wasn't different, it was another period of speculative excess. But near the end in late '99, early '00, the rally sure looked like the real thing. In 2004/2005, land was running out, and home prices weren't ever going to go down again, and we had "never had a housing recession without a significant rise in unemployment or interest rates or both". Unemployment didn't rise, interest rates stayed low, but we got the housing recession anyway. But homebuilding stocks in 2005 were absolutely parabolic before the end came.

Today, we're seeing all time highs for oil prices, metals prices, grain prices, fertilizer prices, shipping prices. "But there's no inflation." If the price of everything is going up, is that a sign of inflation? In my own stupid, humble, little world, I think so. Of course, it's not just commodities, it's college costs, health care costs, and debt levels for governments, businesses, and individuals, that are also going up. Perhaps the better question is "what isn't going up in price?" What do you actually pay less for these days? Cars? No, they're fancier, and cost more, but they're still just cars. Televisions? No, same thing, they're bigger and flatter, but you still do the same thing with them, and you're paying more. The biggest beneficiary of the current boom are all the emerging markets and the countries that sit on all those commodities.

We are five plus years into this bull market. How long do uninterrupted bull runs last? Not much longer than five years this century, even including during the 1920s bull, which had a mid course correction between the start in '21 and the end in '29, the 1950s bull that had several, the 1980s bull, that started in 1982 and had the 1987 crash, and the 1990s bull, which had the Mexico/bond market/Orange County crisis in 1994, and the Russia default/Long Term Capital crisis in 1998. Since the Dow 1000 top in 1966, we've had a serious downturn in 1966, 1969-70, 1973-74, 1979, 1982, 1987, 1990, 1994, 1998, 2000-02, and that's where we are today. The three biggest bottoms this century in terms of the magnitude of the decline going into them were 1932, 1974, and 2002. The market from 1932 went up about five years before a major correction that started in 1937. The market from 1974 went up until late 1978. And now we're about five years into the current run.

I don't know what's going to happen from here, I don't know if we're in a "new era" for the emerging markets and commodities, I don't know if stocks aren't ever going to go down again. What I do know is that the median valuation in Value Line's universe is above 19 times, and the ten year note is at about the same level, and all the bulls saying the market is "cheap" are looking too narrowly at the market cap S&P500, which is dominated by financials and energy, both of which compress the "market multiple" way down. Without energy and financials, the market trades well north of 20 times. Tech stocks are twice that expensive yet in terms of the Nasdaq or Nasdaq 100 multiple. There are substantial credit problems developing in the economy. There are trade tensions rising.

So will it be different this time? Will this bull market reach into the magical sixth year, which we haven't seen during any previous run this century? Perhaps. Investing is a lot of different things, but it's partly about putting yourself on the right side of probability over and over again, like being on the right side of an actuarial table for an insurance company, or the right side of the odds for a casino. During the final up leg of any market, it looks really stupid to be betting against it, and the bulls really feel their oats. It's starting to feel an awful lot like that to me. Like October bottoms, history has shown a preference for major tops in late August or very early September. That's still a long ways away if we're going up 300 points a day, but there's no promise that it will last that long. There's also no promise that my concerns will prove out, but that doesn't mean that it's not the way to bet, and that the next month plus won't be a pretty good time to start taking some more chips off the table. I'm getting ever more cautious about the current run.

indigestion

2007-07-11T20:19:00.000-07:00

Given the history of acquisitions, i.e. they usually end up sucking, are today's deal breakers at GE/Abbott and Sallie Mae, combined with problems financing some recent deals, a sign that we're nearing a threshold? I applaud Jeff Immelt for getting this far along and not being afraid to walk away, for whatever reason. I can't help but think the lights are starting to flash red, and the only reason we're having bounce backs is because of momentum and market dynamics (lots of shorts and skeptics, but for very valid reasons a la early 2000 in tech). It's interesting to me that volume picks up during every big down day and recedes on big up days. It looks like the big boys trying to keep things together until they've gotten out of enough stuff.

twilight zone

2007-07-11T18:20:00.000-07:00

It's been revealed that John Mackey, Whole Foods founder, chairman, and CEO had been posting bullish messages about Whole Foods, and negative ones on Wild Oats on Yahoo Message boards. As I've written on this blog, I'm an owner of Whole Foods, having bought a position recently very close to present price levels. I'm like everyone else about this bizarre revelation, I find it discomforting, and it raises my alert levels. At the same time, guys that create innovative new businesses almost need a bizarre streak in them, maybe even a bit of "crazy". Does anyone think Bill Gates or Steve Jobs is "normal"? And I don't purport to be normal myself, and if I were, I don't think I'd be able to see the markets and understand businesses the way I do. Despite the benefits, very few people I know are able to view the world without bias, and see through to the most probable outcomes, whether it is about markets, politics, or people. To be entirely rational is actually to be abnormal, i.e. unlike most others. I don't like the idea of Mackey pumping his own stock, but he's done a terrific job building his company, and that looks like it's very much continuing to me. And it looks to me like the sellers are running out of stock to sell. I continue to think Whole Foods is a good value in the high 30s, and I think they've got a lot of growth in front of them. As pure anecdote, I was in the Roosevelt/Seattle store last night at about 9:30pm (they close at 10pm), and there were four checkout stands open, each one about five deep. This is not a troubled retailer.

a long way from over

2007-07-10T19:15:00.000-07:00

Moodys and S&P are now getting around to downgrading subprime mortgage bonds, a year plus after the peak in residential housing speculation, months after the bankruptcies of more than a handful of prominent subprime lenders, weeks after the blow up of Bear Stearns hedge funds, and with the ABX index of subprime loans already trading at 50 cents on the dollar. Thank you Moodys and S&P, 11th and 12th man on the deal team, last and second to last to know. Can anyone on Wall Street tell you what's going to happen before it happens? And for some reason, they pay Moodys and S&P massive amounts of money to basically endorse all the crappy paper produced by Wall Street.

How this is going to be "contained", with little or no spillover into the real economy is beyond my understanding of macroeconomics. The truth is that there are three things working in the world right now, emerging markets, financial markets, and commodities. But all those are ultimately dependent on the US consumer and the availability of credit, and both those things are either in or headed for trouble. "Contained?" We'll see.

a made man

2007-07-03T18:06:00.000-07:00

The President commuted Scooter Libby's 30 month prison sentence, and is anyone really surprised? The Democrats are feigning righteous indignation, but that's nothing but pure politics. If I were Scooter Libby, and I had decided to perjure myself to potentially obscure the development of a legal investigation that reached into the highest levels of the administration, I would expect to be taken care of at the end of the day. Particularly given Libby's stature and position. So the cable shows can have some heated debates, but everyone should have expected this, and the full pardon is almost certain to come later. And I don't fault Bush for what he did, it's the way the world works.

What I don't get is this - the Republican's are the ones who like to claim righteousness, closeness to God, respect for the law, the law and order party, but all of them are bringing up some baloney argument that Scooter is innocent and that's why the President is doing what he is. But Scooter had all the money to hire the best lawyers in Washington, and a jury of 12 convicted him. So he's guilty, period. And while all the Republicans are screaming about a pardon, this is the same group of guys who chose to impeach Bill Clinton over essentially the same charges, lying to a grand jury. But there's one big difference. What Clinton did, getting a hummer by some infatuated young staffer, and then lying about it, who ended up dying from that? Who got killed? Whose family was destroyed? Whereas what Scooter did was participate at the highest levels in a scheme to build a case for taking our country to war, by cherry picking questionable intelligence, and feeding it to shoddy reporters under pretense of a "scoop". He and his cohorts in the White House lied us into trillion dollar war that has likely killed some 200,000 people in the Middle East, driving a million Iraqi refugees to both Syria and Jordan, inflaming the entire Muslim world, and resulting in the death of more than 3,000 American soldiers, and rendering another 30,000 or so permanently injured. The Republicans wanted to take down a President, who otherwise was doing a very respectable job running the country, for lying about a sexual indiscretion, yet they're enraged when jury of 12 Americans convict an obviously guilty man of lying to cover up part of scheme that involved the worst foreign policy blunder in modern history. This is accountability? No, it's hypocrisy. And as usual, from the "righteous". This is more of why people hate the Republican party right now.

the blow off top?

2007-07-02T11:31:00.000-07:00

Spurred by another big round of takovers, we're having another celebratory merger Monday. After all the private equity financing concerns and the subprime mess, this provides "relief" for the markets. We're also heading into earnings season, and at the end of last week, we were right up against the ten day oversold line. Put that all in the pot, add a little salt, and maybe we've got the recipe for the last melt up phase for this bull. Buckle in.

where are the judges?

2007-07-01T18:06:00.000-07:00

The recent Supreme court session, where 24 separate decisions came down 5-4, 16 of which encompassed largely ideological issues, with each of those 16 being decided 5-4 in the direction of conservatives, makes one wonder if there's any "judging" going on at all, or if they're just "voting" according to party platform. It brings to mind that line from Alice in Wonderland - "first the verdict, then the trial". John Roberts, who did a terrific job in his Senate hearings, and who said he believed in the principle of "Stare Decisis" (settled law, precedent), and who wanted to build a collegial court, seems to be running as fast as he can away from those goals. Both he and Alito are coming down as clear ideologues, only interested in furthering the conservative agenda. If you're a conservative, you probably think this is great, but I'm not sure you're right. First, these decisions are already generating backlash. Second, it begs the question - are we a nation of men, or a nation of laws? And if it looks like we're headed toward being a nation of men, and those men are like George W. Bush, Dick Cheney, and the five conservatives sitting on the Supreme Court, the direction we're going is not toward democracy, but tyrrany. Toward a paternalistic state, not concerned with fostering the rights of women, minorities, the less powerful. In the recent past, we had Sandra Day O'Connor, who was clearly a Republican, but who was a legitimate "swing" vote, who decided based on the facts, rationality, and pragmatism. That role has now passed to Anthony Kennedy, but he's so obviously more locked into a conservative agenda, that we no longer have any "swing" or impartiality at all. It would be just as bad if all the decisions tilted "liberal", either would be bad the country. For no other reason than to restore balance to the Court, I'll be voting Democrat in 2008, just as I did in 2004 and 2006. Today's conservative agenda is so far removed from the principles of small government and individual liberty, and it's moving at an ever more rapid pace toward the principles of "big brother" and government telling the people what's good for them. I think Reagan and Goldwater would barely recognize today's Republican party. I don't even think papa Bush is enjoying what's going on.

get us a coach!

2007-06-28T17:01:00.000-07:00

Holy sea change Batman! Kevin Durant and Jeff Green. Can you say Jordan and Pippen? Please, please get us a good coach. And now I want the team to stay in Seattle. Roll out the ball, let's go!

it's coming

2007-06-27T21:46:00.001-07:00

The conditions in the credit markets, in terms of liquidity, seem almost certain to have reached a temporary peak, and while it may take some time for real thirst to show up, the markets are no longer drowning in it. This has profound implications, and fits into my thinking that a major top is within sight. Rallies from here, in terms of the broad averages, need to be sold, and I think fairly aggressively (I do think we're likely to get one more pretty decent rally before things fall apart, and it may have just started or be getting ready to start). It seems obvious that what has gone up the most will come down the most, so those hot, hot sectors, like energy and materials, industrial cyclicals, the Wall Street banks, the exchanges, the emerging markets, those are going to get pounded. And ironically, what hasn't gone up at all, or has come down, but where the business looks fine, those are going to be places where you want to be invested. The safer spots may go down some too, but if we're going to have a genuine bear market, the odds are that whatever comes out the other side as the new leadership, it will be a different set of stocks that what led the current bull, and may well be today's laggards.

Omen 3

2007-06-27T17:54:00.000-07:00

Why don't Dick Cheney and Ann Coulter make a baby together? For the Christian Right, what would be a greater sign of the Apocalypse than that? C'mon, it could be like a vampire movie, without any good looking people. It'd be a Stephen King novel come to life. America loves sensationalism, what would be better than bringing the Antichrist to life?

passing the old maid

2007-06-26T07:01:00.000-07:00

Gretchen Morgenson writes a terrific story in today's NY Times about a shell that Bear Stearns set up to unload a bunch of toxic mortgage debt on the public. If this isn't outright fraud and negligence, I don't know what is. Someone should be going to jail for this. Take your own look. http://www.nytimes.com/2007/06/26/business/26bond.html?ref=business.

delightful

2007-06-25T17:54:00.000-07:00

My language may have gotten a bit emotionally charged in my last blog, but I make no apologies. Wall Street is a den of thieves, who fit the old adage - "if they're talking, they're lying, and if they're quiet, they're stealing." There may be a handful of honest actors, but I think I've met all three of them.

Why should Bear Stearns hedge funds be able to suspend margin requirements? And with the use of derivatives, do margin requirements serve any purpose. Those hedge funds that are in trouble were leveraged twenty times or more, that's hardly what I would characterize as stringent margin requirement. And how many toxic bonds did Bear Stearns, the firm, dump into those hedge funds that held client assets, so they could move them out of their own inventory? Bear isn't the only one screwing their customers every day either.

a different set of rules

2007-06-25T10:55:00.001-07:00

Reading about these troubled mortgage bond funds at Bear Stearns is more of the incredible from Wall Street. As they note the apparent lack of volitility in the funds, right up until the time they fell apart, it's another demonstration that there are no free lunches, even when, or particularly when, a Wall Street salesman is telling you there is.

What's unbelievable to me is that the funds are asking their fellow banks to "suspend margin requirements". I don't know if they're going to get away with this, but if they do, it's complete and utter BULLSH*T!!!!!. Those motherf*ckers should have to eat their trades just like the rest of us, and if they can't pay, they should liquidate. All this talk about collateral risk, systemic risk, bringing down other people with them, it's a crock. And even if it isn't, if you own your investments for cash, you have the ability to wait, and if you have cash, the bargains will be terrific. So let the damn system collapse if that's what's going to happen. What happened to caveat emptor? And it's also interesting to me that Bear is putting $3.2billion into the "less leveraged" fund to shore it up, which makes you wonder, what the hell kind of shape is the other one in?, and what would it take to bail that one out? Bear only has about $13billion in book value. I'm surprised the stock isn't down more.

rooting for down

2007-06-20T05:20:00.000-07:00

I'm watching Squawk Box this morning, and twenty minutes in, they haven't mentioned Home Depot's buyback. The conspiracy theorist in me would think that there is a Wall Street mafia trying desperately to tell the negative story on Home Depot, but for the first time since I was comfortable that my clients stake in the company was big enough, I'm hoping the stock doesn't go up much, and can hang around in the high 30s or low 40s, until they can actually get the $22.5billion in stock bought and retired. So please Wall Street, keep spreading the bad news about HD, keep the negative research coming, even if it doesn't make any sense. Most of the what you guys put out is gibberish anyway, so please keep telling your lies and generating your faulty analysis.

The buyback announcement is another significant step in the right direction for the Frank Blake management team. So please stay away, don't buy any stock, and if you're going to, maybe you should use limits back near yesterday's close, around $38. Don't worry, the housing market is going to be slow for quite some time yet, so don't be in any hurry to add to HD. I'm going to keep buying of course, sporadically for select accounts, mostly any new ones, but I don't encourage anyone else to do so.

retail observations

2007-06-19T12:37:00.000-07:00

Home Depot looks like they're getting out of the wholesale supply business, and getting back about $10billion for their efforts. I think they paid a little more than this putting it together, but not by a lot, and it doesn't matter anyway. They are trying to focus on their core retail business, improving the returns from the stores instead of trying to financially engineer their way to better EPS. This is the much better long term strategy for the company, and as a patient shareholder since late 2002, early 2003, and having bought more recently, I like everything I'm hearing and seeing. Some financial engineering that may be very useful is what they do with the $10billion. I'm rooting for the whole shebang to go toward a tender offer for 250million shares at $40, allocating pro rata if they get offered more. That would reduce shares outstanding about 12-13%, which would be a nice chunk.

Whole Foods looks like it's dipping on the revelation that their Chairman/CEO John Mackey made some less than tactful comments regarding the value of removing Wild Oats from the markets. It's hard to know what Mackey was thinking, but he hasn't built this company with large acquisitions, so this is to some degree his only time through this tunnel. I think he's done a terrific job building Whole Foods, I love how he approaches his compensation, and I'm very comfortable that Whole Foods is going to be a terrific growth story with or without Wild Oats. I also think the grocery business, like any retail business, is evolving at a pace that seems to make Mackey's statement irrelevent, so regardless of his statements, I think the FTC is missing the big picture when it comes to this merger. If they come to their senses, great, if not, and they can't be overruled in court, that's ok too. Whole Foods has plenty of "organic" growth in their future (pun intended), and at a multi year low in the stock price, I'm a happy buyer. And it's not like Wild Oats has been fantastically successful as a stand alone, to the point where they've closed a number of underperforming stores over time.

Best Buy's news today confirms my thinking that we are in a consumer recession in the country and the only reason that median income or consumer spending are going up at all is because of inflation and a huge skew at the top, where the Richies are both making gobs of money and engaging in conspicuous consumption, a la Steve Schwarzman's multi million dollar birthday party. And given these thoughts on my part, why do I own retail stocks at all? Well, first, because some, like HD, have all the bad news in the stock price and then some, and for Whole Foods, they sell much less "discretionary" stuff, and they are to some degree selling to the Richies. If you're going to own retail right now, think carefully about the valuation and about the customer base. If it's something that middle America buys lots of that they can put off, like a big screen tv, then it's going to be more vulnerable.

Thinking inside that matrix, I've added another retail stock to portfolios recently, that I won't mention specifically, but I'll tell you is in the office supply business, is trading near a 52 week low, has an excellent CEO, and is going through their own positive process of financial engineering to the balance sheet, where they have been and will continue to buy back stock at a fairly furious rate. Office supplies aren't that cyclical, you buy them when you need them, at least I do.

ignore at your peril

2007-06-15T07:46:00.000-07:00

CPI up 0.7%. What about "core"? "Core"? "Core"? Core this. Yes, we're making money on the long side today, but I'm not happy about it. Ok, I'm a little happy. But I'm in no way getting carried away, and I feel no compunction to get the rest of my cash to work or cover my shorts. This too shall pass (hopefully from higher levels so we will have raised more cash by the time the storm shows up). We're still going to buy when and where we can get more value than we're paying for, but that's getting tougher. Much of what's happening today is more tail wagging dog, with the quadruple witching. Someone needs to be the voice of reason, may as well be me.

believe what you want

2007-06-14T12:18:00.000-07:00

PPI came out up 0.9% today, and the market chose to focus on the "core" number, up 0.2%. If energy and food are only volatile in one direction, i.e. up, and they are two of the most indispensable parts of consumption, then how long can they go up without anyone caring? PPI is running at about a 10% rate over the last year, and that seems inflationary to me, but what the heck do I know? Bonds got very oversold, and were due to bounce, but so far that bounce looks like a squash ball bouncing on sand. I think regardless of our trade deficit, it's a mistake for Paulson and the Bush administration to talk down the dollar or try to negotiate it down. Our trade deficit is a result of our conspicuous consumption, fed in large part by consumers willingness to borrow beyond their means, not the result of a too strong dollar.

There are always economists or pundits predicting a credit crisis, and they've mostly been wrong, but the change in the bankruptcy laws a few years ago, taking away the clean slate option for financially troubled Americans, combined with the growing default problems in residential real estate, which are almost sure to spread to other credit sectors, and you've got the recipe for a lingering credit crunch and sub par growth, much like what happened in Japan from 1990-2003. Wall Street likes to say that no gets it right predicting doomsday, but didn't the doomsday predictions for tech in 2000 come true? And aren't the doomsday predictions for residential real estate and the earnings of the publicly traded home builders and sub prime lenders playing themselves out? How can the predictions of an eventual crash from the manic leveraged buyout boom not happen as well? And how will the banks dodge the problem? And if they don't, how will credit remain abundant?

I would no longer characterize this as a "Goldilocks" economy. It's a lot more like a "Wimpy" economy, Popeye's friend who would gladly promise you a hamburger tomorrow if you would give him one today. Both government and consumers have borrowed at incredible levels over the last five or so years since the second round of Bush tax cuts, the escalation of the Iraq war, and the bubble borrowing in real estate, and if you don't think that all that borrowing is what has driven the economy, you're not thinking straight. The dollar has been falling, and now so are bonds. How much longer until stocks follow suit? I still own a lot of stocks, but I'm spending a lot of time thinking about their businesses, their valuations, the expectations or lack of built into them, and where I think there's vulnerability, I've been selling. And I'm still buying on the other side, but off the current discard pile.

better now, worse later

2007-06-12T20:46:00.000-07:00

The NYSE, driven primarily by interest rate sensitive issues such as closed end bond funds, has seen its ten day a/d line slip into oversold territory for the first time since the sharp February decline. The bearishness in the bond market looks pretty severe, and the chances for some leveling off or a bounce are rising. If we get that bounce, stocks could easily rally as well. But whether they rally or not from here, the cracks in the foundation are now visible, and any big rallies from here probably need to be sold with both hands.

The news that KKR is having problems putting together all the money for their First Data deal. The analysis of Tishman Speyer buying Archstone, buying apartments with a 4% cap while borrowing money at 6%, the success of the deal depending entirely on greater fools to buy some of the individual apartment complexes at nosebleed cap rates, the same essential strategy deployed by Blackstone in the EOP deal, but with more time to go before midnight, and enough greater fools left. Interest rates rising around the world, while the US consumer is in way more trouble than anyone is willing to admit. Utilities, Transports, and REITs all tumbling down the other side of the mountain.

They may be able to put some lipstick on this pig for one more dance, coordinate another round of short squeezes, but the party is almost over. It's still about analyzing companies one at a time, but it looks like the tide is heading out, and we're going to eventually identify a lot of naked swimmers.

the fix is on

2007-06-11T15:22:00.000-07:00

The Chicago Merc just got antitrust approval for their merger with the Chicago Board of Trade. These two exchanges deal in different products, with the CME concentrating more in financial futures and BOT in commodities, primarily agricultural. But they both completely dominate their markets, with many market shares above 90%, and the two of them combining prevents any future competition from one or the other introducing a competing market.

The idea that Whole Foods buying Wild Oats is anticompetitive, when combined they'll run about 3% of the country's grocery stores, compared to the two largest futures exchanges combining operations, and by doing so will have market shares above 90% in almost everything they trade, is a farce with regard to antitrust "scrutiny". And think about what else has been approved recently in the telecom arena, where the regulators have basically approved the reconstruction of more than half the old Ma Bell monopoly, with cellular included. Is there any genuine oversight, or is this all politics? And you wonder why I'm so cynical.

0-2, but a merger free monday

2007-06-10T21:21:00.000-07:00

It looks like I'm in early trouble with the Cavs, but I'm waiting to see game three before I admit defeat.

Onto a more significant issue, I'm reading the Monday morning papers online, and I don't see the announcement of a single major deal. The market has been up something like nine straight Fridays, based on the strategy that weekend deals will create upside bias to the market the following week, so the shorts want to cover in front of that. It's only one Monday, but if the takeover fever cools, that's another major problem for stocks.

funny stuff

2007-06-08T15:06:00.000-07:00

Paris Hilton, po lil cwybaby, has to go back to jail. The media has been all over this one, but I can't blame them, this story sells, like popsicles on a hot summer day. Sympathy? For Paris? Not!

uh oh, not again

2007-06-08T11:58:00.000-07:00

Here they come again, trying to bid em up. Short term market action is so heavily influenced by the tail wagging the dog, i.e. who owns what, who's in trouble, who's willing to push, what happened the last couple of days, etc. It has almost nothing to do with fundamentals. Each of the last two days, put/call ratios spiked way up, and that's what this rally looks like, a move to hammer those panicked put buyers. I'd be happy either having them recover or collapse. If they recover, I'll get more done on the sell side and keep raising cash, and if they collapse them, I'll be finally able to cash in my shorts and put the money back to work. There's no ideology at work here, just pragmatism. The best thing about the market is that it lets you choose the entry and exit points for your positions, and the worst thing investors can do is let the market choose their entries and exits for them. I continue to think we're building toward some sort of significant top sometime this year, and more rallying from here, even to new highs, will only encourage my beliefs, but that doesn't mean individual investment decisions aren't still much more important.

looking the fool

2007-06-07T15:58:00.000-07:00

Watching tv, talking to friends, I think I'm the only reasonably knowledgeable sports fan who's picking the Cavs to win the NBA championship. The odds are huge. It'd be up there with Villanova/Georgetown. I don't mind "looking the fool", as long as I'm not doing anything foolish, and I think the Cavs may surprise a lot of people.

yyyyyyummy

2007-06-07T12:59:00.000-07:00

Nobody likes a down market like Nelson Yu. Bring 'em in. Maybe they can turn this thing on a dime, but even after today, we're not even oversold on a ten day basis, much less longer term. My guess is lower. I'm going to want to buy stocks . . . when no one else wants them. That's not yet.

back to the straight talk

2007-06-05T20:20:00.000-07:00

I've been a critic of John McCain, I disagree with him about the Iraq war, and I think his cozying up to Bush has been transparently political, but I think he had a hell of a good debate tonight. You might not agree with John McCain, but you have to respect the man. He takes stands on tough issues, he's thoughtful about the process, he's genuine, and his heart is in the right place.

If I were going to hire a CEO to run a business, I think of the Republican candidates, I'd hire Mitt Romney, as long as I could watch him. But as we found out with George W., you don't have much say so after you put a guy in office, and with Romney's constant flip flops, in search of votes at any price, principles be damned, I have no idea what the hell he stands for. He could be a total liar, like Bush, or not, but it's hard to know.

I like Giuliani's moderate stands on social issues, because I think the better half of America's nature is all about tolerance, and letting people be who they are. And it's worse half is about hate, racism, sexism, discrimination of any kind, and no one likes to say it out loud, but the worse half is a big Republican constituency. The thing about Giuliani, the more I listen to him, the more tired I get listening to him. It looks like he's so in love with his own voice, and I can see how the guy's been divorced three times, or whatever, and why he doesn't get along with his kid. There's something about him that's a little like listening to stryrofoam being rubbed together, it grinds on you, and you want it to stop.

I'm about as fickle as it gets, and I'm influenced by the latest presentation, but I like the return of McCain's straight talk express, ironically while many Republicans seem to be jumping off the bus. But I may be a very poor barometer of public sentiment, because just like with the market, what I think and what the crowd thinks is usually very different, and only over time do they come to agree with me.

inside deal

2007-06-05T12:17:00.000-07:00

It just came over the tape the FTC is going to block the merger between Whole Foods and Wild Oats. This is straight out of "Ripley's Believe It Or Not". Whole Foods has 194 total stores, a handful of which are outside the US. Wild Oats has 110 stores, and about a third the square footage of Whole Foods. The country has somewhere around 10,000 grocery stores. Can Whole Foods and Wild Oats combining represent a monopoly, anticompetitive threat to the country when combined they'll have 3% of the grocery stores in the country? If anything, they are a vital competitive threat that is making all the other grocers step up and offer better food and service. If Kroger and Safeway are trying to upgrade their 2400 and 1700 stores to look and feel more like Whole Foods, how the hell is Whole Foods, with the less than 200 stores, bad for the competitive landscape of grocery retail?

That can't be what this is about. This is so obviously some guy inside the upper executive ranks of a major retail grocer who has political connections with the Bush administration, and someone is calling in a political favor. How can it be otherwise? There is absolutely no rational, intelligent person, who could look at the circumstances surrounding this merger and conclude that it represents a major competitive threat in the country. But this is Bushworld we're living in, or let's call it FavorLand.

I've been a recent buyer of Whole Foods near its multi year lows, and think they've got a terrific outlook with or without the Wild Oats merger. With less than 200 stores, and each of those doing a wonderful business, it's hard to think that they won't keep growing for many years. And with the stock down 50% from its highs, and trading for only about a 30% premium in terms of forward p/e multiple to the much more mature grocery retailers, it looks like a genuine bargain. Yes, the forward multiple is about 25 times, which in a static world looks high, but to date they've built this company with virtually no borrowing, which tells you how terrific the business is. And they'll almost certainly double earnings again, and then again, considering how much geography they have yet to tap, and how much better the store quality is compared to their competition. And make no mistake, their competition is not some narrow band of "organic food grocer retailers", they're gunning for the high end and "greenie" customers of all the giants. I wonder who inside the FTC or the administration ordered this block, and whose pocket they're in?

observations

2007-06-03T15:21:00.000-07:00

Bud Selig is an idiot. Today, Major League Baseball suspended Lou Piniella indefinitely for a tirade he threw against a tag play at third base yesterday. He kicked some dirt on an umpire's shoes. Big freaking deal! How long have people been watching Lou Piniella? And how many times did Sportscenter or Baseball Tonight run that clip? And that's because that's just good stuff! It's hilarious! It's funny when Lloyd McClendon does it, or Hal McCrae, but when Lou does it?, well . . . it's just sweet! Sweet Lou. He didn't punch anybody, he didn't spit on anybody (well, maybe a little spit while he was screaming, but that's not spitting on someone a la Robby Alomar). So who got hurt? The ump? Yah, right. A lot of those umps are loudmouths and grandstanders, and I know this particular ump got the call right, but who cares? Lou is part of the show, and he's good for baseball, and I'd take him managing the Ms again in second. Give 'em hell Lou!

I missed the finish of game 5, but from what everyone is saying about it, it must have been something to watch. I'm talking about LeBron James of course. I watched much of game six, and I'm a LeBron fan, and I was rooting for the Cavs, but Detroit got hammered by the refs. That game was called as one sided as any I've watched. I don't know if this kind of stuff is a conspiracy, or just a result of momentum, as the refs get caught up with a winning tide, but I wish it wouldn't happen and we could just have good refs who are impartial. But we don't even get that out of the Supreme Court, which in the current session is deciding almost every case 5-4, along ideological lines. But anyway, back to the Cavs, I know everyone is expecting the Spurs to roll over Cleveland, but the Spurs are getting older, and they're a little slower than they used to be. So far, they've had good matchups, which has gotten them to the final. I don't think they match up against Cleveland quite so well, and sports is all about matchups. I got odds, and I wouldn't put big money on it, but my money is on the Cavs in a big upset.

You won't find a bigger critic of George W. Bush than Nelson Yu (well, that's not true, but I've been pretty critical), but I think some of the stuff he's been doing and saying lately are steps in the right direction. I know most Democrats would just as soon he bury the country over the next 18 months so they could win a landslide, but I'm rooting for the country, and I don't think it's a bad thing if Bush starts making some better decisions. His second look at the Iraq Study Group report is smart, and he's out there trying to talk to Iran and Syria, and that's smart. His appointments over the last year or so have been so much better - Bolton as chief of staff, Paulson at Treasury, Gates at Defense, and even Zoellick as the new head of the World Bank. I like all these choices. And I like what he's trying to do on immigration. I spend much of Sunday watching the talk shows, and I heard Newt Gingrich today complain about three guys who were trying to organize the blow up of fuel lines into JFK, and why those guys are a result of our immigration policy (I think one of those guys was a citizen). Three guys? Who didn't even have money or bombs yet? Gingrich also talked about the 30,000 gang members who are illegal aliens. That's an obvious hot button, but let's frame that in context too. The guess is that there's some 12-20million illegal aliens in this country, so if 30,000 of them are gang hoodlums, that means 0.15-0.25% of illegal aliens represent a gang problem. Think about that. If you were in a high school with 2000 kids, it would mean between 3 and 5 five them represented a gang problem. Well, in a bell curve distribution, I think that's a pretty damn good result. No criminals are good, but considering that most of the 12-20million are hard working contributors to the system, willing to do jobs that many other poor Americans aren't, well, I think we should figure out a way to keep them in this country, and it'd be better to know who and where they are, and to be collecting taxes from them if they're receiving government services. The notion of deporting all those people is a recipe for economic disaster, financial market disaster, higher inflation, violent social unrest, and at the end of the day, it mostly amounts to racism.

I'm no ideologue about politics or markets or hopefully anything else. I've been bearish, and I'm still extremely cautious about this market a few months out, but maybe there are too many in the bear camp right now, and more of them have to be converted before the market can roll over. The blogger survey on Birinyi's TickerSense is significantly bearish, and the AAII polls keep coming out bearish despite the market strength, and I'm hearing a lot of talk about hedge fund managers continually buying market puts to hedge their downside and the puts expiring worthless. I hate to say this, but maybe Michael Kahn at Barrons got it right for once in his recent column about the market climbing the wall of worry. The caveat in that is that everyone (including me now) seems to be talking about the wall of worry, and the idea that the rally's going higher but this is the last inning, well, to be fully committed at this point seems like a game of financial Russian roulette. So I'm sticking with my caution, and will continue selling all the way up, but I understand that I could be wrong for awhile longer. I'll still buy an individual company if the stock is way down for stupid reasons, and hasn't been participating with the more manic elements in the market, but other than that, I'm going to keep cashing in a few tickets at a time.

wacko

2007-05-31T07:42:00.000-07:00

Wachovia, a few months after residential real estate started falling apart, and a few months before the subprime crash kicked in, bought Golden West Financial. Now they're buying AG Edwards. Anecdotal indicator? The S&P500 isn't the only thing breaking out, the ten year note yield just broke out to a yearly high, and utilities and reits, which had been leaders, have started to lag. Important? Nothing's important until it is, at least in markets.

less and less money

2007-05-30T19:47:00.000-07:00

Looking at the construction of today's advance, it looked like more short squeezing, tape painting, and momentum chasing. The failure of the market to break down after what happened in Asia overnight had the bulls rushing in. And they used the Fed minutes as an appropriate juncture to pour fuel on the fire. But it happened on mediocre volume, less than 1.6bill on the NYSE and less than 2bill on the Nasdaq, and new highs only reached 190 on the NYSE and 114 on Nasdaq. Out of more than 3000 stocks on both indexes, those numbers look weak. Less than a month ago (4/25) the NYSE saw 439 new highs, and the new high list on Nasdaq has been putrid throughout this entire rally, hitting a peak of 280 last November (11/15/06). Maybe this is the headfake to keep the bears bearish, allowing them an argument, but not any money to go with it. It's always hard to know the answer or the ultimate outcome. But the narrowness is further demonstration of the tail wagging the dog, i.e. market internals, who's in trouble, who's getting squeezed, who's on the edge, motivating the trading rather than fundamental value all of sudden being discovered. It's like this at the end, but ironically the end will last longer the more resolute the bears are. If we all threw in the towel tomorrow, that would be the end. It's something of a catch-22.

It's getting repetitive, but I'm just scrubbing my positions one by one, and thinking about whether I want to keep them or lighten up. I'll still buy if something makes sense, and just like March of 2000, there were terrific things to buy, like Berkshire, because no one else was buying them, they were too busy buying tech. Now they're too busy buying the stuff that rallied today, and it feels like we're missing the party, while still having to listen to a bunch of drunks. What I know is there are always going to be new opportunities in the not too distant future, which don't require me walking a tightrope over Niagra falls, with no net. So I'm not going to chase this rally, I'm not going to buy Joy Global, or Goldman Sachs, or Potash. That's money I'm willing to not make, even though there are going to be frustrating days like this - "momma said there'd be days like this, there'd be days like this, momma said."

hook

2007-05-30T13:50:00.000-07:00

Well, that felt like the last straw for the bears (include me in that group). China's Shanghai index is off six percent overnight, our market opens weak but starts recovering quickly. The Fed minutes come out indicating inflation as the predominant threat, the market doesn't care, realizing that the Fed is also aware of the slowing domestic economy, and they're going to keep the Fed funds rate where it is, and that's about 4% below today's real rate of inflation, not the bulls#*t published rate, which is massively liquidity enhancing. Stocks like Joy Global, which was down early, turn around, and end up huge. The list of big advancers is the same stuff, mining, metals, industrials, investment banking, energy, energy services. The rich getting richer.

The S&P500 got through the 1527 old closing high that it struggled with for a few days a couple weeks ago. So is the melt up to 1553 in motion, and will it not even think about stopping there but head straight through 1600? It sure looks like it. In the last phase of bull market, the leaders lead and laggards lag. And that's what's happening as we break out today. The only question is how long will the last leg last? It's going to painful and frustrating watching it happen, but I'm somewhat resigned to my fate. I'll buy where I see value, and I don't feel like I'm chasing momentum, but that stuff might not work in this market. So it will be that much more frustrating. It was frustrating owning quality financials all through 1999 and into early 2000, but it was the happiest place on earth while tech discovered reality. I know this boom in China and India and the rest of the emerging world are real, but if anyone thinks that there will never be a contraction or accident hasn't studied any history. Cyclical stocks are cyclical because depending on capacity utilization, their margins go way up and down, unlike staples whose margins sort of straightline.

At the end, it will "look" convincing, and it's starting to take on that appearance now. At some point, the rally will convince enough bears to throw in the towel, setting up the inevitable decline. I don't think that's any more than three months away, which in hindsight will look like blip, but might feel like two lifetimes if you're waiting for it.

more to come?

2007-05-24T20:48:00.000-07:00

Ten trading sessions ago, on May 10th, we had a similar down day, but that day the arms spiked well over 2. And the market made back all the lost ground and then some very quickly. Today's action, despite a terrible a/d line, only saw the arms sneak over 1, which given the terrible a/d line and big down volume ratio means heavy amounts of money were poured into some big priced stocks in an effort to make the damage seem contained. Lots went into Boeing, which kept the percentage losses on the Dow well below the S&P and Nasdaq. Incredibly, the ten day arms, because of the run off of the one day selloff on the 10th, hit its lowest level in the last couple of years, hardly the mark of a bottom, and much more indicative of a top. It also means it's taking a lot of buying pressure to keep the market up, but it still can't make progress. What does that tell you? Ten days ago, volume barely ticked up, despite the heavy losses, but today volume was up noticeably.

It has been an exercise in futility trying to call for a pullback in this market, but the rally over the last couple of weeks may have been enough to reach a tipping point in short covering, and in investor complacency. The calls for a pullback all seem to contain the caveat that "it's going to be a buying opportunity". There's not many predicting any substantial carnage, which to me, means the odds are growing. Maybe we snap back again, but any more major progress is going to lead me to the cashier window, again, and again.

laughing out loud

2007-05-24T07:10:00.000-07:00

New home sales up 16% in April? Yesterday, there was an article in the WSJ about how the government stats being put out about employment numbers are significantly overstating strength in the labor market. And everyone should understand what's happening with inflation statistics, unless of course you can start eating your computer, or run your car or heat your house with your big screen tv. As they say, there are lies, damned lies, and statistics. The home sales number is so ridiculous that it's laughable, yet here come the short squeeze. Is the Bush administration responsible for these numbers, and do they represent the same candor that we're getting about the Iraq war, the administration's firing of US attorneys, or all the continued political grandstanding by the Rove machine? I'm very, very doubtful about this morning's rally, but if it keeps going, maybe I'll find something else to sell.

sheep

2007-05-23T15:12:00.000-07:00

Skepticism, shmepticism, they're almost all in the pen now. There was an article in today's WSJ quoting some Nobel laureate economist I've never heard of, and a fund manager, and a technician, saying we're about to embark on another great bull market. Idiot booyah boy dismissed Greenspan's concerns as noise on CNBC, and now one of my favorite contra indicators has just turned bullish with his column today in Barrons Online. Michael Kahn writes:
"Right now, a significant majority of individual investors appears to be suspicious of the rally and that bodes well for stocks for the next few months."

It's funny the way some people talk about sentiment, like nobody was bearish in March of 2000, or nothing happened between March 1st and March 10th of that year. If fast money is the marginal buyer or seller, who determines price change, then "sentiment" can change pretty quickly in the market, as happens during blow off tops and capitulation bottoms. It's not like there hasn't been any short covering driving the price of Amazon.com the last few weeks.

Even before reading Kahn's column today (and I think I wrote about waiting for him to turn bullish), I sold another position today. Picking tops is a tough business, and can make you feel very stupid when you're wrong, but risks in the market are up right now. Some talk about bull market this and China that, natural resource this, and liquidity that, but what no one can deny is that there is enormous leverage building up in the system, and while no one knows the uncle point, this isn't a time to be whistling while you work.

watching the clock

2007-05-18T19:33:00.000-07:00

As the calendar turned to May, I began to get more bearish about the market and responded by adjusting portfolios to a more defensive stance. We sold a number of positions, raising cash levels significantly, and added to some defensive market hedges. At this point, it looks like my caution was premature, but as is always true, it depends on the individual stocks you buy and sell, and on that account the results of my bearish actions are a little more mixed than wrong, with some positions down a little, some up a little from the selling prices. And this is somewhat representative of what's happening in the market, i.e. a rising tide is lifting fewer and fewer boats as the rally progresses. Ironically, the market divergences have been pounding many stocks into submission, and in the last few days, I was able to add to a position on weakness that I had bought a small amount of a couple months back, and I added a new holding to portfolios. The first stock was right back down to its yearly lows and the new position had just made a new yearly low.

To some, my actions may appear contradictory, but the market is always engaged in paradox, and if you are able to think in only one dimension and one direction, the market is way too complex and multi faceted, and you'll end up stuck with ideology and no profits. And besides the complexities, there is also constant deception and mistaken or excessive pursuit happening in markets, so you not only have to know what's happening, but why it's happening, and what might cause it to either continue, stop, or reverse. Anyone can get lucky in an individual stock or during a finite stretch of time, but long term success requires constant analysis and adjustment.

Where that leaves me today, is that some of the dislocations have turned me into a buyer, because while I continue to have enormous macro concerns, and continue to think that we are setting up for some major market pain in the not too distant future, not all stocks are created equal, and there are always some that get way ahead of the news or are in their own cycle, and so you have to act before the Wall Street Journal or the analyst community come around to your thinking. And while I'm a buyer of a couple individual names, and am looking at a few others because there is some serious selling going on out there away from today's favorites, I'm still utterly comfortable being somewhat hedged, even if it's causing portfolios to seem temporarily stuck in the mud, because we're doing some zigging and zagging at the same time. What ultimately will get us more zig than zag is either choosing our individual securities exceptionally well, or our liquidation points, because you don't have to be right about every security on the same day.

I think we're still building toward a top, and while I've bought a couple of things very recently, I may be selling other positions if we can get the right prices. And while I'm fearful that midnight is approaching, and I'm keeping at least one eye on the clock, I don't ever want my market concerns to get in the way of a terrific opportunity in an individual stock. Paradox, everywhere, all the time.

looks like panic

2007-05-18T08:28:00.000-07:00

Microsoft to pay $6billion for AQuantive, online advertising company. After Google's purchase of Doublclick for $3billion, which Microsoft was trying to buy, and Yahoo's soaking up the 80% of Rights Media that they didn't own for $680million, and WPP Group's purchase of 24/7 Real Media for $649million, it looks like Microsoft thought they were going to be left at the station while the train pulled away. So how did they respond? By buying a company that was trading in the mid 30s before the announcement, for $66.50/share, in cash. It looks like they're paying close to 15 times revenues and about 100 times earnings. This is a stock, AQNT, that was trading for less than a dollar a few years ago during the tech implosion, which raises the question, if Microsoft didn't understand the online ad business well enough back then to buy it, what makes people think they know what they're doing now? And who the hell negotiated this deal? Insiders at AQNT have been selling stock with both hands before this deal was announced. You think they would have said no to $50/share? Microsoft has a fairly in depth history of diworsifying with their cash. Look at the billions Maffei lost with tech and telecom investments during the bubble, or their ill fated purchase of Great Plains software, when they were feeling the threat from SAP and some other people. Microsoft looks like it's gone from being the "900 pound gorilla" to the "rich sucker at the poker table". For all their vaunted understanding of technology, they've still made all their money from operating systems and application suites. Will it be any different this time, or did they just waste $6billion of shareholder money?

more cognitive dissonance

2007-05-17T11:12:00.000-07:00

I read a newsletter today that said outflows from aggressive growth mutual funds over the last 11 months has set an all time record for the fund industry. You can see this showing up in the prices and multiples of the faster growing, higher p/e businessses. And it's not hard to understand the reasoning, as perhaps more money is flowing out of "plain vanilla" aggressive growth mutual funds into more "exotic" hedge or private equity funds, which can still be characterized as "aggressive investing". And many of the hedge funds have moved like any other herd, and invested in a short list of sectors, which have excluded to some extent your "normal" aggressive growth category. But the history of fund flows is that they always seem to go in the wrong direction, and you can see this taking shape again.

Normally, I like to buy what others are selling, particularly if they're being forced to sell, and that's what's happening in the aggressive growth category, as fund managers have to sell stocks to meet redemptions. I bought another stock today, another company that's trading at a 52 week low, off more than 50% from its highs. So while I'm still worried about the market, and I'm normally not keen on aggressive growth as a category, I think the outlook for two companies I bought yesterday and today fit with my value metrics. Value investing can be a lot of different things, but mostly what it is is buying businesses for less than they're going to be worth in the not too distant future (not the stock price, the business), and that entails developing a rational hypothesis of what that business is "going" to look like, not what it "has" looked like. So market, shmarket, the sell off taking place outside the broad averages has me picking up some new holdings.

the final countdown?

2007-05-16T15:25:00.000-07:00

I've written a number of times about the technical analyst for Barrons Online, Michael Kahn, being a terrific contra indicator. Today his column continued to point out the risks to the market as related to the yen carry trade. He also mentioned the all time high in S&P500 of 1553, which I've mentioned a few times (he said 1552, but it's got to get to 1553 to actually take out the old high), and the notion that we're likely to get at least that high before it's game over. I don't like this guy agreeing with my thinking.

His conjecture at the end of his most recent piece was that the bull market may last another seven months, which would make it twice as long as the preceding bear. This seems completely arbitrary to me, so I don't get the reasoning, but the fact that that is his expectation makes me think it's either coming well before or well after his target date, because the guy is unbelievable in his consistently being wrong.

Where this all leads me is that I continue to think we're somewhere between now and 3-4 months from now from a major high in the market, and despite my having bought a stock today, I haven't altered that view. It's hard to do, but I think the proper strategy is to always separate your stock ideas from any views you may have about the market or other stocks. It's living with cognitive dissonance, which the best thinkers are able to do.

With respect to the action of the last couple of days, it has felt a little like we're entering a melt up phase, starting yesterday, even though that rally failed. If that's the case, we may get to 1553 before the end of the month, and maybe that will be enough to convert the majority of bears. Tops always seem harder to call than bottoms, just as it's harder to sell stocks than to buy them. So maybe I'm wrong about all this guesswork. And as I've written recently, the carnage in the broad market, while the averages have continued to make progress, has brought many individual stocks down to interesting price levels, and if they get cheap enough, we're going to turn into buyers again. What we're not going to do is chase what other people are chasing as the market peaks out, no matter how good the stories are, because that is the ultimate recipe for disaster.

stocks and the market

2007-05-16T10:48:00.000-07:00

Ok, they got me to do it. I spent some money today. Although the position we bought was essentially at a 52 week low, so any technician would tell me that I'm nuts to be buying something that's not working while the market is going up. Definitely not from the religion of Cramerica. I heard booyah boy today on Morning Call with Erin Burnett, and he took some offhanded shot at Buffett, saying he was selling what Buffett was buying and buying what he was selling, and specifically mentioned J&J as a sell. Which makes me think that J&J might be a table pounding buy. Buffett vs. Cramer? That's too easy.

Rove takes a shot at Buffett

2007-05-14T07:48:00.000-07:00

The Bush administration is now proposing a tax on private jets. For the most friendly administration in the history of rich people, this might seem an unusual target. But the world has changed, and the limousine liberal has morphed into the private jet populist, as the rich have continued of grow richer, and the newfound wealth of the tech crowd has shifted to the political left with much greater frequency than the industrialists of the past. This has interesting implications for the future of politics, as the Democratic candidates for president have outraised the Republicans in most recent quarter.

I don't know if anyone has gotten much traction taking on Warren Buffett over time, but this recent action sure looks like a targeted shot at Buffett's NetJets operation, by far the largest private jet operation in the world. I think this looks like another example of Karl Rove politics, just like the recent US attorney scandal. The Bush administration may be the most blatantly political administration in the nation's history, and at the same time, the most incompetent. What a deal, all politics and no execution, just what we all want from Washington DC.

The most interesting political development this weekend was Chuck Hagel's appearance on Face the Nation. He just had lunch with Mike Bloomberg in New York, and I think there is genuine consideration of an independent run at the White House. I think this would be great for the country, as both Democrats and Republicans have become far too beholden to the special interests and the far left and right wings of their respective parties. More than any other factor, the huge swing in the independent vote is what tipped the 2006 Congressional elections. There is a huge moderate middle in the country, and it is getting ever more tired of hearing about the same wedge issues in every campaign (god, guns, gays, and choice), and this is at least partially the fault of the media, that wants to focus on the fight by playing the "gotcha" game, trying to find the little nitpicky stuff, instead of focusing on what the respective candidates would do for the country. I'm leaning toward the same candidates that Buffett is this time around, either Hillary or Obama, but if someone of the quality of a Hagel or Bloomberg run as an independent, I think they would get my vote.

changing my tune

2007-05-12T23:22:00.000-07:00

The talking tv heads explained Friday's rally as a snapback from Thursday, fueled by a benign report on "core producer prices". Again, the government created a fake number that excluded food and energy, perhaps the two most important staples in the lives of every American, because they have to pay out so many entitlements linked to "core" CPI that unless they want the budget deficit to be even worse and more ridiculous than it already is, they have to cobble together some phony numbers into a phony index, and tell Americans that their entitlement checks don't have to go up because there's no inflation.

But at least at the producer level, after Friday's real number came out up 0.7 over one month, let's think about what's happened over the last six months. November-up 1.6%, December-up 0.7%, January-down 0.6%, February-up 1.3%, March-up 1%, April-up 0.7%. Well, the January number may indicate there is genuine volatility in the numbers that include food and energy, but it sure seems the volatility has an upside bias. If you put those six month numbers together, it equals 4.77% inflation over six months, or 9.77% annualized, which means for as much as the Fed has tightened, a 5.25% Fed funds rate represents a significantly negative real rate, and that perhaps explains why there is so much liquidity in the world, also taking into account that despite the fact that our short rates translate into big negative real rates, we have the highest short rates of any of the major central banks of the world.

And where is and isn't the inflation showing up? It doesn't seem to be showing up in the paychecks of Joe and Mary Sixpack, and that's starting to show up in retail sales, particularly at Wal-mart. It sure as heck is showing up at the gas pump and grocery store. It's showing up in other obvious places too. It's showing up in commodity prices, and it's showing up in executive pay, and hedge fund pay, and private equity pay, and investment banking pay. It's no longer showing up in residential real estate prices, which Joe and Mary borrowed against at a compound rate of 21% from 2001-2005, and then cut back to only a 9% growth rate in 2006. Am I the only one scared to death by those growth rates? People can't borrow at 5,6, 7 times the growth rate of the economy if their wages aren't going up. But house prices were going up all that time, and lenders were getting ever more reckless, and that's what allowed all that growth in borrowing. But now prices have stopped going up, and lenders are finally being watched more closely by regulators, and that likely means that 2007 is going to have less growth in borrowing than 2006, and that means that Joe and Mary's spending patterns almost have to change.

Over in hedge fund, private equity, and Wall Street world, there's no clamp down by the regulators on lending or borrowing practices, and money center banks are literally printing more money every day as they stretch their capital bases to ever greater leverage ratios. And of course the regulators aren't going to clamp down on this until the accidents start happening, like they've started in residential real estate, and then it will be too late because the cycle will have ballooned too high, setting up what has to be a more painful contraction. And if they don't pay attention to all the leverage building up in the investment world, which they haven't been except for some minor jawboning, we'll eventually get into dangerous bubble territory (if we're not there yet), and we'll also have even more serious inflation than we're currently seeing. And then the central bankers will have lost all credibility and the only way they'll get it back is with Volcker like draconian rate increases. Joe and Mary, who are already hurting will then lose one or both of their jobs, and everything will start falling apart, including all those LBOs that are now being done, and even the brokers, the hedge fund guys, and the private equity guys will then realize that money doesn't actually grow on trees.

I'm not a doomsday guy, and even crashes carry the happy prospect of eventually great buying opportunities, and I'll be one of those buyers. I'm a believer in capitalism, and the scenario I'm describing may never see the light of day, but it's hard not to worry about the excesses that are building up. Income disparity in the country is too wide and it's getting worse. And if the middle and lower classes are hurting and envious, they will eventually find their way to the voting booth, and then the rules will start changing. And the country can't live on the trading back and forth of the Wall Street money guys, at least not for long.

So I'm starting to worry about all those things that I was dismissive about a year ago when the market started going down. I think there is inflation, and it could be a real problem. I think we are very likely in a consumer recession already, and when the last shoe (the financial markets) drops, we'll be in a full blown recession. And I don't think the Fed can lower rates, at least not yet, because as I described, real rates are still negative. I was screaming in my newsletters back in 2000 and 2001, that Greespan needed to lower rates, and fast, and I think he took too long to do what he did. But I was also saying by 2003 that rates were low enough (at around 2%), and he didn't need to keep cutting them. Right now, if Bernanke were going to do what was best for the long term interests of the economy, the currency, and the banking system, which is ultimately what's good for Joe and Mary, he would raise rates right now to slow down the Wall Street paper shuffling bubble. I know he's not going to do this, but neither do I think that he's going to lower rates anytime soon, as some on the Street are predicting. My belief is that central bankers should try to create long term stability, not excessive economic volatility.

I'm giving up

2007-05-11T18:51:00.000-07:00

Today's "powerful" snapback was on a HUGE 1.4 billion shares (lower than yesterday by 0.12) on the NYSE, and an even more GIGANTIC 1.74 billion on Nasdaq (down half a billion shares from yesterday, and the second lowest total in the last month). Convinced? Now I just think the trading desks and hedgies are f*#king with us. Today's rally was pure junkyard, I can almost see Fred Sanford at the specialist post. I sold a few more shares today, and I'm going to continue selling all the way up. I'll still buy something if it makes sense, and I've got a couple potential targets on the radar screen, but in this environment, I'm trying to be exxxxtra patient. Fools and their money, or maybe fooling you money. Either I way, I'm about worn out blogging about it.

unconvincing

2007-05-11T10:58:00.000-07:00

Everything in the market is based upon perspective, and while today's rally looks good for oil, deep cyclicals, and brokers, and some selective stocks with lots of short interest, the averages continue to outperform the a/d line, or stocks continue to underperform the averages. This looks like something of a Chinese water torture advance if you're an index short seller, and perhaps that's the game they're trying to play against the bears, trying to wear them down drip by drip. But except for a selective move here or there in an individual stock, the rally hasn't been particularly satisfying for anything other than very concentrated portfolios that own huge positions in the few working stocks. This is a condition that continues to look like the formation of top. Maybe I'm going to wrong, but I'm not yet ready to leave the skeptic camp quite yet. That said, you have to be careful when you find yourself arguing with the market, so I don't want to get locked into any particular mindset, and I want to keep open the possibility the divergences could go on for a lot longer than I'm currently thinking.

no tongue

2007-05-11T08:05:00.000-07:00

Was that it? Was that all we're going get? That wasn't even a peck on the cheek. This is the stuff that creates the mindset that the market won't ever go down again. And now it looks even more probable that we're going to make a run at the old highs on the S&P500. If it's going to be a major top, maybe this is what has to happen, that the bears have to have all their teeth pulled before it's over, and no novocaine.

no fear (at least not yet)

2007-05-10T17:28:00.000-07:00

Despite a fairly ugly day in terms of the a/d lines on both the NYSE and Nasdaq, and a big number for the arms on the NYSE, no one actually sold any stocks today. What I mean by that is that volume was virtually unchanged from yesterday on both the NYSE and Nasdaq, and basically tracked average volume levels of the last month. That's a surprise to me, and is likely an indication that no one is ready to sell the market yet, meaning that most think the rally is going to keep going. I think it may be a good sign for the bears. Incidentally, I just listened to Dennis Gartman of the Gartman Letter on Fast Money on CNBC who said he was bearish going into tomorrow and was looking for a correction. Gartman said that "volume went way up today". Huh? Sounds like a guy who either doesn't know what the hell he's talking about, or he's telling lies to embellish his opinions and "talk up his book". I saw Gartman on the same show back in early March and he was wildly bearish then, and the correction was over. He's another example of the old Wall Street maxim - "those who say don't know, and those who know don't say". He's seems only mildly bearish now, which means that this correction may get real ugly before it's over. I'm thinking about subscribing to his newsletter, so I'll know what not to do.

Back to the volume, back in late February, when we had that big 412 point down day that followed a big decline in the Shanghai market, volume spiked from 1.5billion to 2.3billion on the NYSE and from 1.8billion to 3.0billion on the Nasdaq. And volume stayed very high for three days, which allowed a lot of selling to get cleared out, and that's why that decline didn't last long, plus it was just the first shot across the bow, the warning. And if that was the warning, then we're now closer to more of an Armageddon scenario, and today's light volume fits that idea. It's indicative of either a resistance to sell or widespread complacency, either of which means things are likely to get worse. That doesn't mean it's going to happen. Maybe the trading desks can coordinate with some big hedge funds and use more of that juice (borrowed money) that they're so pumped up on these days, and just stop the decline in its tracks, but I think that all they'll be able to do is postpone it for a few months, and then things will be that much worse. The better scenario would be for us to get a serious decline right now that takes out the March lows, getting everybody really scared, and then a snapback recovery that gets close to the recent highs or just above them, and then fails, and then it's Hammer time.

I actually raised more cash today, selling a couple small positions out of a few accounts, but despite that, there are a number of stocks popping up on the radar screen, so if things do fall apart quickly, I very well may get in there and start buying. Anyone who reads my blog or the much more comprehensive monthly newsletter, including clients, knows that I'm no perma bear, and I'm a genuine optimist (with a large helping of skepticism, and a sprinkle of cynicism) when it comes to the buying the right stocks, but I think we are either in or quickly approaching an ugly stretch for stocks.

tape change?

2007-05-10T08:31:00.000-07:00

It feels different this morning. A little more off kilter. Maybe it's another head fake, but it's pretty ugly, and the selling isn't even kicking in yet if you look at the arms. Maybe a delayed reaction to the Fed, and the growing prospects of a recession. We've got cash now, so I'm hoping for a decline.

no handcuffs

2007-05-09T16:21:00.000-07:00

For money managers, newsletter writers, or financial bloggers, if you're working from a position of informational integrity, putting out your thoughts for public consumption can create something of a mental trap, where you don't want to be appearing inconsistent, or apt to change your mind overnight. But in the real world challenge that is the stock market, it is mistake to let your past statements lock you into a position when your best judgment the next day tells you that the odds have changed, and you're more likely wrong. There is also a psychological malady known as cognitive dissonance that makes it difficult to hold conflicting ideas in your head at the same time. An example from the market would be to be buying a stock while you hate the market or vice versa. In the monthly newsletter that I write for clients, I am often telling them that I always reserve the right to change my mind, and there's stocks and there's the market, and one can be zigging while the other is zagging. And empirically, the vast majority of stocks we buy for client portfolios have been trading down regardless of what the market's been doing, and the lower price level is part of what attracts us and enhances our margin of safety. This runs counter to common Wall Street thinking of liking what's working. The best widespread example of this was March of 2000, when everything tech, telecom, and media was priced ridiculously high and had carried the averages to extended levels, yet at the same time, many financial stocks, particularly in the insurance sector, and other blue chips like Philip Morris, were trading at multi year lows, both in terms of price and valuation ratios. So while it was a good time to sell an index fund or anything tech, it was an equally good opportunity to go shopping in another sector. I'm remain cautious about the market, fully recognizing that we could be starting a melt up phase that lasts for several months, but that caution will not prevent me from adding an individual stock to portfolios that makes sense on its own merits. And because of what's happening with the market, with the number of stocks leading the averages up getting ever smaller and more concentrated, there is a growing group of stocks that have stopped going up, and others that are going down pretty fast, so while I'm unlikely to buy into anything momentum (but don't lock me into that position either), I'm am actually starting to see value shape up in surprising places, and I may be buying some things if the trends persist, even though I think the market is headed for tougher times.

last gasp?

2007-05-08T16:40:00.000-07:00

They came in selling today, but the bulls won a moral victory, with the broad averages down only fractionally, and the Nasdaq and Nasdaq 100 ended up in positive territory. But to get the Naz back to break even took significant push on the buy side again, with the Naz arms finishing at 0.51, while the a/d line was a fairly putrid .413. With Cisco disappointing after the close and the Fed to meet tomorrow, with the likely statement still being concerned with the inflation outlook, was that it, was that the top? It seems too simplistic for the Fed meeting to mark another top, just as it did last May, and that has me doubting that it will happen. And the S&P500 still hasn't taken out its old highs at 1553, so maybe they can keep the rally going. But then again, I don't hear many people (including me) saying that the Fed meeting is going to trigger a decline, so maybe it will. It feels like it would come as something of surprise right now, and I don't know how many people have their seatbelts buckled.

the meeting

2007-05-06T18:11:00.000-07:00

I always go to Omaha with the hope of finding that pearl of wisdom, the one idea that will either help my life or my portfolios, and Buffett has delivered both for me in the past. I find idol or celebrity worship particularly distasteful, even when it's directed at the Oracle of Omaha, but let's face facts, the guy is really freaking smart, and no one communicates his thoughts better, either through the spoken word or his wonderful letters. And few so successful seem to find their way through life with a better moral compass.

But on to the meeting. Despite record attendance of more than 27,000 (which suggests at least a partial interest in stocks or investing), there were many questions that were tinged with a bearish bent, e.g. what could a derivative blow up lead to? what does the lack of fear in credit markets indicate? where are we in the 17 year cycles of fat and lean that Buffett wrote about in the summer of 1999? And for all the caution that seemed to permeate the room, Buffett seemed reasonably optimistic about the outlook for stocks, noting that Berkshire added some $5billion in publicly traded equities during the first quarter (likely during the late February/early March pullback). This, for me, seemed a marked contrast to the 2000 meeting, when it seemed every question involved Berkshire's lack of participation in the tech bubble, and what he might do to remedy that shortcoming? That of course spelled the top for tech and the bottom for Berkshire.

So does this year's cautious crowd and Buffett's general bullishness signal that I'm wrong about any imminent correction, and that the current trends of metals, energy, China, and the Wall Street money machine (brokers, hedge funds, private equity) still have a long way to run? Yes, no, and maybe. These are markets we're talking about, and predicting markets, and so we're not talking certainty, but probability. And even during bubbles, there are often major interim course corrections, e.g. events such as the '87 crash, the '90 bear market precipited by the S&L crisis and the first Iraq War, the '94 Orange County and Mexican peso crisis, and the Asian crisis of '97 and Russian ruble default of '98 that pushed Long Term Capital over the cliff, all happened within the great 1982-2000 bull market. And all of the factors that have raised my alert levels to perhaps Defcon 3 are still very much in place. That said, I'm a believer in anecdotal evidence and crowd sentiment as a contra indicator, so perhaps my bearishness levels have moderated a notch or two.

Buffett also said that it was impossible for someone running a huge amount of money, say something in the $100billion range, to make 20%/year in markets. Impossible? For anyone? If that's true, and plenty of people made in the high teens compounded all through the 1982-2000 bull, some even better than that, then what does that say about the longer term prospects for stocks? Buffett said if he were choosing between long treasuries and equities, he would rather be 100% in equities, but there's a relationship at work there, and the fact that long treasuries yield 4 3/4% means an expected return from stocks of 7 1/2-8% might be pretty good. But if you spend any time studying stocks histories, you realize that almost everything moves around much more than that within any calendar year, most way more. And what does that mean? To me, it means if intra year volatility is two, three, five times or more than the long term expectation returns from businesses, you ought to be trading more, not less, provided you understand how to value businesses and you can develop a sense of when to buy low and sell high. And if you're smaller, you should take advantage of the fact that you're going to be more nimble, provided you can develop a feel for enthusiasm levels, which tell you when it's more or less risky to jump in and jump out.

I've written several times recently that 1553 level for the S&P500 (its all time high), because it's now so close, may act as a magnet on the market, and that we're likely to at least reach those levels before this run is over. That said, 1553 is not that much upside from here, and for that matter, 1650, if it were to stretch that far, is only 10% from here. While that will seem like a lot if you're sitting in cash, to think that you'll never find investment opportunities within the not too distant future that you can make 10% in, well, that's pretty optimistic about the market, and pretty pessimistic about your investing abilities (but maybe on target if you're clueless), so I remain comfortable having raised some cash, and if the market keeps going for another few months or another hundred points or more in the S&P, bullishness will eventually reach tipping point levels, even if they're not there yet.

Where all this leaves me is that I continue to think the elements for a mid cycle correction of significant magnitude are falling into place, and I'm still worried about it, but we may get it three, four, or five months from now (that'll feel like a long time in the market, but it's not in the context of managing money for the long run). I'm also thinking already of what I might want to buy at the bottom of that correction if we get it. I overuse the Gretzky analogy in describing my investment philosophy, i.e. skating to where the puck is going, not where it is, and within that philosophy is the idea that you want to have some idea of what you'll do with the puck when they pass it to you. You don't know until you get it, because you don't know where everybody else will be, or related to stocks, you don't know at what prices they will be trading, but you can think about a shopping list of "what if this or that gets to a particular price level", and be ready to act if it happens.

early returns

2007-05-03T18:33:00.000-07:00

I have no idea how the pundits are going to come down over the next few days, but my initial reaction is that Rudy Giuliani is a legitimate contender. This is from the perspective of a centrist, a pragmatist, with a heavy distaste for the ideology of both right and left. I have some misgivings about Rudy, and worry about his record on cronyism, with issues like Bernie Kerik, and his alienation of the blacks in New York (will he do the same things running foreign policy and alienate peoples and countries?), but I think he's a genuine centrist himself, and I think that would be a positive for the country. Having no preference for a political party, I would prefer that my top choices from each party run against each other, rather than a poor candidate running against someone I prefer from the other party, because the possibility always exists that the American people will choose wrong. Hell, I even made the mistake of voting for Bush in 2000.

skipping beats

2007-05-03T16:15:00.000-07:00

New high, free pie! The major averages made another new high today. As the averages have continued on this unstoppable run, the ten day moving average of the arms index has spent more time under 1.0 than at any time since late April, early May 2006, right before the last significant correction started in the market. Back then, the arms spent 14 days under 1.0, ticked over for one day, and then saw 6 more days, and then the correction started on May 10th. As of today, we just saw our 15th day under 1.0, and the low of .816 was six trading sessions ago. The low in April/May 2006 was 10 trading days before the correction kicked in. The Nasdaq arms was .57 today, after a .51 reading yesterday. Those numbers are often indicative of markets with 3-4 times as many advancers as decliners, but the a/d line only reached .692 yesterday (not bad, but not spectacular by any means) and was a fully lukewarm .505 (basically flat) today. What that means essentially is that it's taking a ton of money to make little progress, which looks like the trading desks desperately trying to keep the tape positive.

It's starting to feel like this market will need one screaming, capitulative surrender on the bears part, maybe one that takes the S&P500 above its all time intraday highs at 1553, which is now 50 points, or a little more than 3% away. And maybe we get that kind of a move in the next week. But I'm willing to let someone else be fully invested through the last 3-5%. If we get that move tomorrow and next week, I don't think I'll be able to keep myself from raising even more cash.

Today, the American Association of Individual Investors poll came out, and it only registered 29% bulls and 52% bears, which is super hard to believe considering what the market is doing. And maybe this means that the "wall of worry" is still firmly in place, and I'm wrong about the market, or certainly early. But I've got another theory about that poll. Individual investors are having a tough time with this market, because most stocks have stopped going up. And they're also seeing what's happening in the world around them, as local real estate markets are falling apart, and just about everybody who would be a member of the AAII would also be a homeowner.

I could be wrong about all this, but it's looking to me like the risks are really starting to build up for some potential significant downside, and with the a/d line starting to consistently underperform the averges, it looks like the music is already starting to skip, and if and when the markets start heading south, finding a chair might be near impossible. It seems people have forgotten what happened in late February, how small the sell window was when things started down.

buying fear

2007-05-02T20:03:00.000-07:00

The most important maxim for value investors from the school of Graham and Buffett is to be greedy when others are fearful, and fearful when others are greedy. Following through into independent investment decisions, the process is to identify fear, scary, sleepless, chew toy fear. I remember a couple of years ago having owned Merck, and having sold the stock in the mid 40s when Kaiser Permanente stopped giving their patients Vioxx. The lawsuits followed and the stock went into free fall, but in the mid 20s, you could almost see the fear, it was palpable. I knew it at the time, and I was perhaps a little too wary myself, and I didn't buy the stock back at that cheaper price. Big mistake. I could recount dozens of similar situations.

Where was the fear in late 1999, early 2000? It was in the minds of the shorts who were getting run over, and in the minds of the value guys who didn't own anything dot com oriented who thought they might lose their job. Some did including Bob Sanborn at Oakmark, who, if he had stayed and stuck with his holdings like Philip Morris, would have done terrific while the bubble imploded.

So where is that fear today? Well, during rallies, particularly blow off top rallies that mark the end of bull markets, the shorts are scared out of their minds. And fund managers who own the wrong stocks, who today don't own mining, metals, energy, China, get frustrated out of their minds, and some capitulate, like some did during the dot com mania, and buy things they have sworn off for years.

My maneuvering over the last couple of days, selling stocks and buying reverse indexes, despite the fact that it's only been a day and a half of further market rally, has generated quite a visceral reaction in me. I've found over the years that most humans, like animals, think somewhat similarly, and respond similarly to particular stimuli. It's one of the most important factors that drive markets past rationality. So as hard as it is, I try to gauge my own psychology objectively, looking from outside myself in. And if I'm feeling fear, given my general equanimity and 17 years of money managing experience, then I can only imagine how much fear less experienced, less even minded individuals are feeling. And I can see how that kept the rally going today, and may possibly extend it for awhile.

But there are substantial excesses that have built up in the system, and the New York Fed report that was discussed today made note of that. And even if we are in a blow off phase for the market, what's the aftermath of a blow off top? All the shorts who shorted near the end, but not at the end, well, the ones who covered end up feeling like idiots, and the ones who stuck it out are more than vindicated.

I remember a scene in Good Will Hunting, where Robin Williams character says he stayed up all night after Matt Damon's character, Will Hunting, set him off with a comment about his late wife. And then he says he realized that Will was a kid, didn't know what the hell he was talking about, and that let Williams sleep like a baby. And sometimes in the market, you have to do that yourself, i.e. ruminate what's causing you consternation, weight it all out, and decide what's the most rational course of action.

All this makes me much less nervous about the big actions I've taken in the market the last couple of days. That doesn't mean that I know for sure that I'm right, but what will the market look like if it goes straight up for another couple of months? Will the Dow get to 15,000 and the Nasdaq to 3,000, and how bullish and how invested will people be at that point? And how overbought will the market be? I'm a huge conspiracy theorist when it comes to the market, and having experienced the process of buying and selling blocks of stock, it's very hard to believe that market makers and trading desks aren't trying to steal from you every day, all day. And so as I view the current rally, with a backdrop of real economic problems starting to take shape, it really feels and looks to me like the big Wall Street trading desks and some big hedge funds are working in cahoots to manipulate the averages higher so they can squeeze the shorts and unload their long positions quietly, before things go to hell in a handbasket.

Maybe it's a paranoid delusion, but I've watched markets trade a long time, and have made every mistake you could possibly make, twice, and my experience is telling me that the maximum fear in the market resides in the mind of the short seller right now, so that is the fear I'm buying by selling.