Thursday, May 31, 2007

Ropa-Dope Worked Again - Bulls Rule !!!

The bulls again used the ropa-dope tactics to grind down those big bad beefer bears at a new high level [cf my May 22 post]. The S&P 500 closed a second consecutive day over the old high, confirming the break up had real buyers, and not just lots of beefer mo.

As pointed out before, the 100 year wall charts show that breaks up out of long bases often foretell huge bull markets - see 1923-4, 194950 and 1982.

"The Trend is Your Friend"

Who is Saying, "It's Different This TIme" ???

The bears & shorts are. After the close, I picked up Wednesday's WSJ (paper edition) and saw the article quoting John Bollinger (page C1, lhs column) that the record levels of short interest aren't bullish. "The bearish bets piling up at the New York Stock Exchange and the Nasdsaq Stock Market may not be the bullish signs they once were."

Uh, paraphrasing, "It's different this time". I heard that last fall, too, when prior short interest records were set.

Looking at the NYSE chart the article has really surprised me how much short interest has ramped up from last fall's record - about 20% more shares sold short.

The article says it's just beefer pair trades & arbitrage, blah, blah, blah. Bollinger: "Hedge fund activity has destroyed the usefulness of the numbers."

Maybe. But maybe that's just saying, "It's different this time"

PS: Wheat made a big move up yesterday. The drought in Ukraine is getting really bad and the government banned wheat exports. Relief is needed soon or the losses will be catastrophic. The world wheat stockpiles needed to be rebuilt this year, but that drought and the US late freeze killed those prospects. Long December Chicago Wheat per prior post.

PPS: Q1 GDP was very weak at only 0.6%. BUT we already have Q1 earnings and they were fine. So if GDP can get back to moderate growth at 2.5-3%, earnings could be great. That's what I expect and 2007 & 2008 earnings should be very strong unless something bad happens. That's another data point for severe undervaluation in US big caps.

P^3S: GOOG chart looks pretty good on daily & weekly. That one seems undervalued by far. I'm long with average cost around 456 from prior posts. On a good break, I might buy more.

P^4S: The Chicago PMI number was strong. Good is good. The economy is doing fine.

Wednesday, May 30, 2007

Good Morning, Traders !!!

Up in Morning, What do I See,
Bear Raid from China, A to Z :-))

Woe, oh woe, the end is near. China markets, closed to all foreign investors [aka, "real investors" ], goes DOWN overnight. Mirabile Dictu !!!

Uh, that's about as big a surprise as the full moon appearing once a month.

So the beefers hit the world in a full court press bear raid. I guess they want to scare late buyers & run some stops to collect a little payday. Futures are down about 7 pts on the S&P 500. Interestingly, India held about unchanged.

So what's in the news? Big IBM buyback, LBO of CDWC. WSJ says Wal-Mart problems are hurting some suppliers in China (that might mean something - the article is interesting).

Fed minutes today will be important. Since we had some good inflation news before the meeting, a bullish surprise is possible. OR wording to spark a ramp into the June meeting in expectation of removal of the inflation bias. OR they might be a non-event.

So far I think the real buyers will be patient and buy this dip. Disinflation and moderate growth are still the attributes of the US economic trajectory. Nothing has changed.

PS: that title is supposed to remind you of Good Morning, Vietnam !!! [the movie with Robin William and the real DJ in the war zone, Adrian Cronauer]. Just imagine my baritone voice yelling that as you wake up. Have a cup of Joe. Black, no sugar.

PPS: Today's action seems to indicate there's too much stock and ETFs sold short. I think the real buyers are more patient. But if one is shorting every move up, a drop like this would seem like a reprieve. The five minute charts I watch look like short covering plus some real buyers. So those record short interest numbers of last week mean something, like last fall.

P^3S: I thought the line in the Fed minutes that core inflation was "not convincingly" trending down was significant. I think another one or two downticks gets the inflation monkey off Ms. Market's back.

Tuesday, May 29, 2007


It's summer (meteorological summer!) :-))

Suttmeier was on Bubblevision early, spewing strong bearish views. He says US stocks are way overvalued. I wonder how he calculates that? Maybe to the 16th decimal place in his models? I disagree, as I've blogged many times in the past. US stocks are significantly undervalued, especially big caps.

Asia did OK over while the US was on holiday. India was up; China, too. India BPO stocks are getting hurt on the rupee gains as the BPOs get paid in US$.

To me, the charts - particularly on the weeklies - look like a breakout from a long base. Perhaps a revaluation as Ms. Market realizes long-term interest rates are really going to stabilize in the 5% area. That presumes the moderate growth, disinflation economic trajectory that I think will occur for the next couple years at least.

The Japanese consumer seems to be awakening. So I think that the Asian consumer might lead in a 21st Century, peaceful East and South Asian Co-Prosperity Zone which can become a powerful economic engine for the world.

And oil & miners will lead, as India & China growth requires huge amounts as they growth fast on an ever increasing base.

Kosovo !?!?

Can anyone tell me why oh why is the US involved in Kosovo? or Bosnia? of Serbia?

....... waiting ..... waiting ....... waiting ............ GONG!

The Europeans got the US to do their business, pacifying Bosnia and forcing Serbia's Milosevic to step down and to let Kosovo go. Because European nations are too CHEAP to pay for their own military. All the Kosovo-Bosnia-Serbia civil war mess is a EUROPEAN PROBLEM!

The US has absolutely zero interests there. Zippo. Nada. NONE!

Serbia-Bosnia-Kosovo is even a NEGATIVE for the US. It created serious problems with Russia. Bombing a Slavic nation to force Serbia to relent really shocked the Russians [and Ukrainians, I know from personal contact]. THAT was a huge example of the US acting like to be a bully, BUT the Europeans wanted the US to do it. That effort was initiated by EUROPE [maybe western Europe] because they feared a war in the Balkans.

In Bosnia, Europe needed US military power to stop the civil war there among Bosnian Muslims, Serbs & Croats. I remember when the US 1st Armored Division deployed there from Germany in the 1990s. Western Europe just didn't have the military power to DO what they wanted. So they got the US involved. Arghhhhhhhhhhhhhhhhhh!

And US troops are STILL in Bosnia and Kosovo. And a person from Kosovo was one of the terroists planning the Fort Dix attack in New Jersey. And in the news TODAY Bush & Putin were mentioned discussing Kosovo, and Russia has interests there. And the EU is still wanting the US to do its business. So its still hurting US-Russia relations. Thanks EUROPE.

If Europe wants to act like a major power, they need to spend some money on their own military and train some soldiers to fight. Otherwise, they'll always have to run to the US for help.

The US should just leave Kosovo & Bosnia and let the Europeans handle their own problems.

PS: Created after WW I by the Versailles Treaty, "Yugoslavia" meant a nation of the south Slavs. That differentiated them from the northern Slavic nations in Europe like Poland and Czechoslovakia [now split into the Czech Republic & Slovakia]; Hungary & Hungarian peoples separate the two groups of Slavs since the 9th century Hungarian invasion of central Europe. Yugoslavia was an artificial amalgamation of Slovenia, Croatia, Bosnia, Montenegro, Serbia, Kosovo, and Macedonia. But Kosovo was ethnically Albanian and the other Slavic peoples varied greatly. The alphabets, languages, and religions were different. A mess. Sort of reminiscent of ... IRAQ, another artificial, post WW I amalgamation of inhomogeneous peoples.

PPS: Interestingly, the Bosnian mess was sort of a village-village or county-county level civil war for awhile. But massive military power forced them to stop. I wonder if that's a lesson for Iraq? I'm not sure BUT it might be.

Monday, May 28, 2007

A Fine Holiday Weekend

Those grilled steaks were unanimously superb yesterday!

I just left the barn/garage where I spent a few hours today working with my hands & tools. I really enjoy these mechanical hobbies. Getting off my butt & using wrenches, grease & hammers is so enjoyable after days of "thought-work".

Today I disassembled two automatic hole-making machines, cleaned, oiled and reassembled them. I used some copper anti-seize for the parts that get hot & rub at high velocity. And I put a special preservative oil on every piece. They should work great at the special event in Vermont this July :-))

Now I'm going to pop open a beer and sit in the shade and read my book on the Thirty Years' War. I'd like to finish it today.

I hope you had a good weekend, too.

Saturday, May 26, 2007

A Proven Anachonism, and Proud!

I added to my service stripes today as a man & an anachronism in a triple play at the butcher shop today.

1. I bought lots of RED MEAT to grill ;-)
2. I bought real, hardwood charcoal for a REAL FLAME ;-)
3. I paid CASH for $82.32, peeling two $50s off my roll ;-)

The Gen Z-er at the "cash" register was shocked when I handed her the $50s :-))

What a world!

Friday, May 25, 2007


US stocks suffered another distribution day. The S&P chart looks OK, but could use a rest & consolidation. Ditto the Dow. The Nazz looks like it already is consolidating. Ditto the Rut. I don't expect a big drop like in February, so haven't sold a share. My reasons? There has been NO economic news to indicate the trajectory is changing from disinflation, moderate growth. In fact, we got more evidence that moderate growth IS occurring from the durable goods number. And the housing inventories are dropping. This move of the 10 year Treasury to 4.9% is still in the trading range. The Fed won't cut until core inflation drops to the comfort zone. Contrary thoughts were delusional. This pullback could just be beefer sellers who stupidly bought on that "idea" and are now bailing out; it just shows the level of their insights.

US stocks are massively undervalued. I'm looking for a consolidation or grind up as core inflation moves down & moderate growth evidence continues to grow. US stocks "could" melt up IF the June or later Fed meeting drops the primary risk as being inflation based on actual data in the comfort zone.

Long & strong, 150%+ on butter. [hehehe, that's "margin" cf. the old commercial about the bonehead broker confusing margin in a stock account as butter.]

PS: I see Nazz short interest was up 5% from April to May to a new record. Perma-bears were getting chewed up. NYSE short interest was a record, too [reported a few days ago]. Last fall we saw records, too, when some gurus were pronouncing the market as "extended". AAII sentiment numbers show too many bears, too.

PPS: has a mention of a BusinessWeek article [online edition] that YRCW might get a LBO. I agree & will start a postion today if it doesn't get a poparoo.

P^3S: I noticed that Brent crude is trading at a huge premium to West Texas Intermediate. That pretty much crushes the demagogues claim that US Big Oil is keeping prices up. Norway has the most influence on Brent production. Another myth shattered.

P^4S: There is a serious drought in Ukraine that can really hurt their wheat produciton. Unlike in Soviet year, Ukraine exports a lot of wheat in good crops years. With the late feeze in the US hurting wheat crops here, too, I've got a position in wheat (Chicago, December).

Is Modern Life Too Complex?


Yesterday I got a phone call offer to consolidate my cable, Internet and a digital phone line [fax only] that are all on Comcast now into one bill. I was supposed to save $40/month & get a few more channels I rarely watch. So I said OK. Sounds simple, eh? .............. Wrong!

The call took about 25 minutes & ended when I had to verify the order on a recorded line. Then the phone number that was to be "consolidated" got mentioned [first time]. Uh oh, it was the WRONG number, being one of my other lines with Verizon.

So I had to call back to cancel the order and will have to endure another 25 minutes to get it right. And I have to call back this AM to check that the cancellation was put through since the second guy said he had to get help to do it. All because the first guy got confused between my "home" phone number and the Comcast digital line.

And if I hadn't realized the error, they would have completely screwed up my current home phone & business line. Argggghhhhhhhhhhhhhhhhhhhhhh!

QED. Modern life is too complex! Snafu, fubar.

Thursday, May 24, 2007

Was is REALLY Greenspan, or ?

Bubblevision says the markets sold off yeterday because Greenspan [aka Elmer] said China might sell off. Golly, what a piece of shocking "news" - China might sell-off - !NOT! Elmer needs a payday & the beefers paying him want a return on their money. Did they "leak" his comments after putting on their positions? Nawwwwwww. Some never see knavery in market players.

Or was it Pisani blabbing that the markets were "sure" to break the record yesterday? That's waving a red cape at the ... beefers.

If you read Liar's Poker, you'll know that beefers toss bombs & scream "fire" to start stampedes, and hit the order buy/sell button on pre-determined actions based on events.

Here's my take: we're in the ropa-dope setup & the desperate beefer bears need to create a technical sell signal to get more on their perma-bear side. They're getting chewed up by the real buyers & needed something to put some caution into them. So they hammer the markets near the close & put out this Elmer non-news items & screech "FIRE".

Nothing has changed. I'm just letting this beefer trading foolishness subside & expect the trend to continue when virtual sellers get washed out. If some good stocks get stupidly knocked down, I'll buy some more.

PS: Laughable. Bubblevision "alert" that stocks are falling because of interest rate concerns. Sure, as if a 4.9% US Treasury 10 year yield could possibly hurt the economy. We get good economic news so the "Fed will cut" screechers have to sell or cover. This is just beefer trading fund nonsense. Enjoy the weather.

Wednesday, May 23, 2007

Winding Down

I expect these next three days will be mostly quiet [although the futures this morning seem a bit hot]. A holiday weekend is coming and then summer begins [unofficially].

WSJ says investors in a defunct hedge fund are suing its old prime broker for trading on knowledge of its activities. Nawwww, would a big street brokerage firm everrrrrrrrr do that ;-)

Two sharks gnawing on each other, that's all.

I'm still in homeowners' purgatory, suffering the endless torments of home improvements. I hope I can climb out in a couple more weeks :-((

Excellent weather here today - I expect to spend some time outside :-))

The bulls' ropa-dope seems to be working. Hmmm -> Stock Traders' Almanac says for the period 1985 to 1997 May was the best month for the S&P, up 13 straight for average gain of 3.3%. We had a good May this year. Is another streak beginning? [no opinion - I don't believe MOST of this numerology - market statistics crap - just noise]

PS: A WSJ story about "extreme optimists" saying the market could go up next ten years. I'm very bullish, too, and have been since last year's June Fed meeting. But I think it's foolish to prognosticate that far in the future. The future isn't determined - decisions of people will create it. I do think that we have a solid base that "could" set up a decade long bull market [cf. 1949, 1982], but I think it could be derailed by human stupidity [in DC, China, Russia, Iran, etc.].

PPS: Someday soon I will write about theories that the Universe is, in fact, completely determined for all time. I don't believe that, but the theory and reasons are very interesting and intriguing.

Tuesday, May 22, 2007


The S&P danced thru the old high, but fell back onto the ropes slightly below when the bears thru some right hands. The close was still a gain & the bulls won the round anyway. Beefer bears were unable to manufacture a technical sell signal to start a stampede. They'll try again today, I think, but I hope the real buyers just do the ropa-dope a few days like they did at the old Dow long term high around 11,800 a few months ago. This moves stock in stronger hands of real buyers, and sets up the beefer bear shorts for a flurry & knockout move up.

Check out that great movie, "When We Were Kings" [an Academy Award winning documentary] for a wonderful look at that great historical boxing event, the "Rumble in the Jungle" 1974 heavyweight championship fight between Muhammed ALi & George Foreman where Ali used the "ropa-dope" to beat Foreman.

PS: Started a natural gas position. I like the chart & hot summer plus hurricane prospects seem favorable for a long. Beefers were short & covering in last week's COT report. Very risky.

PPS: I'm very UN-IMPRESSED with the Fed governor, Lacker. He seems way too young & inexperienced and seems to be missing big factors, such as demographics, etc. This inflation-phobia of his seems very wrong and he doesn't seem capable of recognizing his errors last year dissenting & wanting more rate hikes. I found out yesterday a friend of mine who had been doing real estate legal work for many years lost her job three months ago. I think we need more unemployment among economists & Fed governors so they get some realistic experience.

P^3S: Some broad selling in many commodities today. I remember that at the end of last month that a similar sell-off occured. I wonder if index fund re-balancing is occuring or if asset allocations caused both. I'll monitor this. If it occurs next month, too, I think that will determine the cause.

Monday, May 21, 2007

Monday Morning Rambles

On my 100 year wall chart, this move looks like a breakout from a long, seven year base. Past breakouts from similar long bases led to long-term bull markets. Examples are 1924, 1950 and 1982. This pre-holiday week might be quiet.

Long & strong - 150+% long in the Alpha Fund since early March. "Don't Fight the Tape"

PS: Bubblevison & Barron's had pieces about the dearth of dividends. Why is easy: executive greed. They have stock options & don't get any pump from the dividend. Buybacks pump the option value. More hogs at the trough.

PPS: Bubble vision is doing a, "Where were you in 1977 when Star Wars came out?", segment. Hmmm. I was a graduate student doing atomic physics calculations for my Ph. D. and playing rugby. Many moons ago.

Saturday, May 19, 2007

US Stocks ARE Undervalued

Reading Barron's this AM, I saw the table of the earnings of the companies comprising the Dow Jones Industrial Average. The median P/E based on 2007 EPS [probably low] is 16.4x. That's a robust statistic unaffected by outlier low or high low P/E's. These are mostly large, well-capitalized, good credits. Average earnings growth for 2006 to 2007 is 8.5%. So what are these companies really worth, assuming my moderate growth, disinflation economic trajectory is correct?

I'll be conservative: assume 5% compound earnings growth for 5 years - that's slightly LESS overall growth than a more probable 7% earnings growth and one full year of slowdown [zero growth] in the same 5 year period. I'll even use actual 2006 earnings of $787, even though we know that first quarter earnings were good and grew at more that 7% vs. 2006. Discount rate - 10% - likely too high for these good credits. So I'm tying both arms behind my back in this exercise.

Plugging into my valuation model gives .................... ta da ..................... Dow 16,500 :-))
Fair value P/E is 21x off 2006 actual earnings.
We have a long, long way to go BEFORE any ideas about "overvaluation" mean anything real.
Warren Buffet agrees, based on his recent statement on Bubblevision.

Year to Date:
Krypto Fund +4.68% [gold & real estate dragging it a little lately]
Alpha Fund +29.7% [this is my more actively managed stocks]
Commodity Fund +29.1%

"The Trend is Your Friend"

Friday, May 18, 2007

What is Being Powerful?

A reader asked me to define "powerful" since I already defined "rich" and use "rich and powerful" together so much.

Defining "powerful" is more subjective than "rich". A "powerful" person in the political or economic sense I use it [not a powerlifter or weightlifter ;-) ] is a person with recognized "power" over other people. This "power" requires one of two attributes.

A. Ability and willingness to compel or cause actions either thru force of law or through self-resources or through the ability to cause or threaten (real or implied) physical or economic harm or provide benefits. This power might require cooperative actions of others or not to be realized. Senators, CEOs and the activist rich have Type A power.

B. Leadership of a movement recognized by numerous persons who will follow his/her commands without any legal or economic (direct or implied) benefits or threats of harm or benefits in the physical world. A religious leader has this type of power, as did Hitler and Lenin before they came to have Type A power.

The power MUST be recognized by some others in both cases to be real. The power need NOT be universally recognized.

Thursday, May 17, 2007

Beefer / Private Equity Tax Loophole ?

Hmm, I'm starting to understand this phony capital gains taxation of beefer and private equity incentive fees. And it smells really bad. Grrrrrrr.

As I understand it, they give themselves a piece of the partnership for nothing invested & work to increase its value. Then periodically they give themselves more as a "carried interest" if they perform and on & on work to increase the value of their "carried interest". Eventually they get a payout. So their tax lawyers & accountants find a way to call that a "capital investment" and claim a long term capital gains tax. But they never had any hard $$$ invested themselves. Or owed $$$ on a loan to make the investment. Nothing at risk at all.

What crap! [IFF I understand correctly they are investing no hard $$$ or risk no actual $$$ of their own].

That's compensation, just like an executive stock option & should be taxed as ordinary income when exercised/paid. So mega-billionaires use a loophole [I wonder who paid off a congressman for that one to be inserted in the dead of night? ] to pay long term capital gains taxes on their compensation, while any other normal trader pays short-term capital gains on real $$$ invested & risked. And Joe & Jane Worker pays higher tax rates in their compensation than a mega-billionaire beefer.


PS: It's another example how the rich & powerful give themselves special tax breaks, like municipal bond freeloaders, while Joe & Jane Worker pay for the government. Gee, and the rich & powerful sure like to tell the rest of the people how to live, too. Grrrrrrrrrr.

Back in the Saddle

Made a fortune in Vegas ;-)

.... uh ... well ... ok, perfectly acceptable losses. I was truely up after Monday, but ... played Tuesday AM & it was ugly. Came back Tuesday PM mostly & had a lot of fun. I won five straight "Don't Pass" bets with full odds against my dice. :-))

Hmmm, I see the CPI number was good - a year over year downtick. New high for Dow. And S&P is closing in on the old all time high. Rut & Nazz underperform.

Disinflation and moderate growth can bring a great bull market. Perma-bears suffer the drip torture. Beefers starve.

More later.

PS: Inflation ... hmmm ... my homeowner's insurance cost went DOWN 5.9% per $100,000 insured amount. Guess that's a benefit for our crummy weather vs. Florida. ;-)

PPS: Jobless claims down. Another week under 300,000. I guess perma-bear pronouncements that the economy of collapsing are ... delusions.

P^3S: Mrs. B was incredibly lucky, as usual, on the penny slots. Or she can see the future on her machine. Who knows? Who cares why - a win is a win is a win :-)) And the casino even gave her a $13 check as a "comp" for her play.

Saturday, May 12, 2007

Embarrased for the Male Sex

I didn't expect to post today, but while buying a pastrami sub at the local pizza/sub shop I was deeply embarrassed by the action of another member of the male sex. He had a $7+ tab, and asked if he could pay by credit card. How demeaning!

A real MAN is supposed to carry a roll or a money clip & be able to peel off a sawbuck or a $20. It's OK for ladies to pay such a small amount by credit or debit card, since there's nothing wrong about ladies not carrying much cash. But a GUY!!! Sheesh.

That reminded me of a common occurrence in the late 1980s at the athletic club bar. I'd be having a Guinness or an Irish whiskey, and some strapping young man, fresh from his workout, would order a ... Coors lite ... or ... a glass of wine. Grrrrrrrrr. Deeply embarrassing for all men.

Friday, May 11, 2007

TGIF and More

IBD says yesterday was NOT a distribution day for the S&P, NYSE as volume declined. Hmmmmm. Those stocks were the leaders. My impression was we just saw an example of some beefer traders trying to get out and lock in profits on their mo-mo trades. And so the stock moves into the hands of patient real buyers. Unemployment data was good. The retail sales data meant nothing - it was just an excuse to sell as a perceptive reader mused early AM.

From late comments yesterday (after I left the office), I can see I have to write much more on my "libertarian populist" political philosophy. Much seems misunderstood. I replied this AM, but I think more explanation would help.

SNAFU at work again, both for the re-construction of my sunroom and in my commodity account. I think there must be an unknown virus infecting people causing them to NOT pay attention to details. Hence they screw up no matter how carefully I specify or remind them or put requests in writing. It's not just X-ers either. :-(

Next week we get another CPI number - that's very important in my thinking. A flat or downtick in core CPI would be bullish. The PPI number today means little. But it sometimes is an excuse to buy or sell by ... "them".

Sky the Puppy is growing fast, now over 20 lbs. I have to take more photos of him. :-)

The Thirty Years' War and central European affairs before and around that period are really complex. But I'm enjoying reading about them and looking at the maps.

Las Vegas looms - glitz, dice, blackjack, food. Ahhhh. Three days in the adult Disneyland. :-)) I'll be there Sunday, Monday, Tuesday, and return Wednesday so won't post new blogs those days.

By the way, the rational objective in gambling is to have lots of fun while losing the minimum amount. The craps table has the lowest house take if you stick to the pass line and take full free odds. I might make a "Come" bet, too and take full free odds there, too. To that, I add place bets on 6 and / or 8 which also have a relatively low house take to reduce my variance & increase my fun. OR I play blackjack using the optimal play based on the computer-generated card [the Venetian, where we are staying, permits one to use the card on the table openly]. So overall, I estimate I give about 1% to the house. That low loss probability does not show one the variance of expected return, which is truly huge. I've done mathematical models of that and computed profit/loss return probability charts. Most gamblers get wiped out from the variance - there is no recovery from zero.

Money management is important, too, if one wants to have fun for a long time [2.5 days gambling for me]. A sufficient bankroll based on bet size is crucial to survive & give yourself a chance. I understand the games fairly well and have chosen my strategy to fit myself and have a suitable bankroll to have fun the whole trip. So I'm looking forward to having a great time.

PS: Just now, I was run, run, running on my running machines, trying to get lean, giving the "little grey cells" some work. And listening to ... Bubblevision :-(( BUT I heard something & a thought came to me :-)) A guy said that we MUST be near a market top since corporate earnings are a record 12% of GDP. BUT we recently also heard that now 50% of S&P revenues come from overseas. So WHY is US GDP the denominator or the "standard". Much of S&P earnings clearly comes from OVERSEAS. And we know that globalization keeps increasing. So I think that "concern" about earnings as a % of GDP is certainly misleading. One would have to subtract overseas earnings for a true measure. I think it's just "wall of worry", another way perma-bears delude themselves.

Thursday, May 10, 2007

Market Summary

Easy => "The Trend is Your Friend"

Something GOOD About Getting Older

The bad things about getting older are very well known: aches & pains, grey hair starts creeping in, reading without reading glasses becomes difficult, tendency to gain weight, feet get larger, etc., etc., etc. :-((

BUT, as you get older, you become WISE!

My partner-mentor told me when I was a "smart" 27 year old [ many moons ago ;-) ], that "You don't know anything until you're 45". His mentor had told him that when he was 27, too. [Lol, I remember the imitation of the gravelly voiced, "old-timer" vividly.]

As I turned 45 a few years ago I realized it was TRUE. And going from 45 to 50+ seems to continue the trend.

I think by the time one is 45, one has so many life experiences and has met so many types of people and lived in so many situations and seen so much conflict & resolution and has solved so many life problems that one really is WISER then.

So REJOICE as you get closer to 45 and beyond. You are now wise [ & know something! ;-) ]

Wednesday, May 9, 2007


Cocoa got hot again the last few days. I should have re-bought that half I flipped before. Oh, well, the other commodity positions I had were distracting me.

I've liked cocoa for a long term bull trade for awhile now. I think that medical data that chocolate is healthy has much more to run. I heard that over 18 months ago, but the data is better now and is getting play in the press. Over time I figure the public will eat enough more chocolate [do we really need an excuse?] to increase the prices a lot.

There is an ongoing drought in Ivory Coast where about 40% of the world's cocoa is grown. I don't play the weather in cocoa, but read about what's going on in research so I can interpret market moves better.

So I play the long side on dips. Lots of beefers are in it, so cocoa is volatile, as the spike & dip just proved again.

Taking the Auspices on Bubblevision

These seers Bubblevision puts on just make me barf. No substance. A guy just said we have to go down to go further up. Huh? What crap. They babble about some technical crap, like a used car saleman.

All they are doing is a 21st century version of taking the aupisces as the Roman soothsayers did. Worthless techno-babble.

Fed Meeting

The Fed meets today. No change in rates is as certain as anything determined by man. The statement language "could" generate some action, though. Since the last Fed meeting, we received two favorable downticks in inflation numbers [for the core CPI and PCE] after some upticks, so PERHAPS we might get a more marginally dovish statement. If so, we could start a melt-up in PE multiple expansion as the current level of interest rates becomes more certain along with a moderate growth economic trajectory.

But it's probably too soon for them to edge a little more to the dovish camp. Perhaps if we get another month or two of good inflation data. So I don't expect a more dovish statement, BUT I see that as the possible surprise today.

Tuesday, May 8, 2007

Where are We? [marketwise]

Reading the S&P 500 chart with simple Elliott Wave concepts shows this up move [since early March] had an initial pulse "1" and a pullback "2" and we've been in a long up move "3" since late March. So we have to expect a pullback "4" soon, to be followed by the last up move "5". I suppose the S&P all-time high of 1527 "could" bring on the "4" pullback. OR we could pullback now & then push through the old high in wave 5.

A new base around or above the old high over the summer could set up a bullish continuation pattern for the next leg up to 1700, which is my 20% gain expectation for this year.

By the way, I use the S&P 500 cash index since that huge index is much less susceptible to beefer games, as the Nazz 100 and Dow are.

Corn was chewed up last night as the USDA crop progress showed corn was 53% planted, vs. expectations of about 50%. The 10 year average of 57% and last year's 67%. I think the selling was overdone & will add some bushels on a good entry. Iowa is far behind. And I think the huge crop just won't get planted in time for optimal yields. Farmers would plant the easy acres first; the tougher acres last.

What is a Tribe? [modern context]

That's something I've been trying to understand better for months. People with much more direct experience in non-western cultures tell me that in huge areas of the modern world that a person's primary loyalty [after family I suppose] is to their TRIBE. These areas seems to include Africa, the Middle East, and Central Asia. I'm not sure about India, China, and Japan, but "tribe" seems irrelevant there. In southeast Asia, tribe might matter in rural areas, but again seems irrelevant in the cities. Ditto, South America. But the "tribal" areas are central in modern conflicts so I'm thinking that I need to better understand, "What is a tribe?"

One problem I have is that I can't figure out ANY western European analogy to a "tribe" that has mattered for over 1,000 years or more. From early American history I have a pretty good idea what an American Indian "tribe" was, how they interacted and what was meant by being a member of a tribe. But the American Indian tribes were just an archaic neolithic cultural artifact of their isolation in the western hemisphere.

I read the first hand account of T. E. Lawrence [aka, Lawrence of Arabia], titled, "Revolt in the Desert". Many Arab tribes are mentioned with their leaders, such as the Howeitat led by Auda as memorialized in the movie [and relatively accurately portrayed, too, by the script & Anthony Quinn]. The tribes of pre-modern Arabia, Syria and Jordan seem to be just archaic groups like the American Indian tribes. The binding seems to be just a leader and a loose place and some relations, perhaps a dialect and some minor culture.

For now, I think our "leaders" are silly to take these "tribes" seriously in trying to create long term solutions to problems. Their only value is short-term, through personal relations of their leaders. The sooner the "tribe" as a grouping of people is completely wiped out, the sooner some peace might arise in those areas of the world. To paraphrase the Japanese aphorism, the tribe that sticks its head out should be hammered down.

But I have an open mind and admit I still don't understand what a "tribe" is, or what that concept's value is, in the modern world.

Monday, May 7, 2007

Fed Rate Cut? If & When.

Bubblevision just had a discussion about whether the Fed will cut the Fed fund rate this year. One talking head said the 91 day T-bill rate is around 4.8% and has been trading under the overnight Fed funds rate for some time. That is market "proof" the currect Fed policy is STILL restrictive.

So when "could" the Fed cut the Fed funds rate & to what "neutral" level.?

First the easy part. What is a neutral level? That's the 91 day T-bill level on a yield equivalent basis. That rate is about 4.92% now. So the Fed could cut to 5%. [btw, that's where I think they should have stopped last year. That last rate bump to 5.25% was the Maria-leak induced bump for Ben's credibility.]

Second, when? That's easy, too. IIFFF the core PCE inflation rate goes below 2% for a full quarter, they could easily decide to go to a purely "neutral" Fed funds level. So that's when I think they will cut. Not until then.

Market Charts, etc.

Major Nazz composite resistance looks like 3000 from the monthly chart. An uptrend channel is apparent. Short-term, we are near the upper band. Meaning we break to a new level or pullback. I tend to favor a break up. The valuation work I've been doing gives me more confidence that the US markets are massively undervalued, assuming my preferred economic trajectory continues.

The disinflation, moderate growth economic trajectory reminds me of 1985. The following years saw major gains in a melt-up.

Barron's quotes Barry Ritholtz as saying, "The market is now a trading market, increasingly detached from the decaying fundamentals." I disagree.

First, the fundamentals are NOT decaying since earnings are still GROWING nicely. Maybe he doesn't know what "decay" means. A old tree grows more slowly in % terms, but in actual wood growth adds more wood. Decay requires a decline. The US markets are grossly undervalued based on earnings growth & the current level of interest rates. Disinflation & moderate growth has, in the past, created great bull markets.

Second, the market is NOT a trading market. It's a buy & hold market (with moderate leverage) as the undervaluation is slowly realized. I suppose brainless beefers have to buy a group's trend to try to make their fees, and might run some groups too high, too fast. But I think we can make strong gains with simple buy & hold with only moderate trading activity. That worked in 1985-1986, btw.

The public is completely missing this move. In 2000, they learned the wrong lesson, as usual.

Warren Buffet says average "Joe Investor" should buy stock index funds. Uh, like the Krypto Fund strategy :-)

PS: I heard last night on Bloomberg that Warren Buffet's Berkshire Hathaway was considering buying a "big business" that would require financing. My guess is AIG.

PPS: I was wrong about commodity weakness being index funds. The selling was normal beefer commodity funds (coffee, cocoa, hogs, cattle). Index funds added small amounts to positions, except in cotton and wheat.

Monday Musings

The World Turned Upside Down -> Hungarian immigrant elected President of France. [no opinion here]

Quiz: Whence came the first clause above, "The World Turned Upside Down"?

On Sunday I went to a rifle match at a "sportsman" club where I'm a member, and won first place after no practice for about a year. In fact, my score was 275 out of 300 with 5 X's, which was higher than every score at the club's matchs last year. :-)) Bunkerman is very good with his rifle. ;-)

We finally had a pleasant spring weekend here: no rain, warm, mostly sunny.

I had to waste 10 minutes with a credit card company this morning. A vendor used the wrong expiration date last week & the credit card company's idiotic security systems started rejecting regular payments to online services. Sheesh. If I've charged the same amount on a credit card from the same vendor for many month's you'd think they could figure out it's legit. Banks suck bigtime; greedy pigs.

Well, I'd better hit my charts.

Sunday, May 6, 2007

Valuation VI. Example -> GOOG

Here's an example. Look at GOOG. The stock is about $470/share and the 2008 earnings estimates are $19.25/share, so its forward PE is 24x. [earnings source: Daily Graphs at (I subscribe to that good site.)]

Those 2008 estimates are about 27% over 2007 earnings, but are 339% of actual 2005 earnings, which is a 50% compound average growth rate. The last four quarters year over year average growth rate is 82%. GOOG has a very strong market position in Internet advertising.

I have a hard time conceiving that GOOG won't be able to grow earnings at a minimum of 25% per year for the next five years. So after that IF it saturates the world online advertising market AND can't develop new revenue & earnings sources, GOOG still should be able to growth at the nominal GDP growth rate of 5%. This scenario seems very strong, so I think I can use my standard model to value the stock: 25% earnings growth for the 5 year horizon, 20x PE off year six earnings which are 5% over year 5 earnings, and a 10% discount rate of the conservative earnings assumptions.

[NB: using 10% discount rate is ONLY valid for conservative earnings assumptions. If you use more aggressive - aka riskier - numbers, you MUST bump your discount rate appropriately].

I plugged those numbers into my spreadsheet: $910/share, or a 47x PE off 2008 estimates. The matrix range is $634 to $1,377.

Golly, I need to buy more GOOG.

PS: The weekly chart shows a lot of distribution for about a year. I suspect that is big early holders selling around the $500 range. The pattern looks a lot like a huge bullish C&H or ascending triangle. The stock has been basing after breaking up out of a prior bullish ascending triangle around $450.

Saturday, May 5, 2007

Valuation V. Derivation of PEG Analysis.

What about the PEG analysis everyone uses? Does that have any fundamental basis?

Whence came PEG? ;-)

PEG is the PE to growth rate ratio, and is commonly used to value stocks with high growth. [btw, the term "PE" = P/E ratio in common usage] The actual PEG ratio is PE / 100g, since the growth rate "g" is used as percentage, not a discount decimal number. If PEG is greater than one (viz. the PE is more than the growth rate expressed as a percentage), then the stock is deemed overvalued. If PEG is less than one, the stock is deemed undervalued. And if PEG = 1, then the stock is fair valued.

[NB: from prior posts on "Valuation", you can see this method fails miserably in valuing stocks with slow, zero and declining growth stocks. PEG has pesky divergences in the two latter cases and produces a silly answer in the first case.]

We can analyze PEG as a valuation method by inserting P/E = 100g into our infinite growth equation P/E = 1/(r-g) and solving for the discount rate, "r".

A little algebra gives r = g + (1/100g). So if g is reasonably large, the approximation r = g is very close. (Example: for 50% growth, g = .5. So r = .5 + 1/(100 x .5) = .5 + (1/50) = = .5 + .02 = .52)

So the PEG method implicitly values a stock assuming the discount rate is equal to the growth rate.

I suppose a high growth, risky business needs a high discount rate, and using r = g is arguably close enough. Would a high growth business only invest hard $ unless its equity rate of return was at least its growth rate? I suspect they often invest expecting a much lower equity rate of return. The business might just be expanding rapidly into new markets or sectors or locations, with much extra risk at all.

So PEG might be a useful tool, but remember what its use implies & evaluate the ratio with that insight. Think about the true business risk of the company. A high growth stock, say with 50% growth, might be a steal even if the PE is 60x if the business risk is not too high.

PS: You can easily see the PEG method fails miserably for slow, stable growth. The equation, r = g + (1/100g) derived above gives silly results in that case. If a company grows at 5% very steadily - safely - the equation implies the risk discount rate r = .25, or 25%. Of course the business risk of such a company is much lower. So the PEG method simply fails for slow or even moderate growth.

Friday, May 4, 2007

A Useful Word: "eisegetical"

I found a very useful new word when I read U. S. Grant's memoirs a few years ago. I wrote it down & finally looked it up [btw, it's a tough word to find in my dictionaries; I had to look in at ]

"eisegesis" is a plural noun that means "an interpretation, esp. of Scripture, that expresses the interpreter's own ideas, bias, or the like, rather than the meaning of the text."

So "Eisegetical" commentary would be commentary that expresses the commentator's own ideas & bias, not the actual text. [NB: the stress is on the "ge" or the "get" syllable, pronounced as a soft "g" viz. a "j" ]. "eisegetical" is "ahy-si-jet'-ic"

That's exactly what so many Bubblevision Fed commentators give us. And Liesman, too. And all those economists. They must "eisegetors" ;-)))

Those dirty eisegetors. ;-)

Protect Yourself at All Times

Oscar de la Hoya's tip on boxing is paraphrased from the referee's final instructions in a fight. And he was correct, too, that it applies to many life situations. ESPECIALLY the stock market.

"Protect Yourself at All Times."

That's why I'm checking the news & markets every day. I'm 150% long and don't want to miss something that gives us a clue that the economic trajectory is changing.

Btw, I do get a feeling that asset allocations are sucking some money from many commodity markets. Maybe the $$$ is going to US big caps. I'll check the commodity index fund positions this week to see if something shows up.

Valuation IV. Growth.

So now we have the basics. You know why valuation is so hard, and so valuable, too. Those pesky divergences make it extremely sensitive to the growth rate, the discount rate and the TIME the growth persists. You have to cut off the growth at some point or you get a divergence for any rational discount rate or for the growth rates of common growth stocks.

BUT that long winded tome-like post yesterday did give us a valuable baseline PE: namely, a 20x PE is reasonable in today's market for a company growing steadily at the GDP's nominal long-term growth rate of 5%. [NB: use only nominal discount rates to discount nominal growth. Use real discount rates to discount real growth. You MUST be consistent or will make a huge error.]

So, when we cut-off the growth at 3, 5 or 7 years, we can use a PE of 20x to value the future earnings stream to infinity. And for a medium quality credit, I think a discount rate for earnings of 10% is a reasonable midpoint. That's today's Treasury rate plus 5%. And over 70+ years, the long-term equity rate of return is around 8-10% depending on the time period.

So I constructed a spreadsheet present value model using these numbers. I used an earnings growth rate of 10%, a final market PE of 20x for a slow grower, and a discount rate of 10%. [NB: my PE is a ratio of current price to earnings for the next year.] To keep it simple, I did it annually. The answer was 26x for five years of growth before slowing.

I actually did a matrix, using 8%, 10% and 12% discount rates and 3, 5 and 7 years of growth. The valuations ranges from about 23x for 12% discount rate and 3 years growth to 31x for 8% discount rate and 7 years growth.

So you can see how the market valuation of companies can vary as the perception of future economic growth changes and the level of interest rates change.

So what? Well, PG certainly has a growth rate of at least 10% for many years in the past and recently. It's current PE is only 21x off 2007 earnings. Du'h ->> it should be at a PE of 24 to 33x. The US stock market is massively undervalued, IIFFF my economic outlook is correct.

And for the last year, I have been correct in my expectations of how the US economy would evolve. So until some news causes me to re-assess, I'm sticking to "LONG & STRONG"

Thursday, May 3, 2007

Valuation III. Slow Growth

A few weeks ago I wrote two posts on valuation that covered (1) the baseline zero growth case [3/26/2007] and (2) low PE stocks implying declining earnings [see 3/27/2007].

The most important valuation work involves stocks with growing earnings. A simple starting model assumes a constant growth rate & that the Price P as a function of initial earnings E is given by P = E/(1+r) + E(1+g)/[(1+r)^2] + ... + E[(1+g)^(i-1) /(1+r)^i ] ... for all i. One can sum the infinite series and arrive at P = E/(r-g), so a "fair" PE is 1/(r-g). Unfortunately, unless the growth rate is well less than r, you find a divergence or a nonsensically high PE. Remember that a baseline discount rate is about the corporate bond rate plus a few percent for extra risk for weaker credits. So what to do?

First, suppose g "IS" well less than r -> such as a slow/moderate growth scenario. Suppose g is the long term real GDP growth rate of about 2.5 or 3%. What discount rate should you use? A medium quality bond yields about 6.6% nowadays and earnings are subordinate to bond payments, so at least 8% would be necessary for a stable, slow grower. You quickly find the PE = 1/(8%-3%) = 1/5% = 20x. I wanted to find an example, but from my Green Book of 35 year charts, I couldn't find any steady growers with 3% growth. Stable companies mostly had growth rates in the 8 to 12% range [Clorox, Proctor & Gamble, Sysco, most banks, etc.]. Plug those growth rates into the formula & you get a divergence.

You could argue that interest rates are unusually low, but history would contradict you. For very long periods before 1970, interest rates were as low or lower. An equity discount rate of 8% means a no growth PE of 12.5x. Since there do seem to be plenty of LBO and other private equity acquirers willing to buy companies with PEs even higher, I think an argument that the market return on equity of anything over 10% for stable growth is a stretch.

And remember that GDP growth rate was a REAL GROWTH RATE. Nominal GDP growth is about 2% more using the core inflation rate of about 2%. So nominal g is 5% or more. More divergences. Or you bump r to 10% and get a PE of 20x again.

What does this mean? Either the market is ridiculously CHEAP or the series is not infinite and "The End is Near" ;-)

The 35 year Green Book of charts casts doubt on the latter. So you can see another reason I think we are in for a great bull market.

I'll write about a simple composite model tomorrow morning that I use to guide my thinking about specific stocks.

PS: The reason I'm first writing about these analytic valuation solutions is that one needs to understand the mathematics of valuation and why PEs can have such a wide range of values. Real difference in the prospects for growth cause that wide range {& beefer mo-mo & anti mo-mo, too ;-) ].

Back in the Saddle

What a great song by Gene Autry!

I'm back in my Aeron chair in the "turret" surrounded by 13 monitors (three quad mounts & one large single) plus the TV. So my office looks like a turret on a medieval castle with battlements. I survived the Beast.

Today we have some possibly important productivity data , the weekly unemployment data, and crop exports sales data. Tomorrow is the monthly employment report, which could be important, too.

Ms. Market beat off the vile bear raid of a few days ago, & is taking good care of the real buyers who assisted her on that dip. ;-) The S&P 500 all-time high beckons. Big caps still seem stronger than small caps. Maybe we are seeing slow, steady asset allocation to stock index funds, while beefers still are playing ping-pong. Hmmm. Will they underperform this year, too?

Corn has recovered. Iowa planting is far behind. A good export sales number this AM could help. I think some acres will never get planted & some will be late, hurting yields. So a hot, dry summer weather play is setting up. That's the strategy anyway. I'd like to buy a few more bushels if the chart shapes up.

PS: I'm long soybeans, too. (not sure if I posted that). Whither corn goes, thither goes soybeans. ;-)

PPS: Good productivity, unit labor cost, and jobless claim numbers. Disinflation & stable growth rules! :-)))


I wonder why that word's usage has declined? I experienced two instances of it yesterday. First, an address we were given was missing a key element. Then a bank I use fouled up on an electronic payment. Two SNAFUs in one day. Grrrr.

The WW II generation figured that out. We should keep this word & use it.

Too many people have a lackadaisical attitude in paying attention to details, causing a lot of snafus. Maybe it's a form of the entropy of civilization, or modern life. But people can reduce it if they paid attention to what they are doing. That's paraphrased from Yoda, in Star Wars. ;-)

Wednesday, May 2, 2007

In the Belly of the Beast

No, I haven't been swallowed by the White Whale. I'm in my office in NYC (midtown area).

Yesterday seems like another day proving that "real buyers do it on the dips" ;-)

The train ride to NYC went very well - this is definitely the way to travel between Boston area & NYC (NYC to DC, too).

I guess there is some inflation - my room at the club costs more. But the coffee & bagel with cream cheese was the same. And the WSJ was the same; subway fare, too (for now). I guess I'll find out about my "World's Greatest Martini" cost at the club bar when I get my bill. I taught the bartenders how to make it. ;-)

Tuesday, May 1, 2007

Going to the Beast in a New Suit

I am traveling to the "Beast" (aka NYC) today and will return Wednesday evening.

I have a new suit to wear and new shirts, too. Both are custom tailored to fit. I've worn custom business clothing for 25 years. But I gained some weight slowly from about 2001 through early last year and my old suits didn't fit well anymore. A problem I've always had has been getting suits & shirts to fit. Years of lifting weights make my size non-standard (lol, the tailor said "weightlifting does terrible things to a body"). This new suit & shirts fit me much better and I think I'll be lot more comfortable.

PS: The action this AM still looks like beefer trading action; nothing meaningful. The Rut leading the selling and the oils selling off indicate that to me. We could get the rotation I mentioned a few days ago, but I thought they'd load up on the Rut more. I guess there weren't many real buyers in that move to the old high. The ISM mfg. number was good.

What's Going On?

I remember that line in the great spy series, "Tinker, Tailor, Soldier, Spy" on PBS about 30 years ago. Yes, I have it on DVD (& had it on VHS tape, too).

Yesterday had all the signs of a beefer selling rampage to protect their fees. The Rut downside leadership is the key tell (down almost 2%) , and the Dow moderation (down only 0.5%) means the real buyers weren't selling. All the trillions in trading funds need to generate movement to make fees and the real buyers do it on dips. ;-)

I've noticed some broad, steady selling in many commodities in recent days. I wonder if that's asset re-allocation or month end profit taking. That effect actually is common in commodity markets.

I've seen no news to cause me to re-think my outlook. Nothing has changed.

PS: USDA reported that corn planting is only 23% as of April 29 vs. 46% in 2006 and 42% for the past five year average. Good. Weather is good this week so the farmers should make progress, but rain is coming soon. They have a lot of planting to do with record acreage needed. Planting delays push the pollination phase into hotter days of summer that can really hurt yields. And a hot, dry summer is more possible as the La Nina is developing. That's why I'm long corn and corn options. (not a full position yet).