Friday, August 31, 2007

End of Summer

A long weekend begins today- hehe, so many people take the day off to stretch it into a four day weekend - so the market would otherwise be dead.

But, we have Benspeak in ... Jackson Hole - sheesh! What a Junket!

And some economic news - the PCE inflation index comes out for July. That could be important. And the August Chicago PMI number comes out. That might be a sign if the economy got hit hard by the credit crunch.

So a lot might cause big swings on a thin day.

WSJ story says that investor properties in CA, AZ, FL, NV, etc. are causing about 30% of defaults. Serial flippers got caught on their last flip. That's just the greater fool theory at work. Tough. They have no excuses.

Fed says discount window borrowing has fallen, "suggesting the bank has managed to calm markets" ?! Bullcrap! The discount rate is a penalty rate STILL. Fed fools at work, being delusional on their government paychecks. Patting themselves on the back while failing. Grrr.

Futures are up quite a bit early, purported on a W speech on programs to help subprime borrowers. That's questionable reasoning.

I bought a good bit of stock yesterday and shifted more money from bonds (TIPs) to stocks (across the board). I think the Fed will be forced to act soon even if they are too bone-headed to do the right thing anyway. So I'm positioning for the next big move up.

PS: Year-over-year core PCE inflation is 1.9% for the second straight month. Inflation is dead. Overnight money at 5.25% vs. 1.9% inflation is tight money. Having tight money in the face of a risk of a slowdown is Hoover-esq.

PPS: The Chicago PMI for August was OK - 53.4 indicating the expansion is still working - no big drop in August. Good news.

P^3S: The Bernanke speech was rather poor, imho. He's not showing any leadership at all. He's not looking ahead at all. So far, he's just reacting and making inadequate moves. It's another example of why the Fed needs adult supervision. Compared to J. P. Morgan (the elder), today's Fed is a limp-wristed, bespecked fop.

Thursday, August 30, 2007

"Confirmed" Rally !?

IBD says yesterday's "pong" bounce confirmed the rally that began mid August on the pre-discount rate cut reversal day. The Nazz had higher volume and was up over the 1.7% cutoff amount. One might as well go along with long-standing rules. IBD messed up August 2006 when they let a bearish pre-conceived attitude induce them to not accept a minimal rally confirmation signal.

And from the index charts, an inverse head & shoulders bottom does exist on the Nazz, S&P and Dow. The neckline is not straight, but the ping-pong right neck two day point might be deceptive. Well, of course Tuedays and Wednesday were ping-pong days, too.

The Bible of stock patterns - "Technical Analysis of Stock Trends" by Edwards & Magee [5th edition, 1966] says sloping necklines are OK as long as the shoulders are pronounced AND the neckline break has VOLUME. I don't often write about volume as beefers and ETF games make it somewhat suspect nowadays. But here I think it might matter. IF the inverse H&S pattern is correct, there should be resistance at the downtrending neckline, around 1475 S&P cash. So there must be volume on a breakthru if the pattern is correct. Let's see what develops.

The Fed needs to cut rates at least 50 bps.

European banks are still starved for dollars. I think the Mideast and Russia governments are holding petrodollars back, hence the Euordollar famine.

XLE is showing an intermediate term bottoming pattern. XLF might show an inverse H&S bottom, too, but it ragged.

The beefers favorite toy, the Russell 2000 index, shows a "W" bottom pattern. Some consolidation over the 50 DMA and 200 DMA might set up a big move.

It's Thursday - in keeping with trends on the "Street" lately, I suspect that many participants will start exiting for the Hamptons & other holiday weekend spots this afternoon. Maybe beefer managers with gutshot returns will play more ping-pong. Don't be fooled unless something significant occurs.

Wait for a trend unless you like risky games like I play - buying sectors I think will outperform next year. Unless you have a fundamental outlook, that might be hard for you.

I still like the big cap financial, big integrated oils, deep water drillers, miners, and Internet related Tech. That's where I'm looking for my 30% gains over the next year.

Even with the carnage in some of my stocks, the Alpha Fund is still up 34% YTD. My high was 51% so I'm well off those levels. And I've shifted a bit, selling most of India and buying the big cap financials.

PS: The iPhone works great! I put some Julie Andrews and Judy Garland songs on it, along with some Artie Shaw and some old World War I era songs, like, "It's a Long Way to Tipperary". Later this morning, I'll put my stock lists onto it. The picture, sound and ease of use are superb!

PPS: Selling more TIPs bonds at the close & buying stocks: US, Pacific, Europe, Emerging Markets, some REITS, too.

P^3S: Bought some more AA, DOW and WB.

Wednesday, August 29, 2007

Fed Fools

The FOMC minutes released yesterday showed the Federal Open Market Committee as being stunningly out of touch with reality, almost delusionally focused on the inflation even as it has shrunk under 2% year over year core PCE.

They disregard the known lag in their policies.

They disregard turmoil in the commercial paper markets for even high quality paper.

They disregard months of trending declines in core year over year inflation rates.

They act like ivory tower scholastics discussing how many angels can fit on the head of a pin.

I've jokingly ranted in the past about them being on vacation in Nantucket or, I suppose, going to Jackson Hole to be worshipped as gods. Those FOMC minutes seems to confirm my rant.

The discount rate cut has obviously not worked, contrary to the innumerable buttkissers lauding them as geniuses.

So what does it take to get them moving? Maybe a big collapse? Who knows, they are such fools!

Perhaps they should ponder instead how many of the common man need to lose jobs or homes to feed their egos.

Grrrrrrrrrrr. In the past I've ripped them, such as in May 2006. My anger at their antics always seems to be confirmed. The Fed is a very dangerous institution. It needs adult supervision.

PS: I'll be out most of the day. I'm going along to a sheep herding training session with my two Kelpies, Sky and Krypto.

Tuesday, August 28, 2007

Bears Growling Again

That "subprime" bone is getting quite well chewed, so they must be hungry. I suppose they want to scare the public some more and run some stops. They keep finding "new" items to try - the latest is rising credit cards delinquencies ... uh, what did they expect in a period of slower growth that began six months ago?

Richard Hoey on Babblevsion is talking about the need for a steeper yield curve to let the banks take on more paper - he's right. The Fed should quickly cut to 4 to 4.5% overnight rate with the discount rate equal to that rate, not higher. If that rate is a "sign of strength" as the Fed says, WHY is it higher? That's illogical. The Fed is really behind the curve - swinging at air.

Nothing new in yesterdays charts.

Uh ... since there are known to be billions in subprime loans out there, why is it a "surprise" when a bank or institution announces they have some? Where do people think those loans are? In the phantom zone?

Perhaps I've lived through so many real crises and panics, that I'm jaded. This one sure seems like a yawner to me.

So far it's still the "Rich Man's Panic of 2007"

PS: I did buy that iPhone yesterday. The sales demo was quite good - even a technological troglodyte like me might be able to use it. So this morning I'll activate it. More later.

PPS: Anyone who bought little, illiquid "slices & dices" of a MBS - whether residential or commercial - or of a CDO - and expected to be able to sell it before maturity is & was ... a fool.

P^3S: All this anguish about "subprime" and we haven't even had a moderate bank failure or other bankruptcy. One or two crummy mortgage "bankers". Sheesh. Whiners.

P^4S: The market is down a good bit, much after the Fed minutes came out showing the FOMC is a bunch of out-of-touch ivory tower dopes. Everyone was kissing their butts about that "genious" move. Not me. And now we see it proven to be a failure. The Fed is a very dangerous institution and really needs some adult supervision.

Monday, August 27, 2007

A Monday in Late August

Zollars of Yellow Roadway says truck shipments are trending lower since March. Uh ... the Fed is behind on the count.

No major catastrophies over the weekend.

I noticed that Wachovia Bank has a dividend over 5%. Darn, missed that one. I'll start a position today.

The Russell 2000 is setting up a W bottom. It needs a couple closes over 800. The other major averages might be setting up inverse H&S bottoms.

I'm going to buy an iPhone this afternoon - getting modern!

PS: The persistent bearish attitudes that I've heard since the bottom in 2003 have never stopped. I heard more today. The World is Ending! They come up with one "sign" after another. Maybe I'm delusional. But it seems that nothing is really different. The signs they see are just those of moderate growth, which has been the case for months. So I think they're just wrong - fighting the wrong war - the last war. Mostly Bubblitis, as if one crash or bear market means that another simply must be happening now.

Before Yalta: The Background

From our modern vantage point, the Yalta conference is often seen as a turning point in the history and structure of modern Europe until 1990. Undue focus on the decisions made there, while neglecting the events of the preceding three years simply gives one the wrong impression, however, that the Yalta Conference was decisive. The book, "Armed Truce - The Beginnings of the Cold War 1945-1946"" by Hugh Thomas contains well researched summaries of that background with excellent source material. For the record, Hugh Thomas is a British national.

Another error made by people today is putting the United States at the crux of those decisions. In 1941 before Pearl Harbor, the United States was simply uninvolved in European diplomacy and politics. The United States was still in a period of isolationism and had no experience in European realpolitik. The United States was involved in the war at the margins, by supplying Britain with Lend-Lease war supplies and helping Britain fight the submarine menace in the Atlantic. But there were no treaties of mutual defense with any nation in Europe. And the US and Britain did have some points of conflict, namely British colonialism.

Here are some key facts that influenced Yalta.

1. The Atlantic Charter - an unsigned statement of principles made by Roosevelt and Churchill on August 4, 1941 - was somewhat based on Woodrow Wilson's "fourteen points". The statement provided that the US and Britain "desired no territorial changes contrary to the wishes of the peoples concerned; respected the right of all nations to choose their own forms of government; and wished to see self-government, and sovereign rights, restored to peoples who had been deprived of them."

2. In December 1941 Stalin demanded British recognition that Soviet boundaries after the war would be those of six months before. That meant, in particular, the incorporation into Russia of the territory conceded to him by Hitler. Namely this was Estonia, Latvia, Lithuanian and eastern Poland. Britain rejected this plan, as did the US.

3. Stalin accepted the Atlantic Charter on January 1, 1942, after the United States entered the war. The obvious contradiction of the Atlantic Charter with Stalinism was ignored. But firmness did work - Stalin needed lend-lease supplies and was hard pressed by the Germans.

4. Churchill began backtracking after only a few months as he wanted a free hand in negotiating deals with Russia, saying "that the clauses on self-determination in the Charter did not apply to the territories of enemy states. He also urged Roosevelt in March 1942 that 'the principles of the Atlantic Charter ought not to be construed so as to deny Russia the frontiers which she occupied when Germany attacked her'." The freedom of Estonia, Latvia, Lithuanian and eastern Poland was thus cast aside as an objective.

5. The US took the Charter more seriously. The US Department of State expressed its support for the principals of the Charter in discussion with the British: " 'if we did not build our new world on principals, we would crash again.' "

6. Through 1943, the US was not ready to discuss the future of Europe. "All officials in the US declined responsibility for detailed discussion of European frontiers. Equally firmly, being essentially 'universalists', they declined to consider anything so machiavellian as allowing 'spheres of influence' anywhere."

7. "By mid-1943, the British foreign secretary was uneasily admitting that his Polish policy was also 'contrary to the Atlantic Charter, but saying it had to be pursued to secure Soviet collaboration after the war."

8. By late 1943 the Red Army had proven that it could defeat the German Army and was rolling back the Germans across the entire Eastern Front.

9. Discussions at the Tehran conference between Stalin, Churchill and Roosevelt, the borders of postwar Poland were determined by Churchill and Stalin. Roosevelt did not want to play a part in it. The American contribution to this despicable act was simply good maps. "[Roosevelt] indicated that he would not resist Stalin on these matters."

In conclusion the focus on Yalta as a crucial, determining event for postwar Europe is wrong. The decisions of Yalta were really simply a ratification of the existing trends, earlier small steps, and exigencies of war. No concerted, united effort by Britain and the United States at Yalta could have changed anything significant in postwar Europe. That path to the Cold War was built during the prior three years of mistakes, appeasement, backtracking and indecision. Early indecision is really a decision to let the position of the armies at war's end be the deciding factor. That was bad to the peoples of eastern Europe. Residual American isolationism left the US unable to make timely, critically important decisions for postwar Europe.

My next [last?] post on this subject will be some speculations how the world could have been changed by stronger leaders and what they needed to support them.

Friday, August 24, 2007

Fed Failure

The ivory tower crowd fails again. Mr. Potter style bankers want to grind the common man down further. Timidity and caution rule in the cosseted halls of the Federal Reserve. What! Me Worry? They all have government paychecks, health care and pensions.

I'd like to bitch slap some sense into them.

Look, you dopes [referring to the Fed officials], to make a CHANGE in human behavior, you must act decisively with a substantial impulse. Baby steps and slow applications of policy changes just don't cause a transition in patterns of human activity.

Physics is riddled with proofs of this concept. Adiabatic invariants stay constant under slow, small changes no matter the cumulative size. Particles or systems in quantum states do not change until acted on by enough energy - at once - to shift their energy level. Einstein won a Nobel Prize for this insight.

Gasoline demand provides a clear human behavioral example. Demand drops dramatically when a Katrina event causes a sudden spike in prices. But a slow rise in prices such are this spring have no effect on demand.

This pittance of a discount rate cut is a failure. No bank is using it except for symbolic shows of support. Why? That's obvious! The rate is TOO HIGH!!! Why the heck is a bank going to borrow at 5.75% when it could borrow at 5.25% in the overnight market? Is the Fed stupid? Timid? Cautious? All of the foregoing?

The Fed should make a decisive move: lower the overnight rate to 4.5%, and lower the discount rate to 4.5%. All at once!!!

PS: Another example of Fed timidity causing failure for a policy was the long string of silly 0.25% rate increases a few years ago. Those slow, small increases did NOT slow housing speculation fast enough. So they permitted the housing bubble to grow too large. A quick bump up by 1% once they decided to start raising rates and then a string of 0.5% bumps to get to 4.5% to 5% faster would have stopped all those ARM subprime loans in 2006. Grrr.

PPS: The European interbank market is still gasping for air. I wonder if drains from big players like the Russian or MidEast is affecting interbank lending?

Yalta Appeasement II

Reading the book, "Armed Truce" [by Hugh Thomas, published by Atheneum 1987], which is a thorough history of the 1945-1946 period when the post World War II landscape was being created, I found statements by two high level foreign affairs officials of the Soviet Union that support my theory that US and British appeasement of Stalin created or worsened the Cold War. [See post of August 4, 2007 for the original posting of the theory.]

Maxim Litvinov was Deputy Commissar for Foreign Affairs in 1946, working directly for Molotov who had been at Stalin's side since the 1920s. From page 57-58 of "Armed Truce" -

"[Litvinov] asked the United States journalist, Edgar Snow, author of that most influential of books, 'Red Star over China', 'Why did you Americans wait until now [fall 1945] to begin opposing us in the Balkans and Eastern Europe? ... You should have done this three years ago. Now it's too late, and your complaints only arouse suspicions here' ... In 1946, Litvinov suggested that Stalin might have acted with more restraint in East Europe if the West had been firmer and less equivocal.
"The views of Litvinov appear to have been shared by others: the bleak Soviet ambassador to London in the last years of the war, Gusev, also apparently said that if the West had taken a stronger position, the regimes of Eastern Europe might have been saved from Communism."

Nothing is certain in the affairs of man, but the appeasement of Stalin before and at Yalta certainly opened the door for his expansion in Eastern Europe and created favorable conditions for Stalin to restart the totalitarian movement for world domination that had been deferred during World War II.

Thursday, August 23, 2007

Is It Over?

I mean the Rich Man's Panic of 2007?


But the end game is unfolding rapidly before us now.

BAC invests $2 Billion in CFC in a convertible preferred stock. Hmmm, shades of Warren Buffet - he did a similar thing in 1987 for Saloman Brothers. That's his signature security. And Buffet owns a big chunk of BAC. Hmmmm. Interesting.

Wilbur Ross looking for subprime investments. Hmmm.

This track is following the script of the commercial real estate bust of the early 1990s, but about 10 times faster. That's not surprising, since then people were having to figure out the solutions. Now, they all have first hand experience on how a real estate credit bubble gets busted and mopped up. So they can move ultra-fast.

The beefers & investors holding the subprime debt are getting a bigtime haircut. Investors buying subprime paper at huge discounts can restructure the homeowners' debt and still make money - since they are buying the debt at huge markdowns. Political pressure against foreclosures and their huge costs will motivate this scenario, too. At the mortgage loan level, I think the combination of a big lender haircut & re-writing the homeowners' debt (as described a few days ago here) will do the job.

NYSE short interest dropped 3% - not really much. Some bears covered. The WSJ doesn't publish the full table now - cheapskates! Trying to save paper? Grrr. Maybe Barron's will publish the full table this weekend.

I'm still following the time diversification process. Be patient. Get good entries. The bears will keep hitting the market, so wait for dips.

Wednesday, August 22, 2007

Be Careful What You Wish For

That's a cliche one hears all the time, but has elements of truth especially for human psychology.

"Everyone" was looking/wishing for a 10% correction. Uh ... they got it last Thursday. From the charts, some real buyers really did put out big bids there and stocks rebounded heavily. One had to be an active trader to get those low prices, as the closing prices were quite off the lows that day. That's one advantage of ETFs over index mutual funds. I missed those intraday prices - I think I was at the farmer's market getting some good vegetables. Oh well ... I'm not afraid to buy anyway, but am waiting for more time to pass since my last big buy. Use time diversification!

"Everyone" was complaining about too much global liquidity. Uh ... that's long gone now. Europe is gasping for liquidity as its asset-backed commercial paper market is gutshot. From what I can tell, the conduits were not properly structured [I wrote about that some yesterday].

"Everyone" was griping about dollars flooding the world. Uh ... Europe has a dollar shortage now - its banks need dollars from the US to fund lines of credit.

Listen to me. The world is NOT ending. The world economic growth trajectory is intact. The US still has a trade deficit and is still sending dollars overseas to provide global liquidity and monetary base for the world money supply [I wrote about this concept a few months ago - see February 7, 2007 post]. So far, the government dolts have done OK - not great, just OK. They need to do more, but have shown signs of a willingness to do what's needed. I think Sen. Dodd's political pressure yesterday was a good move. Those ivory tower economists need a bitch slap of reality once in awhile. Congress has real power - if it gets motivated, it can really move fast and do things.

Use time diversification! It's a bull market. [uh ... unless the Fed fools stick another sword into it.]

If the global growth story is still intact - as I think it is - the oil & gas & miners have pulled way back. If you were waiting to get some of those, you might consider starting long term positions with a time diversification program of your own. BHP reported stellar earnings this AM - that's my largest miner position. My largest oil & gas is CVX. I own lots of stock in these groups, but do add bits & pieces here and there. I still think a 21st Century "Greater East and South Asia Co-Prosperity Zone" is forming and demand for oil and metals will grow for years to come.

PS: Mmmm this coffee tastes good. It's "Sumatra Mandheling" dark roast - pure and black - a man's drink ;-). Fresh hot "Joe" in the morning is a pleasure of life!

Tuesday, August 21, 2007

What's Going On?

COF closes Greenpoint Mortgage Unit, which was the creator of the Alt-A loan. That business was valued at about $6 billion a few years ago. That's fitting.

KKR Financial can't roll its $5 billion commercial paper ("CP"). Its creators, "the" KKR say they'll put in $100 million as part of a $500 million stock offering. Hmm. That's "equity". So the unit was undercapitalized? Could it be that a firm set up by LBO-types had too much debt? lolol. The WSJ story says the units sold asset-backed CP to fund ... mortgage securities.

Uh ... where are the back-up bank lines of credit for the CP? I guess the cupidity of KKR Financial knew no bounds as they wouldn't pay for them, risking the entire company. How did the CP get rated? I wonder if the rating agencies relaxed conditions? In my day - many moons ago - any asset backed CP programs needs back-up bank lines of credit. Maybe that went the way of the 20% down payment.

WSJ from yesterday has an interesting story about many German banks having severe problems and a story on Babblevision this AM early by Sylvia said several more have failed. Apparently those banks created off-balance sheet conduits that sold asset-backed CP and invested in securities. D'uh? Isn't that just an off-balance sheet bank? Didn't Enron go under through off-balance sheet financing? It seems those asset-backed CP programs had no back-up bank lines, either.

Does no one do risk analysis anymore? Or is the infatuation with derivatives so intoxicating that the modern masters of the universes don't bother?

If an entity issues CP to buy mortgage securities, there is a miss-match in (a) maturities, (b) fixed-floating rates (e. g., LIBOR vs. a fixed rate index like Treasuries), (c) basis (e. g. Treasuries vs. the securities market yield), and (d) default risk in the securities. Not all can be hedged. In fact, only (b) can be hedged. Hedging (d) with a "credit swap derivative index" is just a fiction as that introduces another factor of basis risk. That's why "EQUITY" is needed! That's why back-up bank lines are needed! Sheesh! We knew and did this 20 years ago. What the hell is going on?

CP is a very touchy security - like an unexploded bomb. When it becomes due, it's DUE! No questions, PAY ME! Issuers of CP need armor protection or risk instant bankruptcy.

German ZEW August business confidence index was very low this AM - way below expectations and way below July. The German bank problems must be impacting that.

Here's why the Fed MUST cut the overnight rate. The discount rate cut simply will not work as the overnight rate is too high forcing the discount rate to be too high. Think about it! The discount rate is 5.75%. You've got a bunch of high grade securities yielding ... 5.25%. That was a pretty good rate a few months ago. How can you finance those thru the discount window and lose money every minute? So you can't. So you have to discount them further. That means more liquidations. Which is what the Fed "says" it wants to prevent.

The Fed is causing more liquidations by keeping the overnight rate unnaturally high. Look at the Treasury Bill rates! Money market funds are scooping up T-bills and cutting CP investments. Why? They are worried they can't sell CP holdings if they get redemptions. Why? The discount rate is simply TOO HIGH!!! Financing that CP thru the discount window at 5.75% creates LOSSES and then they risk "breaking the buck" and failing.

Everyone patting the Fed on the back for a "brilliant" move are mostly wrong. That discount rate policy change would work IF AND ONLY IF the Fed cut rates simultaneously - a lot.

The Fed must cut the overnight rate to 4% and the discount rate to 4.5% so the yield permits funding of the CP and other collateral at a positive spread.

Heck, the Fed is effectively raising rates! Issuers of CP used to get 5.25%. Now they must pay at least 6% to issue the paper and then have it financed by the discount window at 5.75% as a positive spread is essential for a bank to do this.

These dolts in DC really need smacked in the face. A functioning CP market is a primary reason the Fed was created. Are they just stupid or insular or what? What the heck are they worried about? Their inflation fighting image! Phooey! Fools!

PS: A Babblevision guest is making the point tht non-bank entities acting like ... banks are a cause of this situation. The non-bank "banks" depress margins and hurt the banks; they get better margins by avoiding bank regulations, but forego access to the discount window and other safety nets. Uh, I've been ranting about entities like hedge funds acting like banks for ... many moons. Other non-bank banks are the mortgage "bankers" like Thornburg, which are really just finance companies.

PPS: this also shows that once these non-bank banks get wiped out, the banks will make good money. That's part of the logic for my big bank play: BAC, C, JPM - more in BAC than other two.

Monday, August 20, 2007

Monday Review

Babblevision must really have a hard time booking US guests on its early AM show, "Worldwide Exchange" - a very good show normally; they have Sutty on again ... babbling nonsense.

S&P cash is up to the 200 DMA. There is lots of resistance overhead. An Elliott Wave ABC major correction has been completed. Interestingly, the Russell 2000 shows the most relative strength and has a pending W bottom pattern in place. A couple closes over 800 would confirm that.

Countrywide reversed course and is now laying off people ... uh ... what a surprise! I still think they are doomed - perhaps they'll be acquired now.

WSJ has a long story about how the Fed made it's decision last Friday - obviously they have good sources involved in it. Uh ... I didn't see any mention that the Fed read this blog, though :-( Too bad, it might have saved them a lot of anguish ;-)

Why should I canonize these guys? Phooey! They're my age and were educated similarly to me - or worse. And some were in my class in college. I have high standards. If I could figure it out as an outsider, just reading and thinking, why does it take them 10 days to realize they screwed up? All they had to do to catch up was read this blog ;-))))

I'll keep kicking their butts until they get it right :-))

PS: We watched the movie, "Semi-Tough" last night. It's a hilarious parody of all the self-help fads in America in the early 1970s. Check it out, if you've never seen it.

PPS: It is interesting that this funding panic originated in Europe. I guess many of those highly rated MBS and CDO classes with some subprime exposure were sold overseas to small banks in Europe. And many small European banks fund with commercial paper. So when fear spread, they were unable to roll the paper. The ECB came to the rescue to prevent many bank failures. Commercial paper is a very dangerous funding source - it must be backed up with irrevocable bank lines.

P^3S: Odd. The blog is very slow in posting this. I wrote it about 5AM EDT.

Sunday, August 19, 2007

Uses of Wealth

The private enterprise system and private property [aka that Marxist term "capitalism" that I dislike] fantastically motivates people to create wealth. Some create great wealth. Here's a quote from Thucydides that sparked my thinking - perhaps I first read it referenced in Erasmus' "Praise of Folly". The quote is from the famous oration of Pericles.

"We cultivate refinement without extravagance and knowledge without effeminacy; wealth we employ more for use than for show, and place the real disgrace of poverty not in owning to the fact but in declining the struggle against it."

Other than Bill & Melinda Gates, who among the modern mega-rich emulates the beneficence of Andrew Carnegie who donated everything to create libraries in multitudes of small towns in America, including my home town? Following Pericles, his great wealth was quickly used to increase the intellectual capabilities of the entire nation. It was not hoarded in trust or a foundation to perpetuate the glory of the donor. The Gates Foundation has a fixed time limit to spend - use - all the money.

Modern rich and powerful people lobby to eliminate the rule against perpetual trusts, so they can create a new de facto nobility [not de jure as no titles can exist in America thanks to the Constitution, Article I, Section 9]. Named foundations are created that, barring stupid investments, last forever as independent institutions. Their independent boards of trustees over time can completely diverge from the donor's wishes - only the name is perpetuated. The Ford Foundation is the quintessential example.

And then I read Bill Gross in the WSJ, August 4-5, 2007 issue, page B4: "... now is the time, long overdue in fact, to admit that for the rich, for the mega-rich of this country, that enough is never enough ..." and "... "A thirty million dollar gift for a concert hall is not philanthropy, it is a Napoleonic coronation."

Much of the mega-rich seem to just want more, or to be able to brag about their "returns", hence the current infatuation with hedge funds. Or the money is spent in great shows of extravagance. Many modern mega-rich emulate dukes & princes in the past courts of Europe in their opulent parties, colossal mansions, and vast landholdings. Or endowing events and groups with the primary purpose of creating a perpetual edifice inscribed with the donor's name. Or donating to universities for fund named endowed professorships or named institutes therein. Younger scientists - those actually making most of the discoveries ... get little.

Is using the funds for increasing the capabilities of the human race ever a consideration?

Some do. A recent WSJ article about a conference in mathematics sponsored by the American Institute of Mathematics that was founded by John Fry seems to be one fine example. From its website:

"The American Institute of Mathematics, a nonprofit organization, was founded in 1994 by Silicon Valley businessmen John Fry and Steve Sorenson, longtime supporters of mathematical research.

The goals of AIM are to expand the frontiers of mathematical knowledge through focused research projects, through sponsored conferences, and through the development of an on-line mathematics library.

In addition, AIM is interested in helping to preserve the history of mathematics through the acquisition and preservation of rare mathematical books and documents and in making these materials available to scholars of mathematical history. "

Pericles would approve.

Citation: Great Books, Vol. 5, Thucydides, page 397, section 40.

Friday, August 17, 2007

TGIF and More

Big reversal yesterday - the S&P closed green after touching 1370 intraday. Volume was very high. Trend reversals have often occurred with similar patterns in price and volume. The real buyers likely scooped up stock at the 10% correction level, and the virtual shorts covered when the selling momentum dried up.

So that's a new "Day 1" in a prospective rally count. We need a big up day after Day 4 on higher volume to confirm the rally.

BAC is setting up a small H&S bottom pattern - needs a couple closes over 50.2. C and JPM bounced strongly, as did MS. Afterhours, HPQ had strong earnings and raised guidance.

In yesterday's comments, I mentioned a small silver buy and a CSCO add.

I didn't pull the trigger on buy#2 per yesterday's "time diversification" posting since the market was recovering and I figured I wouldn't get a price close to S&P 1370 at the close. That proved correct. So I'm still waiting.

Japan markets were crushed overnight - probably beefers reacting to the yen craziness, or locals getting margin calls.

PS: Fed cuts discount rate 50 bps to permit funding of ANY mortgage collateral. Very early pre-market reversed huge from down big in early futs to up huge. Beefer shorts are being grilled.

PPS: I might pull the trigger on my buy #2 on any day with a dip, since the Fed seems friendlier now and not "completely" wrong-headed. Yes, I let policy changes & long-term thinking affect my tactics, as any long term investor should.

Thursday, August 16, 2007

Using Time Diversification

I analysed my time diversification buying program. My prior buy was the close on Friday July 27 at about S&P cash 1460 in the Krypto Fund. I sold some TIPs bonds and bought index funds for US, Europe, Pacific, Emerging Markets and REITs.

I think my next add point on selling bonds and buying more stocks is either (A) early September or (B) 1375 on the S&P cash index. I need either more price diversification or more time for the situation to develop.

This will be buy #2 of 3. The final buy is a pure time play for mid-to-end of October. By then this "crisis" should be fully understood.

Late October is also my add point on the Alpha Fund purchases of the big banks: BAC, C, JPM and MS (BAC is largest - about equal to 40% of total). This Alpha Fund add will be new cash I will be investing then. Otherwise, I'm just making small buys in things like CSCO and DOW. All are long term buys.

Homeowner Arithmetic

I did some calculations to get a better feel for some numbers being bandied about relating to home mortgages.

The FNMA and Freddie Mac loan limits for a "conventional" loan is $417,000. So those government sponsored entities can buy unlimited amounts of home mortgage loans up to that principal amount that meet "conventional" standards. For lower income people, the FHA loan limit is about $200,000 and down payments can be as low at 3%. FHA loans go into GNMA securities which are 100% guaranteed by the full faith & credit of the US.

"Conventional" loans are made at 80% loan-to-value, [more with private mortgage insurance] and have 28/36 payment ratios, meaning that (A) the principal, interest, taxes and insurance ["PITI"] can be no more than 28% of gross monthly income, and (B) PITI plus other debt service can be no more than 36% of gross monthly income.

So what gross income can qualify for the maximum FNHA loan? For a 30 year fixed rate loan at 6.5%, the debt service constant is 7.5848%. Assuming taxes and insurance are about 1.5% of the home's value per year. With a little algebra and setting the loan amount at $417,000, the annual gross income that can qualify for that loan is ... about $140,000. The annual median household income in the US is about $47,000. 80% of all households have median income under about $92,000. So the vast majority of Americans have incomes where standard maximum affordable housing expenses will fit into FNMA and Freddie Mac program limits.

The median home price in the US is about $220,000. A "conventional" loan of $417,000 - the FNMA max- is 80% of value, so that corresponds to a home price of $521,000. Since that is 237% of the median price, obviously vast majority of homes in the US can be financed FNMA and Freddie Mac loan limits.

Hmmm ... the vast majority of Americans have incomes where standard maximum housing expenses can fit into FNMA and Freddie Mac limits, AND the vast majority of homes have prices that also fit into those program limits. So that covers the vast majority of the US housing market. And FHA programs can help lower income people buy homes.

Uh ... what's the crisis?

PS: FHA - reminds me of a fine song from the 1940s, "Will You Still Be Mine" sung by Betty Hutton, that had lyrics referring to events taking a long time. The memorable line was something like, "... when we've paid our FHA note, ... will you still be mine?" FHA loans were for 30 years, a very long time.

PPS: I remember being "house-poor" in 1984, as I bought the biggest home with lots of land that I could afford with conventional 80% financing. Lololol we had almost no furniture for a year!!! It was very cozy, watching TV in the living room leaning on some big pillows!

P^3S: Today's WSJ has a story about a family that is now "house-bankrupt". They make $90,000 gross. So with some algebra, we know they can afford housing expenses no more than $25,000 per year. That means they can afford no more mortgage loan than $266,000. They have a 2/28 mortgage loan with a balance of ... about $560,000. The story reads like a cluster FUBAR: higher RE taxes, lower home prices, a prepayment penalty (!) before 3 years, a big rate reset, on and on. Big dreams plus slimy mortgage lenders is a train wreck. Sad.

P^4S: By the way, this math also shows you that the above subprime 2/28 loan is really worth about 47% of its face balance. A lender haircut plus restructuring would produce a loan marketable to FNMA and Freddie Mac even today.

P^5S: I wonder how many square feet were bought in CA for that $567,000 purchase price?

P^4S: The huge reversal and green close on the Dow and S&P will count as a Day 1 for the IBD "rally" count. Volume was up, too, vs. y'day.

Wednesday, August 15, 2007

Wednesday - What! Me Worry?

That's the line from Alfred E. Neuman, the youthful fool of Mad Magazine fame. Yes, I still subscribe and read Mad magazine once in a while ;-)

Yes, I'm still bullish. I think this is still a rich man's panic - investors in beefers are panicking as are their managers. And the mortgage lending industry nonsense is returning to the time-tested practices: 80% loan, verify income, debt service coverage, etc. Golly, how onerous!

That was the standard from the 1930s until recently when the creative finance guys and hedge funds got involved. People could borrow over 80%, but had to buy mortgage insurance or qualify under the VA or FHA.

WSJ: warehouse lines to many small mortgage bankers and brokers are going away -> their product was garbage and there's no market now. Also, "... allowing banks to grab a bigger share of the market" -> that's part of my reasoning for buying big positions in the big banks, like BAC.

WSJ: US move to expand access to data from spy satellites is likely to to ignite privacy debate. Hmmm ... living in the woods with overhead concealment seems smarter & smarter ;-)

Today's CPI number is important. The key data points are the core CPI and the year-over-year core CPI. Last month, the year-over-year core CPI was 2.2%. I'd like to see a number that is flat or a downtick.

On another topic: let's deconstruct this quote from Reuters ->
"WASHINGTON (Reuters) - The top U.S. commander in Iraq will recommend pulling U.S. troops out of some areas where commanders believe security has improved, the Los Angeles Times said on Wednesday, citing Bush administration officials"

Did you notice that word, "recommend"? Uh, the "top US Commander" will "recommend". Hmmmm. Is he the "commander" or not? Or is the "war" being run by "Bush administration officials" - aka micromanaging? I'll bet it's micromanaging.

I think that Rumsfeld, Cheney and Bush and now Gates, Cheney & Bush were micromanaging all along. And the Pentagon buttkissers, too. That explains a lot of the odd, counter-productive, silly decisions that have been made for five years. Like letting Fallujah fester & develop into a terrorist/Al Quaeda base early on. And all the concern about being "nice" to the Iraqis. And the rules of engagement that tie our troops into knots. Once again, the W Bush == Lyndon appellation works perfectly. Phooey!

More W idiocy: WSJ - "The Bush administration is moving towards blacklisting Iran's Revolutionary Guard Corps as a 'terrorist' organization, subjecting at least part of the entity to financial sanctions." Huh? What the heck were they before - an Iranian Boy Scouts????

Is all official Washington stupid or part of the problem? They seem to have a serious "enemy recognition" problem!

IF I was paranoid, I'd think they want more terrorism so they can grab more power.

PS: I guess Warren Buffet reads this blog - he took a stake in BAC, among others ;-))

PPS: Good CPI numbers - core yoy was flat with June at 2.2% Good news.

P^3S: Santelli on Babblevision confirms what I've been saying - no mortgage funding problem for the traditional home loans: 20% down, income verified, 30 years, fixed rates. The creative financing is dead, though.

P^4S: Hello Ben? Three month T-bills are at 4%. Your overnight rate is ... 5.25%. Uh ... don't you think your monetary policy is a bit tight?

Tuesday, August 14, 2007

More of the Same

Hedge funds dodge taxes on loans using foreign sister funds.
Removal of uptick rule increases volatility.
Small investors get nailed making arcane trades.
Options trading by small investors was up 46% yoy in July at OptionsXpress
Margin interest was up 20% at same firm.

Is anything new under the sun?
Does anyone ever pay in cash anymore? [except me}
Does anyone ever just buy a stock to hold awhile any more? [except me]

Jesse Livermore: "The big money is made in holding stocks for the big move" [paraphrased]

WMT misses EPS big, says low income people under pressure.

Hello Ben! Are you listening? Or on vacation in Nantucket with the other ivy leaguers?

PS: Bring back the uptick rule! Apply it to ETFs! Keep stock investing ... as stock investing. Get rid of this creep to commodity style trading in stocks. Yes, I an a proud anachronist. The old ways were better.

PPS: Bought some S&P Sept. eminis for a TRADE on a potential W bottom. If the pattern breaks, I'm gone. Otherwise will hold awhile. In around 1439 for Sept contract.

P^3S: I took the small loss near the cash close. I don't like the cash close under 1430. The W pattern is now suspect since the cash close was under the first leg close.

Monday, August 13, 2007

Monday Review

Oh ugh! Sutty on Babblevision again. Sheesh - is everyone else on vacation?

So what's new?
ECB and BOJ add liquidity again.
ECB mulling a dollar-euro swap with the Fed. That's interesting! I remember Fischer Black explaining that as a way to support - or peg - currencies.
Karl Rove to resign.
Mitt Romney wins Iowa straw poll - shows organizing ability - he's a successful businessman, he should have that.
Food inflation hitting Europe now.

In September, presidential politics will start to heat up.

On Friday, S&P 500, XLF, XLE, Nazz comp, Russell held lows. Dow Industrials and transports did not on intraday basis., neither did the Nazz 100. Since the DJIA was the index that had the followthru day, I think this "rally" is suspect as the DJIA broke the prior low.

I can't log-in to IBD online. I'm getting really annoyed with them. They might lose a subscriber.

So what could happen to spark another sell-off? I don't think more "subprime" screeching will do it now. But I think that Countrywide Finance could go under. That firm made huge numbers of the garbage loans to get fees. And they service many loans so will be the name foreclosing. Political pressure could get intense. Bad publicity could mushroom. And I read this weekend that they were adding staff recently. And it's hard to see MBS investors trusting their product, except perhaps for garden variety fixed rate loans. And they have residual interests in the MBS trusts that bear first loss on the MBS. And their servicing income gets cut when the loans default. So I see many, many pressure points for CFC.

Besides, the CEO is a pig in his compensation, he sold huge amounts of stock at the highs ... and he has too fine a tan for trust ;-) Anyone with a fine tan in a business suit gets a question mark in my book ;-)

PS: Retails sales were OK for July. MBA says prime mortgage delinquencies were down for Q2 [saw headline but can't find the story - checking]. Where is the contagion?

PPS: My closing out of soybeans and natural gas were very poorly timed. Ugh!

P^3S: Wall Streeters [on TV at least] are so self-centered. And the analysts, too. All they can think about is how a Fed rate would affect the beefers - bailout or not. But what about the common man scammed [some] on the other side of those slimy ARMs. Do they ever think about that? Nope.

Sunday, August 12, 2007

Two Blunders to Contemplate: Hubris?

Reading the weekend newspapers I was struck by two similar but unrelated blunders of humans. Both seem to be traceable to hubris in the people responsible, in these cases an unwillingness to check and re-check data and consider that their theories may be wrong. "Hubris" means excessive pride. The Greeks knew it often led to disaster in man. Cromwell's famous quote rings in my ears in these situations: "I beseech you, in the Bowels of Christ, think it possible you may be mistaken."

Investor's Business Daily, page A18 of Monday, August 13 issue, lower left corner article: NASA was forced to correct errors found by forensic audits of data in the temperature record and - mirabile dictu!!! - the hottest year in the US since 1880 was 1934, not any recent year! And the error was a Y2K bug! See for details. Isn't that amazing! And one wonders why oh why didn't NASA spend some time & money actually checking its data - even a cursory perusal of the actual data charts would show an obvious problem! But they didn't bother to check. Heck why check the data - it fits their theories! Colossal hubris at best! At worst, a fraud to retain government funding!

Another site has photos of actual measurement sites. Take a look at a few now being documented [golly, someone's really checking now!!!] -> under "Albums". Uh, can anyone honestly say those measurement stations are not massively affected by the urban heat island and heating from human-built structures? Has NASA documented and checked its raw data? No! They just want the money to pump out theories backed by ... nothing.

The weekend WSJ [page B3, upper right corner, Saturday/Sunday August 11-12 issue] story about "quant" funds is headlined, "One 'Quant' Sees Shakeout For the Ages - '10,000 Years'" . Here's the quote: "Events that models predicted would happen once in 10,000 years happened every day for three days." The article refers to a Ph. D. heading Lehmann's global head of quantitative equity strategies. D'uh - maybe they don't make Ph. D's like they used to. Wasn't 1998 the 10,000 year event of the last decade? Is this like boxing's "Fight of the Century" ... one every decade?

How many panics have happened in the 200 year financial history of the United States? Maybe 20? D'uh ... one every decade. I guess that Ph. D. didn't read, "Monetary History of the United States" by Milton Friedman and Anna Schwartz. Or read the other dozen of books about other panics. This Ph. D. - your blogger - has in fact read those books. In a panic, all models fail because human behavior is unpredictable under stress. In the physics analogy, a model derived from conditions in normal space fails near a black hole.

So all the quants used similar models to make money in normal times. Maybe that's the failure - the "heads I win, tails you lose" aspect of hedge funds. Don't bother being careful, the hedge fund managers just want the money to play with - and collect the fees. That normal statistics fails in panics is well known. Fischer Black taught me that at MIT in 1980. Mandelbrot wrote a whole book about how statistics fails in markets. Another book, "Wisdom of Crowds" has an insightful example of the "greater fool theory" when many participants use the same technical analysis or similar computer models. They create their own "buy" and "sell" signals, moving prices. But when something abnormal happens - poof! - the models collapse.

And I wrote a few weeks ago about how the fad of the long/short funds, the 130/30 funds and that ilk were causing short interest to rise to unnatural levels. Some said, nahhh, "It's Different Now" Those are hedges, etc. Whenever one says, "It's Different Now" - check your model, your data and your wallet!!!

Friday, August 10, 2007

When It Rains It Pours

Friday early AM:
ECB adds about E84 billion more [I don't has a euro symbol!]
Washington Mutuals say it's having funding problems.
Countrywide says unprecedented liquidity problems - having to keep loans on its books.
Asian central banks injected cash. JCB adds $8.4B. Australia, too.
SEC is looking at the books of GS, MER, BSC to see if they are hiding subprime loans.
Babblevision hyping the setting of the LIBOR rate (!)
Euro banks need to convert the Euros to dollars - will Fed accommodate?
Fed funds trading at 6% early. Uh ... I thought 5.25% was the target rate? Fed asleep, I guess.

If WaMu and CFC can't sell the new loans they make, they will quickly shut down when they hit their funding limits.

WSJ story about a medium sized German bank funded investments in complex MBS with ... commercial paper. Sheesh! Wasn't that lesson learned in 1980?

Renaissance Technologies, a recently hyped quant beefer, says it's down 7.4% in 2007. Highbridge "Statistical Opportunities] fund [lolol!!!] quant fund say its down 16% for 2007.

Bernanke still playing Alfred E. Neuman, "What! Me worry?"

Hoover [aka Lyndon aka W] opposes temporary increase in Fannie Mae and Freddie Mac loan limits. Hoo-booy. What a dullard! How dumb is he?

Hmmm ... Hoover ... isn't that a frat guy in Animal House? A double fit!!!

Speaking of stupidity or sheer duplicity ... -> W griping about Congress spending. Uh, for 6 years he spend like a "drunken sailor" [to quote Ronald Reagan] when the R's were in control. A real porkmeister. Now he complaining, trying to make a political issue of it. Arghhhhhhhhhhhhh!!!!

OK. Emotional transhumance* has occurred in front of us in markets. From the dominate emotion being greed, obviously it's intense immanent** fear. If you've been practicing time diversification, you have some cash. Wait for a sign of telic*** selling. Let the situation develop.

Patience, grasshopper.

PS: as you know, I practice what I preach. I did put some cash to work at great prices in index funds two weeks ago. And bought some big cap financials. That was half my extant cash to invest. I have more coming in after October 1 from other sources. So overall, I've put about 1/3 to work. If you've put half to work - good - now WAIT. If you haven't, you might put half in today or Monday. Don't buy any open. Wait until after 11AM or for the last 1/2 hour.

PPS: Barron's online is getting better & better. I just read a story that the Hulbert survey of newsletters shows only 5% bulls vs about 50% a few weeks ago. Hmmm. And the story says that in March 2000 - a real top - bulls actually increased after the first sell-off wave.

P^3S: LIBOR was set at 5.96%, up aboot 10 bps. more and about 70 bps over the overnight rate and way over the 30 day T-bill rate. Obviously Fed policy is waaaaaaaayyyyyyyyy too tight. Ben the Boob.

P^4S: This situation is why I keep a good bit of the Krypto Fund in bond-like investments, such as bond index funds, TIPs index funds and money market funds. I was at 20% and my recent shift put 5% into stocks. So I'm at 15%. I'll go to 10% at some point, but am waiting. When the market was moving up & up, I was adding to those bonds to keep the stock allocations in line. This re-balancing lets you make higher returns over time at lower risk.

Value Words ->
*I wrote about "transhumance" a few days ago.
**"Immanent" is a $10 word meaning all pervasive, indwelling.
***"Telic" is a $100 word meaning tending to an end.
[I learned "telic" yesterday PM and re-learned "immanent", so I'm trying to use them so I might actually remember them :-) ]

Thursday, August 9, 2007

Market Madness

Here we go again. Deja vu all over again. [Hehe, a fine aphorism of Yogi Berra!]

BNP hedge funds stop redemptions since the fund can't value the illiquid MBS slices, even though they re Aaa/AAA. No surprise, who really knows what's in some little slice of some trust holding who knows what? Why would anyone expect liquidity is that? Madness. Mass delusion.

Quant funds are in trouble. I read that "unexpected" events not remotely probable under "statistical" probability models are causing losses. Gee, what a surprise! I've written about that before. I learned almost 30 years ago from Fischer Black that the markets had "outlier" events that can't be modeled with statistical distributions. More greed at work to get those fees. We're seeing the fear now - what will be under the next rock that's picked up?

Goldman Global Alpha Fund down 8% in July. Hmmm. That' possible - my Alpha fund lost about 16% from the July peak to August 1. But I dropped from +51% to +35%, still OK ytd. The geniuses at Goldman at down 16% for the year. And the smart "rich" are paying them big fees for that? Sheesh. Gullible fools.

Some commercial paper issuers have illiquid MBS in their portfolios. Sheesh. How stupid is that?
Was all Wall Street under a mass delusion that beefers and derivatives provide wonderful liquidity in everything? I heard quite often - that beefers are GREAT since they provide liquidity. And that derivatives are GREAT since they provide liquidity. This sounds like a version of the greater fool theory. They were/are all in the same crappy paper and when anything happens unforeseen, like running out of rocket fuel at the frat mixer, they all head for the exits at once. Sayonnara liquidity - that fantasy of beeferdom.

Hmm - another "I told you so" seems appropriate, here and in another forum I posted much on last year and before.

PS: "hehe" is my Beavis & Butthead style chuckle :-))) hehe hehe hehehe, he said "butt"! :-)))

PPS: still using time diversification on adding o the big cap fins. Those were solidly green yesterday, but I figure that at some time until late October, I'll get a good entry for the last half. I think I'll make 30%+ on these investments over the next year. Uhhhh that's the "plan".

P^3S: Those little slices of MBS really were designed to be held to maturity in a diversified portfolio, not traded like stocks. But being originally based on high quality FNMA and Freddie Mac MBS or GMNA securities, Wall Street geniuses applied the math to much more complex underlying securities and sold them the same way. I guess no one really thought how they would figure out what's really there is they wanted to sell. Dumb!

P^4S: Since when do hedge funds give money back on demand? Those are sounding more & more like non-bank banks every time something new comes out. If it looks like a bank it should be regulated like a bank. Ditto re looking like a mutual fund. A hedge fund should have limited redemption demands. This just shows more & more that hedge funds are way, way over the line and need serious regulations to prevent them from causing big problems.

Japan was saved by ... the A-Bomb

Today is the 62nd anniversary of "Bock's Car", a B-29 piloted by Charles W. Sweeney, dropped the second atomic bomb on Nagasaki, Japan to set in motion the end of the War in the Pacific, primarily between the US and Japan. You can see this plane in the National Air Force Museum in Dayton, Ohio. I've seen it and the museum includes a dummy mock-up of the "fat man" plutonium atomic bomb.

Post war documents and interviews of Japanese war leaders prove that dropping this second bombs shook Japan out of its mass delusion and caused the civilian leaders finally to be able to neutralize the military leaders. This deadlock provided a means to request the Emperor to decide - he decided for peace. The alternative was national suicide under the mass delusion that was guiding Japanese war policy since the 1942 battle of Midway and Guadalcanal after which loss of the war was obvious.

Even then, Japanese fanatics attempted a coup to prevent surrender, but it was stopped. The actual surrender message was broadcast by the Emperor on August 15, which is celebrated as V-J day.

The US was planning a November 1945 invasion of Kyushu and a spring 1946 invasion on Honshu, the main island of Japan. With Japanese suicide tactics and overwhelming US firepower, it's likely that half of the Japanese people would have been killed in these last battles and the "mop up" that would have followed. Every factory and bridge and building in Japan could have been leveled. Many more major cities would have been totally destroyed with additional atomic bombs that the US was producing. Could Japanese civilisation have ever recovered from such devastation? Maybe. Maybe not. Maybe after a hundred years? The loss of human capital would have been enormous.

Could Japan have ever surrendered in conventional war since the government and people seemed to live a mass delusion and favored death over surrender? I think the answer is NO, except for the shock of the atomic bomb. The second bomb proved the first was not just a special device. That moved enough Japanese leaders to snap out of their fantasy.

The atomic bomb led to quick surrender and saved enough of Japan and her people to form a base for the future. Modern Japan owes its existence to the atomic bomb.

Wednesday, August 8, 2007

What Happened?

So my exegesis posted yesterday about the Fed was right, and my eisegesis was wrong. See how dangerous eisegesis can be? I'll try to be explicit if I'm being an eisegete to avoid confusion.

The Fed made a mistake - I guess having a government paycheck dulls the senses.

Yesterday afternoon we witness some professional level ping pong by the beefers. I wrote a ditty about their antics last year and posted it in another forum. hehehe, it really made some pro-beefer traders angry. And the action of the past few days in many major groups and even yesterday illustrated how accurate the caricature was. So I'll re-post it below.

Song of the times follows (based on the song, "The Grand Old Duke of York") ->

The beefer Duke of Funds
He had ten thousand stocks
He marched them up to the market top
And marched them down again.

Lolol, that ditty gave into my head yesterday afternoon. I sang it in my turret.

PS: I'm still very bullish long term, but short term I think we'll chop awhile until this Fed created mess gets sorted out. My 20% gain expectation this year for the S&P 500 is looking less probable, but still possible if the Fed wises up early this fall. Stocks are still very cheap.

PPS: Efforts to raise the FNMA and Freddie Mac loan limits won't help the low income person, but will help the high income, jumbo loan borrower. I guess DC knows where its bread is buttered. Help for the well off, none for the less well off. Sheesh!

Tuesday, August 7, 2007

Fed Tuesday

The Fed meets this afternoon. Will investors be fed with a rational policy or will they be fed to the lions? Both exegesis and eisegesis are appropriate here - see the "PS" for definitions.

Here's my exegesis: based purely on the data and the statement of the last meeting, the Fed would provide a more dovish statement, perhaps take off the inflation bias in the statement only.

But I think that would be wrong - analogous to the December 2000 meeting and the May 2006 where they were simply behind the economy. In both cases, the error was recognized quickly and the incorrect policy altered before or on the next meeting. By wrong, I think that policy would be wrong AND I think they will not do that today.

Here's my eisegesis: The Fed "knows" that core year-over-year PCE is under 2% and has downtrended for many months. The Fed "should" know that their policy effect has a time lag. And they "should" know that all the delinquency increases are in variable rate subprime loans and they "should" know that billions need refinancing over the next year, particularly beginning this fall. And they "certainly" know that Democrats control Congress and a Fed policy that fights inflation primarily on the backs of the lower income people "might" generate massive political heat. And when (?) they read today's Wall Street Journal, they will know that banks are starting to have trouble making jumbo loans to good credit, well off, higher income people, since the banks now have to consider they might have to hold the loans for awhile. Golly, the country club - DC - NYC - CA upper middle class are being being affected. Those are big contributors to Democratic politicians. Maybe the rich & powerful can't get a loan on that $2 million mansion!!! Oh woe!!! So being a politically sensitive institution, the Fed "should" cut the overnight rate 25 or 50 bps. In the statement they can say that they are watching inflation closely, but recent trends in core inflation indicate that risks of inflation are lower. The risks to the economy outweigh the risks of accelerating inflation, thus a reduction in the overnight lending rate ratifying the extent market level is appropriate.

The dollar be damned! Full speed ahead!! The legal authority for the Fed does NOT include ANY direct consideration for the value of the dollar. The Fed's statuary mandate is for stable prices with maximum employment. Babblevision seers saying the dollar matters for Fed policy are either just talking their book or engaging in closet eisegesis.

PS: "Exegesis" is a $10 word meaning "critical analysis of texts". "Eisegesis" is a $100 word meaning "an interpretation that gives the interpreter's own ideas rather than the meaning of the text."

PPS: If I ran a big bank, I think it would be a good time to grab some customers. Offer fairly priced mortgage loans to people with long-standing accounts OR new, large accounts. That might get some long-term, high quality customers. Those are very expensive to attract in normal times.

P^3S: IBD says yesterday constituted a confirmation of the rally for the Dow. Reading their analysis, I see that the Dow never undercut its prior low, so that rally confirmation is correct. I suppose that also means the big caps are the leaders.

P^4S: The Fed acted like an ostrich or entrenched wonk, unable to recognize reality, so did essentially nothing. Since Bernanke was in my undergraduate class at Harvard, I'm a little embarrassed, but he lived at Princeton and DC too long and not in the woods. I suppose if the Fed governors were trying to get loans or their children were, they might have a grasp of reality. But like in December 2000 and May 2006, the Fed ivory tower fools living in the big city suburbs are unable to react to change until it grabs them and hits them in the face. So I think this drags out a few months now. I'm planning to wait and buy my last slug of financials in late October. How any well-grounded financial leader can keep tight money in the face of foreclosures for the poor is incredible to me. It's sheer Hooverism!

Monday, August 6, 2007

Rich Man's Panic II

Friday was more of the Rich Man's Panic. This time it was more hedge funds and the piranhas at Bear Stearns. Hedge funds are getting redemptions from their rich investors who aren't so enthralled now and fear losing money. Gee, maybe they'll be embarrassed at the country club.

The bears want for panic and are planting news stories to create more confusion and fear. They never seem to get past shouting "subprime!!!!"

What are the facts?

1. The yield on intermediate grade bonds ... fell 13 bps. [Barron's, page M52].

2. A real loan to a real company gets ... oversubscribed. [WSJ, August 4-5, page A4 re Imperial Tobacco. "High demand"

3. Prime mortgage delinquencies [90+ days] are ... flatish for both variable rate and fixed rate. [WSJ, August 3, from the chart page C1]

4. Credit card delinquencies are ... flatish. [Same source as #3].

5. Subprime fixed rate mortgage loan delinquencies [90+ days] are ... flatish [same source as #3]

6. Auto loan delinquencies [90+ days] direct with banks are ... flatish. [ditto re source]

7. Auto loan delinquencies [90+ days] through dealers are ... up slightly. [ditto re source]

8. Subprime variable rate mortgage loan delinquencies [90+ days] are up substantially.

We know that corporate and commerical mortgage loan defaults are still at historically low rates.

So this is all a subprime mortgage variable rate loan problem. Hedge funds provided funding for unscrupulous lenders who, following Greenspans advice, took out variable rate loans at a time when variable rates were historically low. The mortgage brokers & bankers sucked out their fees and the hedge fund managers did the same.

Now the low income borrowers are stuck and can't refinance, even if they have a job and income since the "lenders" are changing the terms and loan to value levels.

This is a problem with permitting non-banks like hedge funds to play being banks. I wrote in another forum how hedge funds were trouble and were going to cause a big problem. I said that if they want to be banks they should get regulated like banks. Some challenged my thinking, saying whoever got hurt? What problem except LTCM ever occurred? How would normal people ever get affected? Hedge funds are good, they said, by bringing "liquidity" to markets. Now we see the dark side of their antics. I was right then and we are seeing the cost of letting them play "bank".

Low income people might lose their homes because they were scammed by mortgage brokers and bankers funded by hedge funds. Sure, they were stupid and made a dumb financial decision. The victim of a bunko scam IS stupid or greedy. But bunko and fraud ARE illegal. The "Truth-in-Lending Law does exist. And the Fed or other responsible agencies should regulate hedge funds playing banks.

Derivatives re another post. These stacked derivatives are really garbage, too. As are the collateral rules. That needs to be regulated so dumping the collateral doesn't create problems in other markets and sufficient collateral and capital requirements need to be imposed.

PS: Here's another flaw in the "This will spread" claim. Since when has this economy been propelled or driven by low income people? For years it has been the upper middle income and rich who are doing the spending and investing. All the retail data for years has shown that and that has been widely recognized. So how is this pain for a slice of lower income people going to destroy the world's growth?

Some Influential Books

On Saturday, a reader asked me for the names of the five best books I've read, and I responded that books have qualities along so many dimensions that ranking them on one scale doesn't bring out their value. So instead I list below ten books that were influential in developing my thinking. These are what I'd call, "first level" books, namely they involve a first hand account or a detailed analysis of actual facts or events, or something similar. A superb, but complex synthesis of thought like "Totalitarianism" by Hannah Arendt, the subject of Saturday's post that prompted the question, is not on the list.

I admit I've never read the entire Bible or even most of it, so I can't put it on my list.

Here is the list, not in a ranked order.

1. Memoirs, U. S. Grant; alternative is Battle Cry of Freedom: The Civil War, by James M. McPherson.

2. Battle for North America, by Francis Parkham. This book uses first hand accounts of the earliest French and English explorer to cover the entire history of North American, including Indian activities, from discovery to 1765. Outstanding.

3. Monetary History of the United States, by Milton Friedman and Anna Schwartz. A super history of US economic development to modern times.

4. The Robber Barons, by Matthew Josephson. A classic account of the rich and powerful in the US in the 19th century.

5. The Illiad. Perhaps an accurate title would have been "The Rage of Achilles".

6. Classical Mechanics, by Herbert Goldstein. This is a first year graduate school text in theoretical physics. Alternate, Mechanics by E. M. Lifshitz and L. D. Landau.

7. The Classical Theory of Fields, by L. D. Landau and E. M. Lifshitz. This is also as first year graduate school text in theoretical physics.

Regarding books #6 and #7, I read them by age 19 [yes, I was a good student] and they influenced my thinking and career very much. I wish I could list a book on quantum mechanics, but I learned it from my professors at Harvard and many sources including journal papers. By the way my professors included many Nobel Prize winners. Seeing how complex phenomena can be explained with "simple" mathematical structures and symmetries can determine laws of physics had helped me think about many complex phenomena including markets. That's how I think about markets - like complex particle interactions.

The next three books all relate to freedom. To borrow some phraseology of a friend's email to me, "I'm a bit nuts about freedom".

8. I Chose Freedom, by Victor Kravchenko. This book is listed in my blog background as a favorite book.

9. Witness by Whittaker Chambers.

10. The Road to Serfdom, by Friedrich Hayak.

The above three books: #8 is a first hand account of Stalinism in the 1930s and 1940s; #9 is a first hand account of communist spying in America in the 1930s and 1940s; #10 is a core analysis of socialism leading inevitably to a form of serfdom for the people by a Nobel prize winner in economics.

Sunday, August 5, 2007

A Salute to John Basilone

I watched the movie, "Flags of Our Fathers" on Friday evening. The movie is about the raising of the flag over Iwo Jima and the Marines memorialized in the famous photo of the second flag raising [sic, yes the 2nd]. Those who survived the battle were taken to the US and exploited by politicians and overall treated rather badly.

I liked the movie, which was mostly accurate as far as I know [which is a lot], but I thought the emphasis on the Marines raising the flag was misplaced. A better story is that of John Basilone. I first heard about him reading a book on the history of the Battle of Guadalcanal in 1942. Later I heard his name on a tape of Marine Corps cadences I use for inspiration when running on my elliptical trainer. Here's a short bio COPIED from
For more than 60 years Marines have heard about the legendary acts of Gunnery Sgt. John "Manila" Basilone.

In the steaming jungles of Guadalcanal, two sections of heavy .30-caliber machine guns at the Tenaru River were in charge of defending a narrow pass to Henderson Airfield in the Solomon Islands. Suddenly, Japanese forces attacked their position. Vastly out numbered, the Marines held their ground and fought valiantly to check the savage and determined assault.

Suddenly one of the gun crews was knocked out. Disregarding his own life, a Marine lifted his 90 pounds of weaponry and raced 200 yards to the silenced gun pit and started firing. Enemy soldiers attacked to his rear. He cut them down with his Colt .45 pistol. Short of shells, he dashed 200 yards amid a stream of bullets to an ammunition dump and returned with an armload of ammo for his gunners. This Marine battled his way through hostile lines running back and forth between gun pits clearing jams and re-supplying the other Marines with ammo. Flares lit up more swarms of grenade-tossing attackers. The Marines' hands started blistering from the heat of his machine gun, but still he kept shooting.

At dawn, reinforcements found this Marine resting his head at the edge of his pit. The line had held. Nearly 100 sprawled enemy dead were around his cut-off outpost. At least 38 enemy dead were credited to this Marine, many killed at arms length. The day was Oct. 24, 1942 and his name was Gunnery Sgt. Basilone. For his actions he was awarded the Congressional Medal of Honor.

Upon returning to the United States, this Raritan, N.J. native traveled across the country on a war bond tour that prompted $1.4 million in pledges. He met Hollywood starlets and his picture even made the cover of Life magazine.

The Marine Corps offered to make him an officer and let him spend the rest of the war in Washington, but he reportedly turned them down stating, "I'm a plain soldier, and I want to stay one."

After his war bond tour, Gunnery Sgt. Basilone requested to be reassigned to a gunner unit with the 27th Marines. He could have continued to sell war bonds or he could have even stayed back in the states. But this man instead chose to live his life as a Marine.

So he said farewell to his new wife, Lena Riggi, and joined the Fifth Division. Staying behind, he told buddies, would be "like being a museum piece." And it wouldn't seem right, he said, "if the Marines made a landing on the Manila waterfront and 'Manila John' wasn't among them."

On February 19, 1945, Basilone was again in action on the black sands of Iwo Jima on Red Beach II. Enemy gunfire pinned down his platoon. Everyone, that is, but Basilone, who walked straight up, kicking butts and yelling, "Get off the beach! Move out," he yelled at the gunners just behind, hunkered low and straining under the heavy loads of weapons and ammunition amid the blistering fire. Minutes later an enemy artillery round exploded, killing Gunnery Sgt. Basilone and four other members from his platoon. Immediately before, he had single-handedly destroyed a Japanese blockhouse, allowing his unit to capture an airfield. On his outstretched left arm was a tattoo that read "Death before Dishonor." He was 27 years old.

After World War II, his body was reburied with full military honors in Arlington National Cemetery and he was posthumously awarded the Navy Cross. A life-size bronze statue depicting him in battle dress and cradling a machine gun now watches over his hometown of Raritan.

Gunnery Sgt. Basilone, the man whom Gen. Douglas MacArthur called "a one-man army," became the only man in the history of the United States awarded the Congressional Medal of Honor, the Navy Cross, and the Purple Heart.

John Basilone has been remembered in a variety of ways for his service and supreme sacrifice. In 1949 a destroyer, the USS Basilone was commissioned. The New Jersey Turnpike Bridge across the Raritan River is named in his honor, as are numerous American Legion and Marine Corps League Posts. Interstate 5 outside of Camp Pendleton has been renamed the John Basilone Memorial Highway. A tribute to the war hero started in 1981 with "Basilone Day" and continues to be celebrated annually in Raritan, N.J. on the last weekend in September.

However, John Basilone never cared much for the fame that accompanied his Medal of Honor. The parades, the newsreel appearances, the starlets who hung on his arm; he would much rather, he insisted, be just a "plain Marine" like his buddies who were still out in the Pacific. He told his brother after joining the Marines that, "Without his Corps, his life meant nothing."

The movie, "Flags of our Fathers" would have been better if John Basilone had been the focus.

PS: The war in the Pacific against the Japanese was incredibly intense. I've read many first hand accounts of this war and that in Europe. I think the war in the Pacific was at the level of fighting the SS in Europe all the time - no holds barred, no surrenders.

PPS: John Basilone led a heavy machine gun unit in Guadalcanal. Those were water-cooled M1917 belt-fed machine guns mounted on tripods. I've fired them many times. The water quickly boils to release the heat. If kept firing, the water will boil off entirely and the gun could overheat and stop. Sgt. Basilone is reported to have told his unit to piss in the guns to keep them cool when they ran out of water. I don't know if this story is true or not, but it sure fits his character and determination.