Thursday, January 31, 2008

End of the End

Yesterday was the "End of the End" of the real foundation of the subprime+recession risk for the economy. "Battleship Ben" finally ended the dithering and brought his big guns to bear. The Fed rate cut to 3% in the overnight rate to bring it to the low end of the "neutral" zone, possibly even to the stimulative area as these zones aren't marked with certainty. And the statement said that the shelling will continue until risks to economic activity cease.

Fed rate cuts aren't a laser beam - continued low rates are needed over a period of time to let people obtain or save real cash from those lower rates. Refinancings and lower monthly home equity loan rates will pump huge amounts of cash into the pocket of the common man. Just like the US Navy learned in WW II on the islands, shelling of enemy positions requires extended, thorough hammering with the big 14" - 16" shells to reduce resistance. So Battleship Ben's cuts of last week and this week and the FOMC statement of continued shelling is what was needed.

That doesn't mean the beefers won't keep trying, as they did late yesterday PM. Their modus operandi is getting clearer. Short a rip and then put out rumors of more losses. They are even openly manipulating the press to create fear in operations reminscent of the 1920s. Anyone who has read that great trading book, "Reminiscences of a Stock Operator" can recognize their despicable tactics. For example, that fellow, Ackman, who runs a short pool - I'll just use the 1920s term - put out press releases to scare more people about bond insurers and to try to forestall investment in them.

These guys use double counting to get headlines. If a CDO has loans that realize losses, that's a ONE real loss. If a bond insurer insured a class of the CDO securities, there is still just ONE loss. It's just a matter of who bears it, either the actual holder of the class or the bond insurers. Press double counting is rampant - Babblevision doesn't bother checking or even asking these guys for facts before pumping our the rumors and charges. Battleship Ben mentioned the double counting in a recent speech.

If one has bothered to listen to conference calls of BAC or WB, for example, you would know that their year end marks looked through the CDO to the actual underlying loans and marked against them. Even if the bond insurance is zero , they have no significant further losses. That "fact" was both part of the company presentation and the subject of detailed analyst questions.

Also, the Fed lowering interest rates means that net interest income of these big banks is very positive and growing. That's a huge number for these banks with huge deposit bases.

So I think this is all over but the "mop up" operations. Those might take awhile and beefers might screech and more rich might panic, but the "End of the End" is here.

If the beefers knock stocks down, I'm a buyer.

Wednesday, January 30, 2008

Finally Fed Day

When thinking about the markets and the world economy, I try to focus on (1) what is important and (2) what I know. This mode of thought works for many other endeavors, too. In other posts, I've written about what I think is important, viz., inflation, GDP growth and its momentum, and the Fed. The various jobs numbers are important, too, but have quite a bit of measurment error.

What do you know ? I use the government statistics - they aren't as bad as some think as many, many years of solid, detailed effort has gone into making them as good an estimate as possible. For inflation, use the core PCE on a monthly basis and on a year over year basis. Core CPI is a secondary indicator. The nominal numbers are less important, but on a year over year or multiple year moving average basis, it is important, too.

All the other economic indicators and business news can help one understand what is evolving, but none of them are definitive. Metaphorically, those bits of news are like individual molecules pushing a particle around in Brownian motion, or like quantum fluctuations and phases that are added up in a complex, multidimensional integral to determine the classical motion of the macroscopic economy.

This thinking works well for long term investing. For trading, one needs to think about the detailed news and perceptions of the beefers and their herd instincts. In short term trading, and for some intermediate term trading, perception matters and can be decisive. For longer term all those virtual actions get added up and averaged out. Reality matters for longer time periods.

So today's ADP jobs number, GDP and today's Fed policy decision are very important. I would like to see an ADP number at +30-50,000 and Q4 GDP at 2%. And I want the Fed to cut rates by 50 bps and signal a willingness to cut more.

PS: Q4 GDP was 0.6% very low; year ove ryear core PCE was 2.1% - very good number; ADP jobs was +130K good for the economy. Overall the Fed should cut 50bps by putting weight on the low GDP and good inflation numbers.

Tuesday, January 29, 2008

State of the Union

I didn't watch last night's propaganda show. These speeches have become a combination of a pep rally and baloney session. I think they are a waste of time as one can read the main points in about ten seconds in the morning's newspapers. I remember reading some of Lincoln's State of the Union speeches. They were very short and to the point. He also spent a bit of time on actual federal budget numbers - amazing, a real number in a speech !

The Florida Republican primary is today; polls say that Romney is tied with Mccain. At least two honest men are leading. With the economic problems in Florida and their housing problems, this might provide some insight into voters' thinking.

Market-wise, I await the Fed's decision tomorrow. I want 50 bps ! Is that clear enough ?

Bank stocks acted better yesterday. Some bullish patterns were formed in a few. BAC broke up and out of a bullish pennant; WB is trying same as is C and JPM. DVN was very strong. GOOG was weak ahead of earnings this week.

I sold a bit of gold yesterday in the Krypto Fund and will put the funds into stocks. I need to sell almost 1/3 of my large gold holdings as that group is very overweight. I'm keeping silver until it hits at least 1$18/oz. I'll let some gold go every few weeks as long as it's over $900/oz.

Monday, January 28, 2008

Waiting ...

I suppose the markets will slide down in low volume until the Fed rate announcement on Wednesday. Why should any real buyer step up and buy cheap stocks until assured the Fed won't betray them again ? I'm doing nothing and waiting, but I already have large positions that I think are very, very cheap and have solid value and will do well this year and next. If you didn't buy the collapse last week, there is no reason to buy now.

US voters seem to want a clear change. Obama crushed Hillary in South Carolina, and his favorable press from that win might give him enough publicity in the big states to get undecided voters into his camp. He actually has more real experience than Hillary in governing, as she merely has seven years as a Senator. Before that, she might have been watching hubby Bill, or not. It's a secret, you see. Doesn't that make one wonder ? Whenever the Clintons keep a secret, it has meant something negative was hidden. Don't assume anything good is being kept secret by them.

McCain looks like he is gaining more support and he does represent change, too. Some bigmouths like Limbaugh say that a McCain nomination would tear the republican party apart. What a fool ! George W. Bush has done that with his wild, drunken sailor spending and his LBJ-like war strategy. So McCain as an honest man with a good record opposing spending and a now proven correct war strategy looks like a real leader. Hmmm ... my rich man's vote for him last summer is looking like a winner.

Romney is honest and quite smart, but this election season just is not good for a business style leader.

Asia and Europe are down. Beefers dominate those markets, too. I suppose this might be a good things, as it should kill the talk that the slide last Monday was all due to Societie General's selling. Pay attention to what you know and facts, not the fears. The press is fanning the flames of fear, but seem to have only pundit opinions and fears backing that talk.

Friday, January 25, 2008

The Arrogance of Wealth and Power

"Davos" is the epitome of that syndrome. Rich and powerful people meet in a resort to discuss the "world economy", viz., how they can control the common man and bend him to their wishes. Is increasing human freedom a pillar of their goals ? ... No. Is increasing human culture and knowledge a goal ? ... No. They network among each other to exchange thinking on how to maintain and increase their control over ... the rest of us. Every year Davos makes me want to puke.

Then I read in the WSJ that Bill Gates wants to "change capitalism". Hmmm, the world's wealthiest person who become wealthy running a de facto monopoly wants to tell us how to change "capitalism". I don't think he really knows what word the means. That word, "capitalism" is unfortunately a Marxist word for an economic system in contraposition to socialism and communism. "Capitalism" is not simply a system with private capital employed for increasing wealth, but is a label for the entire free private property system where a free man or woman can "own" things and do with them what they please. What people think of as "capitalism" is an effect of this human freedom which developed in the early 19th century as free people found ways to band together and use resources more effectively by sharing and exchanging risks and ideas.

So efforts to "change capitalism" are simply stupid. What does that mean ? If it means anything other than trying to get leaders to "freely" adjust business practices, then it is really a limitation on human freedom. Now some limits on human freedom are fine with me, namely those that prevent the rich & powerful from using their positions to dominate the common man and become new feudal lords. Or to manipulate the dynamics of markets to create fear and intimidate the common man. That's how feudalism began ... good fighting men used their skills to dominate farmers into giving up their own freedom and lands and accepting "protection".

So is Davos about actually helping people .. or is it about using and creating fear so "they" can become new Dukes & Barons ? I think it's a bit of both, but the well-meaning fools seeking the former are being used as cover by those knaves seeking the latter. Are restrictions on the rich and powerful a subject at Davos ? What about regulation of hedge funds ? If they want to discuss how to control themselves, fine, that's an admirable topic. Otherwise, they should shut up and leave us alone.

PS: Futures are up at 5AM ET. MSFT had good earnings. Gold is up. Oil is back over $90. I am about 200% long with some reserves to deploy IF we get another dip. I made a lot of reallocation trades yesterday. My Alpha Fund positions are BAC, WB, GE, JPM, C, GOOG, CVX, DVN, RTP, PCU, AAPL, BHP, RIO, RIG, DO, SU, HDB, IBN, MRO, VLO, BTU, FCX, CCJ, EDU, in rough size order. The largest is over 20x the size of the smaller. I have to sell some gold in the Krypto Fund and buy stocks. Gold is way overweight there. I might do that today, but since it's physical gold, I have to do it in small bits.

PPS: I'm holding a barf bag and puking, seeing Maria, Gates, Dell & Bono blab. Arghhh !

Thursday, January 24, 2008

Big Fraud

Gosh, a single trader caused a $7 Billion fraud at Societie General !!! After those huge UBS losses, I guess we now see why Europe has been a source of the panic selling. Nick Leeson and Howie Rubin redux ... it's deja vu all over again.

Yesterday was a huge outside day reversal from a new low on high volume - that's a "key reversal" and can signal a technical bottom. Basically everyone who had wanted to sell had sold and no sellers were lower. When the selling dried up, sensitive traders turned around, started covering shorts and bottom fishers scooped up cheap stocks. This built on itself and created a wave of buying. Financials and retail led as beefers decided these "early cycle" stocks were the place to be. Tech, energy and miners were still weak. So ... the beefers created a panic when the Fed was showing no leadership and then created a bounce . All this action is sort of like a "Lord of the Flies" society of unsupervised adolescent boys going crazy ... which is what the Fed, SEC and the rich have given us.

We have to live with it, though. At least the Fed seems to have learned a lesson, viz., gradualism doesn't work at turning points. We need more rate cuts next week - 50 or 75 bps. And we need a followthru day, which is a big gain on higher volume on IBD days #4 thru 7 preferably.

I have GOOG and AAPL on my long term buy list. I'll wait until they stop going down to make adds. I also am thinking of buying more of certain energies and miners. Over time I plan to consolidate my positions into larger blocks of fewer stocks. I think that will be easier for me to manage for taxes and taking advantage of beefer rips & dips.

If you don't have a cash reserve, be a bit careful now. The beefers might try to "retest" the lows.

PS: I have some short term losses this year so am not inhibited from making changes by LT gains dates in this position consolidation process. I'll probably sell CSCO, ORCL and buy more GOOG and AAPL. I also got some EDU and might get some more. I think my energies, miners, and deep water drillers need some consolidation, too - no net selling, just concentration.

Wednesday, January 23, 2008

The End is Near

A little double meaning there ;-)

The doomsayers will soon start screeching about the Fed "pushing on a string." and the world is ending.

But since the big gun, viz., the Fed, is now on track to eliminate its wrongheaded tight money policies, the end really is near. That is, the end of the end of the "subprime" fiasco that began almost one year ago.

Low and soon to be lower overnight rates means that payments on home equity loans go down and payments on many floating rate loans go down and rates on corporate debt come down and refinancing and home affordability goes up. All that is good and "will" lead to renewed vigor in economic growth.

Note that I said, "will", not the endless "may" of the fearmongers.

AAPL reported good earnings and tepid guidance. That's AAPL's recurring style and why I told Mrs. B to wait until today to buy her shares for the Sky Fund.

More Euro-liquidation is occurring this morning, even though Asia was up solidly last night.

No significant news ... Davos rich & powerful are preaching again ... I "greatly dislike" that event.

I am now about 200% long. BAC, GE, WB, JPM and C are my biggest positions by far.

All the energies and miners are at fine prices if you have none of those.

I do have some reserves if needed, but I plan to wait now and watch. I am also planning to sell a bit of gold to buy more stocks in the Krypto Fund as gold is wayyyy overweight in it. That takes time as it's physical gold, but as long as gold stays up here, I will do it.

Tuesday, January 22, 2008

Bronco Busting

"Fasten your seatbelts, it's going to be a bumpy night!" - Bette Davis as Margo Channing in that great movie, "All About Eve" (1950).

Europe had a panic yesterday when the US markets were closed as did Asia overnight both Sunday and Monday. US futures are down 500 pts on the Dow as of 4AM. Babblevision has stunned German reporters talking about worst markets in memory, and "man on the street" interviews of Chinese "investors".

There was no significant news.

As usual, Bunkerman was early in buying a barrel of GE on Friday plus more BAC and JPM. Sigh... that's getting a bit tiring. I'm putting some more money back into the Alpha Fund accounts as to my tired old brain thinks I am getting prices of a lifetime on high quality stocks that I can hold for a decade.

Beefers seem to want to create a financial panic ... half are pressing shorts and the rest are screeching sell and panicking to do something to keep their jobs and gross pay. That's an industry that needs to be gutted and put into a straitjacket of regulation. Trillions of hot money flopping around is highly dangerous to the innocent "common man" investor and global economies.

BAC reports this morning ... I admit to being nervous.

The Fed must cut rates bigtime now - 100 bps would be OK for now with a signal for more.

Also derivatives and hedge funds must be regulated and the uptick rule needs to be reinstated. Those are another of Elmer's long list of errors.

PS: I have to take the Kelpies to sheep herding classes midday, so will miss some of the "fun".

PPS: I'm putting more money into Mrs. B's Sky Fund as there are a couple of stocks she can now get at fine prices.

P^S: Fed does what Bunkerman says ... finally ... cuts 75 bps.

Monday, January 21, 2008

Books for the Day

With today being Martin Luther King Day, I thought that looking back to the slave period and following Civil War in the US is an appropriate way to try to learn and understand what happened then.

For the human side of slavery, the recent publication of "The Annotated Uncle Tom's Cabin" edited with an introduction and notes by Henry Louis Gates, Jr. and Hollis Robbins [W. W. Norton & Company, New York 2007] provides us with a marvelous means to read that classic work by Harriet Beecher Stowe. Her book of fiction about the human and emotional aspects of slavery was the most popular book - by sales - of the 19th century except for the Bible. Henry Louis Gates, Jr. is the W. E. B Dubois Professor of the Humanities at Harvard University and edited "The Norton Anthology of African-American Literature. Hollis Robbins is a humanities professor at the Peabody Institute at Johns Hopkins University. The book includes innumerable contemporary and modern illustrations of the scenes and characters of and derived from the book, including the engravings in the original printings.

"Uncle Tom's Cabin" galvanized northern public opinion against slavery. The stories of ripping families asunder, cruelty and sale of one's children "down river" helped the northern white women and men come to understand its evil. The notes by Gates & Hollis help modern people living over 150 years from that evil understand how the book is depicting events that one could actually see if living then, as Harriet Beecher Stowe did see them.

For the ensuing war, I suggest the Memoirs of Gen. William Tecumseh Sherman. He was quite a controversial figure then and is still such now. But his descriptions of his campaigns before, during and after his famous March to the Sea are wonderfully clear and vivid. Because of its actual long sections on that March and the time his army was in the major slaveholding areas of the South, I recommend this book for this day over those fine memoirs of Gen. Grant. Sherman's Army freed scores of thousands of slaves, whose happiness and gratitude are expressed in first hand stories. The cruelty of Confederate officers and soldiers toward those people are also told.

PS: So when a major modern political figure, viz. Mike Huckabee, defends the Confederate symbol in modern times, one must wonder whether he is a fool or a knave. Is he ignorant of the evil that symbol represented over 150 years ago and that my ancestors and their brothers fought to defeat, or is he a demagogue and knave trying to curry favor with ... the rabble ? Either option leads one to conclude he is unfit to be a U. S. President.

Friday, January 18, 2008

Analysis of Fundamentals

I was rather cryptic a few days ago describing how I think about the economy and how I try to determine its most likely trajectory, so here are the basics. "IT" means the world economy.

Where is IT now ? A solid base of activity and trade exists worldwide with increasing freedom and trade.

Where and how strongly is IT moving ? Worldwide and even in the US alone, growth is still positive, but less positive that before.

A system in motion will continue in motion unless acted on by sufficient outside forces to alter its path.

What are the forces on IT ? Current fed policy is still restrictive as is ECB and Bank of England policy. China seems to be trying to find a restrictive level of policy. Fiscal policies are roughly neutral, and the US trade deficit is still adding to the global monetary base. Recent Fed and ECB policies on credit lending are positive forces in relieving credit market problems [ref. Fed's TAF, ECB's policies].

What transition events are occurring and will they amplify or cancel ?
1. Overbuilt US housing market causes loss of incomes [construction activity falls] and credit market cutbacks [loan losses].
2. Overbuilt financial industry in structured markets, hedge funds and derivatives cause losses and fear.
3. High energy prices cause a shift in investment and consumption patterns.

Items 1 and 2 are connected, but different and have amplified each other. How do these amplify and induce changes in the rest of the economy ? Low income people are hurt by 1 and 3. Rich Wall Street scammsters are hurt by fallout from 2. Real estate speculators are hurt by 1 and 2. Overspending consumers are hurt by 1, 2 and 3.

What supports exist to restrict changes ?
A. Jobs are still "OK", but growing less. But people still have jobs on average.
B. Export trade is growing.

Item A helps cancel item 1 and keeps item 3 within limits. Item B does the same. The restrictive Fed policy amplifies 2 - a bad situation. The TAF helps 2 a bit. Growth in world monetary base might be somewhat neutralized by the flow of $ to places like the oil states where the money might be used less actively.

So what is the main problem - obviously it's the combination of (I) weakly constrained effects of item 2, viz., financial panic risks and (II) the still restrictive global force of tight money policies by central banks. This is why I say that the Fed must cut rates now to a low neutral or even stimulative level of under 3.25%, which is 100 bps below the current overnight rate.

So I am a bull and think this is a bull market correction. IFF the Fed acts, then this is a great buy point to load up ... and I will go heavily long. I like to be 200% long on the big dips so have a lot of buying power ready .. waiting.

PS: GE good earnings, meets "Street", reaffirms 2008 guidance. No world recession.

Thursday, January 17, 2008

Back in the Saddle

I made it home to Massachusetts ... flying sure sucks, but I guess it's better than driving 13 hours as one ages. My plane was late, as is normal nowadays. But the car service was on the ball and delivered me to my hidden, snow-covered bunker with no problems.

The forest is beautiful here with the trees covered with frozen snow and ice - very picturesque.

Hello recession mongers ... my plane from Columbus to Boston was full and loaded with business people working on laptops and blackberries. A big guy in a high school sweatshirt listening to Judy Garland on his iPhone was quite unique; very few "leisure" travelers.

No recession without Fed betrayal.

The Merrill losses will be interesting. Why is Merrill a survivor ? Should it not be sold to JPMorgan and the trading operation zeroed. The brokerage, investment and private bank is quite valuable, but that's all.

Actually, part of my long term thesis on the big banks is that "creative destruction" will destroy much of the hedge fund industry, which is really a scam on the wealthy anyway. All those "investment banks" making money on "prime brokers" are just trading frauds. They created fake securities [aka most "derivatives" ] and traded with each other and ran up the values and made commissions and booked gains, etc., but it was all just paper. Few "real" securities issued by a real company were behind them. Derivatives were created to add to leverage to skirt the margin rules.

So now Merrill Lynch pays the price. And at least Bank of America is selling its "prime" brokerage operations.

My point is that on a reversion to "reality-based" financing, the big banks will hold all the cards: sources of real money to make real loans. Hedge fund "fake banks" go to the dumpster. Small banks got their noses bloodied and will just revert to buying loan participations from the big boys like before. GS, LEH, etc. revert to a hedge fund and pure investment banks. So the big banks will be able to control the markets, increase spreads on loans and fees and mint money for years. Obviously the infatuation/bubble in securitizing everything is over.

Alas, I was early and some big banks like C were really stupid, too. But longer term, I think this will really pay off.

I am noodling over many adds at these low prices, but will likely wait until the Fed meeting of late January. Ms. Market has been betrayed by the Fed twice already. No more, please.

Wednesday, January 16, 2008

Thinking ...

I'm still in Ohio, so posts are a bit slow and light.

So much fluff, wind and bs on Babblevision and everywhere else. I try to focus on key facts since I'm not a trader. My time frame is one year. Even if a trade can make money ST, in my experience I can lose more in the combination of taxes and losing my position date stamps that let me take advantage of future rips up.

I focus on core inflation, the Fed, jobs and unemployment claims and GDP. After that I just listen and think and try to synthesize a picture of how the world economy is, what its momentum is and how it will evolve under existing and foreseen forces. I could explain this process better using analogies to quantum path integrals of a global economic Lagrangian, but that might not be a "simple" analogy, hence not helpful. Hehehe :-)

Well, that's how I think about the world, in truth.

Still doing nothing. The CPI was OK, the INTC earnings were OK. Fear still rules.

Tuesday, January 15, 2008

Doing Nothing

I see no reason to do anything here, except wait out Ms. Market's hissy-fit. I plan to buy more BAC after their earnings reports if it's under 40.

I still see nothing inconsistent with the mid-cycle slowdown trajectory. There will be no recession as long as Ben doesn't betray me. The big guns are on my side ... aka the Fed. So on my time horizon of one year, I am very bullish.

I posted my gold tactics in the comments a few days ago. I'll sell about 20% of my large holdings in bits between 920 and 1000. And if silver gets over $18 I'll let 20% of it go, too.

Sunday, January 13, 2008

Strategy and Money Management

The markets have given all a very hard six months. A review of the strategy and money management plan is warranted.

My outlook is for a renewed bull market after this correction in price and time runs its course. The Fed has cut rates and Ben has indicated that more cuts are coming. Their TAF has reduced spreads in overnight lending. "Don't fight the Fed" is a long-standing rule that pays off given time. It takes time for investor fear to work itself out. Unless the Fed betrays Ms. Market, she will be looking quite attractive by fall.

My long term money management plan gives me the flexibility to withstand these wild days. There are two parts to it.

First, the bulk of my investment assets are in the "Krypto Fund". These accounts amount to about 80-85% of my investments today. The "Alpha Fund" accounts comprise the remaining 15-20%, as I have cut the size back from the prior 25% as I posted this fall. Why did I do that ? It was simple risk management. As the dollar value of the Alpha Fund grew, the absolute $ amount of the volatile swings got scary to me. Seeing my accounts "fluctuate" by a personally significant amount was too much. So I cut them back. Remember, I use margin in my Alpha Fund - it's an aggressive fund. Everyone has to set a $ limit of what amount of a "fluctuation" is too much for them.

Now I can be aggressive in my Alpha Fund because the bulk of my investments are managed thru long proven, globally diversified index funds plus real estate funds and gold. So this money is safe and provides really fine, long term returns, viz. over 10% per year on average. If you have a safe base - core holdings of diversified assets - you can be aggressive on your "Alpha Fund". A safe, well-structured investment base is crucial to maintaining a positive mental attitude in your investments. An investment base is like the castle of a Baron. From his safe castle, a Baron can make forays to gain new wealth and lands. If setbacks occur, the Baron can return to the safe base and recover and regroup to fight again. You need this safe castle, too.

If you try to be aggressive with too large an amount of your holdings, the swings and volatility will shake you mentally and financially. So don't do it. This is an absolute $ limit on the amount you can bear under volatile market swings, not a % limit. The absolute $ amounts are what causes fear, not the percentages. An absolute $ limit on your volatility in your "Alpha Fund" will help you control position size in risky stocks. I can keep a very large position in stocks like BAC, but a stock like EDU gets less. Almost all "four letter" stocks have much risk of a blow-up, except the larger, stable ones like GOOG, CSCO, ORCL, etc. So keep the position size in those down.

It's been a tough year so far. Take some deep breaths, collect your thoughts and get ready to ride the bull. A likely starting time is the Fed meeting of late January.

Saturday, January 12, 2008

Krypto Fund - Correction

Mrs. B gave me her retirement fund statements for year end 2007 and I see I omitted to add to the Krypto Fund some of her TIAA returns. So I have done that and the actual final yearly return for the Krypto Fund for 2007 was 7.38%.

That's pretty good vs. the S&P 500 for a tough year. Massive diversification and re-balancing rules !

[Note: I have corrected the original post now.]

Friday, January 11, 2008

Ancient Insights

The famous Greek history, Thucydides, had a reputation for dryness that repelled me for years, even though I prefer nonfiction to fiction. But after seeing a wonderful quote from the oration of Pericles cited from it, I decided to slog through it as part of my "re-education of Bunkerman" program. Gosh, I really learned a huge amount from it. The book has insights on the development of civilization, fascinating direct and indirect descriptions of the tribes and cities of ancient Greece, their diplomacy, military arts, personal leaders and political systems.

The dimension I want to dilate on here are its insights on the failures and frailty of human group behavior. Athens was a pure democracy as were the states of its empire. Yes, Athens was an empire with "allies" obligated to provide tributes and military forces on demand. The states of the Peloponnesian league were oligarchies - rule by small groups .... some aristocrats or others. [cf. reason #1 for a war in my blog post of December 2, 2007]. Wartime decisions of Athens were made by the people in the assembly by simple votes. Declarations of war, votes for resources and naming of generals were all decided by the assembly of the people. From the book, this seemed to be about 5-10,000 active participants, perhaps less in most situations. The setting is the Peloponnesian War which ultimately lasted about 30 years between Athens and her empire and Sparta and its Peloponnesian allies such as Corinth.

So how did Athens screw up ?

By year ten, Athens had effectively won the war by (a) defeating the Lacedaemonians [aka Spartans] at Sphacteria and capturing its army, and (b) later defeating and killing their general, Brasidas, in Thrace after his brilliant, but ultimately unsuccessful, efforts to induce revolts in Athens' empire there. Those defeats shocked Sparta and led to a peace treaty - even an alliance - with Athens. One can read the actual treaty in Thucydides. Now a flaw in a democracy apears: a mass delusion by a group of humans.

In year 17 of the war [there were other actions in years 11 thru 16 involving another city, Argos], Athens decided to invade and conquer Sicily, The people were induced by representations of support from some tribes in Sicily and some Athenians desiring the fame and gains of conquest. Alcibiades was a prime proponent of this extension of the war. Hmmm ... lust for fame and glory ... two factors of human error. The people in the assembly fell prey to these hopes and visions of extending their empire and voted huge resources to prosecute the war ... in a far off place.

To keep it brief, in one of the fifteen most decisive battles of the ancient world - the battle of Syracuse against the Athenians - the entire Athenian fleet and army was destoyed. Alcibiades had first been deposed and condemned by the Athenian assembly in one of its vicissitudes and subsequently turned traitor and helped Sparta in aiding Syracuse. The Athenian empire began to revolt and collapse as Athenian ability to control it evaporated with the losses.

Mass delusion and the people deluded by lust for more power by leaders having their own lust for fame and glory - all are shown in wonderful detail in a situation relatively compact and understandable. The dangers of uncontrolled democracy are evident.

PS: The free election of Hitler in Germany is a fine modern example of a failure in democracy.

Thursday, January 10, 2008

Moving Target

I see the recession-mongers have moved their target now to Q2 and Q3, as the mouthpiece of the chief piranha of Wall Street [ viz., GS ] staked out his claim to fame. I suppose he had to move it, since Q4 won't fit now and Q1 looks slow, but OK too. These guys make these big mouth claims loudly so that IF it occurs, they can receive the mantle of "genius" and live on that for years. If it doesn't well, ... forget about that. Babblevision never checks a track record.

Hmmm by mid 2008, won't most of the "subprime" loans have reset? And won't the Paulson plan be having a major effect by then, too ? So all the risk for Q2 and Q3 is from secondary damage. That's pretty flimsy reasoning.

But they say, lots of other loans will be having more losses - credit cards, auto loans, corporate loans ... on and on. Of course, they forget to say that losses in corporate loans are still well below historical norms. And banks do make loss reserves in the ordinary course of business for losses on ... auto loans, credit cards, etc. So what's new ?

The only thing new of important is the Fed. Keep focused on the Fed. They matter. Bernanke speaks today at 1PM - hugely important if he says anything about current conditions.

The Fed has a tight money policy that they need to relax to avoid CAUSING a recession. Tight money can always do that if maintained too long. And they have had tight money for a few years now. Their unwillingness to recognize that the inflation war was won has induced them to keep money tight. That is a problem and it needs to be fixed.

I showed on these pages a few weeks ago that the "neutral" range in monetary policy is 3% to 5% for the overnight rate. So with obvious weakness, the overnight rate should be close to 3%. And the monetary base growth of 1.3% is too slow for an economy growing at over a 5% nominal rate [3% real plus 2% "core" inflation ].

The excessive, prolonged tight money policy of the Fed is causing the risk of a downturn. Had the Fed correctly recognized the war on inflation was won in early 2007 as core PCE was declining, they would have cut rates to mid-neutral then [viz, 4%] and mostly of this credit crunch would have never occurred.

As usual, they screwed up. Now they need to fix their mistakes and lower rates even more.

Hello Ben ... read your messages from Bunkerman ... obey him ! [ hehe ... ;-)) ]

Wednesday, January 9, 2008

Some facts

I really getting tired of the fear-mongering ... are the markets every "clear" ? Is uncertainty ever gone ? So why do I hear pundits say to be cautious due to ... "uncertainty" ? Sheesh. Phooey !

Here are two facts.

1. Copper prices are up 10% over recent lows.
2. Dupont issued increased EPS guidance for 2007 and 2008.

Where are the negative pre-announcements? A bit skimpy. So where is the evidence for the disaster for Q4 2007 that the pundits assume occurred ? Their claims for a recession were counting on Q4 2007 and Q1 2008 to meet the minimal criteria.

Every day I hear another analyst saying that something bad "may" occur. They are falling over each other trying to create a bearish CV ... sheesh.

I think I'll puke if I hear another pundit say that some event "must" happen since the "market" predicts it. Uh ... didn't the market predict Obama would beat Hillary last night ... uh ... what happened to that one ? Real people made the actual decision, not the "market" traders. That same principle applies to the economy and the Fed - real people will make the decisions.

I must be getting old - at least I'm over 45 and in the "wise" age group !!! Sheesh, I remember the same garbage in 1981, when articles about Fed policy seemed to imply that a bond trader 's thoughts were "important" about a long term policy. Sheesh, what sheer nonsense !

Focus on the facts and forget the fluff.

Tuesday, January 8, 2008

Gold and Oil


Gold hits $876 this morning on the February futures contract. I remember a year or so ago discussing gold ... when it was in the low $600s. The question from a friend was regarding the psychologically difficult decision whether to hop onto the move since the lows under $600 had been missed. My reply was that those $25 missed look really small compared to the gains when gold hits $1000. Missing a low or buying too early are psychologically difficult barriers to overcome when trying to buy for the big, long term move. The barriers are magnified as they seem to be big percentages of the original amount. This is why I think about what the prices will be in one or two years. I buy a long term position on that basis - not the much smaller bounces and dips that occur as the beefers move around the stock or commodity.

So what now on gold ? I "plan" to hold it all until "about" $1000, then will sell a 'bit" - maybe 20% of my large position - on principle. That's been a long term target and not taking some sugar there would anger the trading gods, implying hubris and cupidity, which are punishable sins. After that, I will continue to hold unless something changes and review the matter.


At $100 per barrel, I believe that slow conservation is taking hold and reducing future total demand in the US and in many other markets, particularly the emerging markets where industrial and process decisions can be made to permanently reduce future demand. This will help keep oil from rising to levels well over $100 barring a supply disruption. And this conservation will give room for new needs and demand from emerging markets due to growth. So supply and demand seem balanced to me around this level. New production will go to replace declining old fields. A wide trading range from $90 to $110 seems likely to me.

So what to do about the oil stocks ? Those were big gainers in 2007. I've graded my oil positions 3, 2, or 1, which are rough $ value proportions of the holdings that I want to keep: DVN, CVX, COP, XOM, HES, MRO, SU. As my LT gains dates are hit, I'll cut back the stocks that I now grade as 2 or 1 to the appropriate level. I already took some sugar on some per my post of last Friday in the early AM - fortunate timing :-)

3's: DVN and CVX. these two companies have big deep water fields in the Gulf of Mexico and stand to gets big new reserves as those fields are developed. No selling here.

2's: XOM, SU, COP. XOM is well managed but has a higher PE; COP is poorly managed but has a lower PE and a lot of natural gas; SU is a very long term play on the oil sands in Alberta.

1's: MRO, HES. These are smaller integrateds that I've held as possible takeovers. HES seems fully valued now, but my LT date is in March.

Most of these, except HES, are still undervalued. As the confidence in keeping $100 oil increases, I think they will continue to increase in value. Also, at some point, - maybe this spring, refining margins will increase again which will help them all.

I grade VLO a 2 as it is very cheap and is integrating forward slowly into retail sales under its own brand. BTU is a 2, also. I will keep all of my RIG and DO as multi-year deep water drilling plays. At some point I'll probably sell NOV and NE, but can't now. In all cases, I sell on the periodic rips caused by beefer rotation.

Monday, January 7, 2008

Whither Now?

I think that quite a few pundits and beefers are using a 1990-1 template for this period in the markets. At that time, the commercial real estate industry was cratering due to massive overbuilding, the high yield bond market had high defaults and regulatory changes that were devastating, and the first Persian Gulf war was causing much fear. I remember that rumors abounded over the Christmas holiday then that Citibank couldn't sell commercial paper and was in danger of failing ... and that's when the Saudi prince got such a bargain by investing in it. Persons thinking history is repeating think a recession will occur, as in fact one did in the 1990 period.

And then, belated Fed easing was "pushing on a string" as they were far behind the momentum of the economic trajectory, so their efforts took quite a long time to show any effect.

A principle I use often is that history doesn't really repeat, if makes people think it will, then changes. People notice imprecise patterns and think the entire situation will repeat, but overlook important differences. Hence they error in their conclusions.

So what errors are the recession pundits making ? First, notice that the 1990 recession was quite shallow - it almost did not occur. On my 100 year chart of GDP, it's almost imperceptible. Second, see my description above - I listed three major negative factors for 1990. Today there is only one real factor: residential housing overbuilding and consequential value weakness and defaults in weaker mortgage loans. Third, the Fed is actually "slightly" on track - not completely behind - as they did start cutting rates in September. So they are pushing to re-accelerate the economy before it actually reverses course and slows.

But they aren't doing enough and their public dallying and unclear readings on the economy are hurting their efforts. And the overnight rate is still too high. And their monetary policy is still too tight.

I calculated the growth in the monetary base for the past year - it's only 1.3%. That's very restrictive for an economy growing at a nominal rate of at least 5%. So they still have a tight money policy and overnight rates are too high compared to core inflation.

So they need to get more aggressive on cutting rates and increasing the monetary base before more negative economic momentum can develop. Or that "pushing on a string" metaphor might become true.

PS: to clear up some readers' confusion, let me post this analogy that I wrote in the comments: "another way to explain my thinking, is that based on the real interest rate level and the non-growth of the money supply, the Fed now has its foot on the brakes, causing a slowdown. They need to take the foot off the brakes and tap the gas a bit to offset their errors of the past nine months."

Sunday, January 6, 2008

Perceived vs. Real Inflation

I've argued here that real inflation is quite low, and that all the screeching about inflation nowadays is just "perceived inflation". That oil and wheat and corn prices are high is true. But the cause is NOT a general increase in the price levels, but specific supply-demand imbalances. And the high prices in areas like NYC and DC are caused by the rich and powerful bidding up prices for real estate and most services. In Florida, Arizona, Nevada and California the weather choice drives up prices for property and services. In both types of areas, service providers can't afford to move there to keep costs low. Demand by geezers distorts those weather markets, too, and in Florida, hurricane costs drive prices up. All those factors are unrelated to real inflation.

Here is another example how consumer choices create perceived inflation, not real inflation. Food can be really cheap IF one is willing to prepare it. Of course, thirty years ago, people did prepare food for home consumption. Women then did know how to cook and men knew how to carve a roast. Nowadays, people prefer to buy the fried chicken already cooked in the store and buy expensive, but convenient, prepared foods. So they pay a lot for those extra services and then proceed to gripe about "inflation."

Here's an example. Last evening I - the man of the house - made a roast chicken. My choice in the store was buying either a 4 lb. turkey breast for $20 or a 7 lb. whole chicken for $7. I know how to roast & carve a bird, so the choice for the chicken was easy. Then Mrs. B made some boiled turnips and parsnips. Those are really cheap tubers [aka root vegetables] and have a sweet, delicate flavors, far superior to potatoes. No sour cream or butter is needed - just skin, slice & boil for 20 minutes. With a salad, we had a tasty, nutritious and cheap dinner and have enough leftover for another dinner tonight. Doing the preparation oneself saves a lot of money and avoids sources of perceived inflation.

Here's another example. Mrs. B makes really tasty pumpkin pies. Ingredients are 1 can Libby's pumpkin, some sour cream, stevia for sweetening, some spices and a prepared graham cracker or shortening pie crust. Total cost of ingredients is about $4-5. Mix & bake - very easy. This can be a dessert or a yellow vegetable for breakfast or lunch. [btw, I know pumpkin is scientifically a fruit.]

Here's a different example of non-inflation. In the 1980s, the price of VHS tapes was uniformly about $20 each. I just bought some DVDs, which provide a superior picture and sound. I paid about $13-14 each for The Music Man and Blade Runner, among others, on Amazon. That's down 33% over 20+ years. I used to rent VHS tapes at a local store for about $4/day. Now I can get 4 DVDs a week from Netflix - so over a month I can get 16 DVDs delivered to my house for $25/month, about $1.50 per movie. So the price of home entertainment has gone down hugely while the quality has gone up. No inflation.

So with dinner, the pumpkin pie dessert and a fine Fred Astaire+Ginger Rogers movie from Netflix, Mrs. B and I had an enjoyable evening at home ... and experienced no inflation.

Real inflation today is nearly zero. Most of today's "inflation" is either in perception only or caused by specific supply-demand imbalances or stupid government programs [ref ethanol here].

The Fed is very wrong is thinking inflation is a risk. And the stagflation pundits are completely wrong, too. Both are fighting the battle of 1980 over - fighting the last war. It's 2008 - get back to reality. Cut rates to 3.25% NOW!

Friday, January 4, 2008

The New Year

This is a two part blog: the New Year for me personally and for Ms. Market.

First, one of my New Year's resolutions is to get back onto the exercise program - a core part of my weight reduction effort.

I have been successful ... so far. I like a basket approach to exercise - I have many enjoyable types of exercise and vary my choice daily to avoid over training any particular muscle group and give those tendons a break. When you are older, that's important.

Here is what I do: elliptical machine "running", rowing machine, weights (heavy/upper body/lower body/power), boxing, knife fighting.

For example, boxing requires lots of jabs. Since I'm right handed, that means lots of left jabs. Knife fighting is the reverse, requiring lots of right hand thrusts. So opposite arms are heavily trained. Another example: Heavy weights means deadlifts. "Power" is force x velocity. That means power cleans, which really work the whole body vigorously with speed and force. Being over 50, I lift weights for about 30 minutes in a session after some moderate loosening exercises. That is enough and prevents injuries. And obviously, the elliptical machine is different than the rowing machine. So I vary the exercises both to prevent injuries and boredom.

Now Ms. Market.

I looked at some weekly charts. No doubt, they stink. The major averages are in consolidation patterns with a bearish slant. If one uses Elliott wave, the possibility of an intermediate bearish wave down clearly exists.

The Fed is not doing its job and is still fighting the last war, viz. inflation. The risk of negative downward momentum is clearly building. The Fed really needs to get interest rates down to the low end of the neutral range soon. That means under 4%, preferably to about 3.5%.

I still think there will be no recession and the US will have slow growth for 2008, accelerating into the end of the year into 2009.

Some of my large positions in energy and miners attained LT gains on parts of them today and more will over early January, so I will be trimming them to levels I can hold "forever". Since I have a bit of margin, I do need to take some sugar in those winners. Since XLE is at all time highs, now is a good time. I also took partial gain in AAPL again. I was waiting for 2008 so the taxes would go into this year.

My recent adds suck. But I bought them for a year and am managing them. I expect to buy some GNK and DSX. Those are dry bulk shippers and have pulled back a lot. They fit into my transports play and "no global recession" theory. I added some more YRCW yesterday. That's a perfect example of my "buck fever" error in jumping into an idea too fast. Oh well.

PS: Fed gets an F. Jobs up only 18,000, unemployment up to 5%.

Thursday, January 3, 2008

Don Quixote

I am listening to the great novel, "Don Quixote", by Cervantes. This book is so funny at points that it was dangerous for me to drive while listening. So far, I'm about 1/3 way through. The book was written 400 years ago and again proves that we "modern" people really aren't so modern at all. The humor in Don Quixote reminds one of sit-coms and modern skits and jokes.

Don Quixote - the character - is a madman, driven mad by his total immersion in chivalric books of the period - the adventures of knight errants. He had read so many that he thinks they are true. In Cervantes time, those books did exist and were widely read. That's why his novel was such a success as a parody.

Now that brought to my mind the modern youth and young people's fascination with computer games. As time has gone on, even young adults now play those games like zombies. Those games have quests and fighting and all sorts of aspects of the adventure stories parodied by the book, "Don Quixote".

Perhaps some young people are also being driven mad by these computer games ? Certainly examples of such exist. Young people becoming so immersed in delusions of quests cannot be good. And the demeaning aspects of life in those games with the endless killings, shootings, and more. That's really horrible. Some modern movies do portray people living in delusions derived from computer games.

So all this was seen by Cervantes about 400 years ago. Are we really modern or just the same people with new technology.

I think much of what people think as "new" is a recycling of ideas known 100 to 400 years ago. I'll give more examples of this in future blogs.

PS: Ms. Market needs a rest. These endless "worries" are getting silly. What kind of data do people expect is a "slowdown" ? Nothing has changed. The Fed needs to do what I say - cut rates to a truly neutral or low neutral level around 3.5%. They still have tight money in place. really stupid.

Wednesday, January 2, 2008

Happy New Year !

A new year begins, so it's time to see how the last year went and review strategies and tactics.

For the calendar year 2007:
Krypto Fund +7.38% [corrected - see post of 1/12/2008]
Alpha Fund +54.0%
Commodities +28.5% [closed midsummer 2007]

Gold helped the Krypto Fund quite a bit, as did the emerging markets and Europe. Real estate hurt. US stocks were middling. The two year compound return for the Krypto Fund is 11.5%, which is a bit better than my 10% target. Some moves I made shifting some TIPs investments [TIPs = Treasury Inflation Protected securities] to stocks were poorly timed. I am still learning how the TIPs act. They really are quite uncorrelated with stocks so are quite a valuable diversification tool. Over time I want to rebuild that position but will wait for better prices.

Big winners in the Alpha Fund were AAPL, RIG, DO, RTP, HDB, HES, NOV, PCU and FCX - those are all 100% gainers. Alpha Fund was hurt by almost all my 2nd half new positions, viz. BAC, C, WB, YRCW. I bought those for where I think the stocks will be in year end 2008, but was obviously to early.

One problem I have is letting a "good idea" wait a good entry. Sometimes I can do it, but other times I get "buck fever". In other words, I preach better than I act often. Emotions are hard to control.