New Mac

I am writing this from my new Mac computer - it's very nice.

The screen was huge - 24" and the resolution is outstanding.  So far no problems, but I haven't done much yet.

This morning I spent a long time waiting for my rather new Vista PC to do it's thing - updating, downloading, etc.  So I had to wait while it fixed itself - Grrrrrrrr

The Mac starts up really fast.  So over time I am going to try to do everything on this computer to see if I can mostly junk my Windows PCs.  I think it might take a year to get really confident.

Next step is to transfer some files and make sure my iPhone synchs OK with this.  I think I should transfer the songs first, though.

I'll post more over time about this experiment.

Perception vs. Reality

The financial press keeps talking about huge losses in subprime & CDOs and CLOs. And the major financial institutions get painted with that tar brush, as if they are holding the risky paper.

The reality is that as the subprime mortgage loans default - there are very few corporate defaults still - the real losses go to the subordinated layers of the structured debt first. And those layers are rather thick before the Aaa/AAA paper gets any.

I'm talking about real losses, not perceived market losses created by a selling panic.

So who owned the subordinated classes - the AA, A BBB and lower rated classes? The beefers - hedge funds - and some managed accounts for pension funds. That is where the "real" losses will be put.

Billions and billions of real losses go to and will go to classes owned by many beefers and they are being liquidated. That will be done by year end, or sooner.

Have you noticed how no one is talking about that paper? I haven't heard a single story in the financial press about that paper. How much of it is there? Billions and billions upon billions. And it bears the first, second, third and more layers of losses before the Aaa/AAA paper bears even $1 real loss.

When the dust settles and the actual losses show up in the trustee reports, as a group those Aaa/AAA classes are NOT going to show much, if any, real losses.

Golly, if I was paranoid, I'd think the beefers were feeding misleading stories to the financial press.

I am very long BAC, C, WB and JPM for long term. I have a trading long in CFC.

Over a long time frame, reality will rule over perception.

A Day of Thanksgiving

I have much to be thankful for on this Thanksgiving Day: family, friends, felicity of the past and present, and old and new, and good fortune. I spent some time this morning thinking about the past year and what I have to be thankful for.

And I again read the "Review & Outlook" of the Wall Street Journal that has published the same pair of columns on the day before Thanksgiving annually since 1961. These superb expressions of some of the deep meaning behind Thanksgiving Day help one put this day into a larger context. The title of the first is "The Desolate Wilderness"; the title of the second is "And the Fair Land." I highly recommend them. I began reading them in 1981 when my partner first showed them to me. And I have read them almost every year since - every word again and again.

Cut Rates Now !!!

I carefully read articles about the Fed's minutes and extended forecasts. They forecast 2008 growth as 1.8 to 2.5% real growth, while expecting headline inflation to be 1.8 to 2.1% and core inflation as 1.7 to 1.9%. Unemployment is forecast as 4.8 to 4.9%. The current overnight Fed funds rate is 4.5%, which is 2.7% over the midpoint of the core inflation forecast for 2008. In Note A below from a variety of data I educe the range of reasonable "neutral" real interest rates as 1.5 to 2.5% with 2% as the central neutral level.

The inflation forecasts of the Fed itself show they have won the war on inflation: price levels are forecasted in the zone of stability - the "Comfort Zone".

The core PCE is now 1.8% year over year and the Fed midpoint forecast for 2008 is the same. So the "neutral" Fed funds rate is 3.8%. But why should the level be at "neutral" ? The Fed's own forecast shows subpar growth for 2008 and higher unemployment. So they are violating their mandate to maximize employment with stable prices. The Fed should be maintaining either below neutral real interest rates or at least a real rate at the low end of neutral, viz. either at 3.3% or lower.

Mirabile Dictu !!! Ms. Market concurs !!! The two year Treasury note is trading at 3.06% !!!

So why can't the FOMC figure this out ? Surely Ben Bernanke is as smart as his college classmate, Bunkerman. Maybe the FOMC members are still fighting the last war - inflation - and still shooting though they admit they've won. Some Fed big mouths do say that. Or it's something else. Hmmm, what could that be ? From the screeching of the press and some politicians, it's the dollar ! They are afraid the dollar will drop considerably more. Grrr, they have no statutory authority to support the dollar.

How many common men must lose their jobs & homes to support the dollar ? I'd like to hear Barney Frank ask Ben that in sworn testimony.

Let no common man be crucified on a cross of dollars ! *[see note C]

Cut rates now at least 125 bps ! Or cut 50 bps and signal continued cuts !

**********************************
NOTE A - REAL INTEREST RATES
There is a range of Fed interest rate levels due to error and inaccuracy in knowledge. So accepting the core PCE inflation level of 1.8% [which corresponds to the recently released Fed "central tendency"], what range of real returns should be put onto that for overnight money ?

I remember learning in B-school that a 0% real return for T-bills was the empirically mean over long periods of time. Adding 1% for a bank risk makes sense. And I know that current Treasury inflation indexed notes give around 2-2.25% for multi-year money. And I know that old gold notes have long term rates of around 2-3%. So suppose a reasonable range is 1-3%, midpoint 2%. Let's take the range and divide by two to get a core centroid: (3% - 1%)/2 = 1% core centroid which is + or - 0.5% on the midpoint, viz. 2% real rate plus or minus 0.5%.

So higher math gives a neutral real interest rates as between 2% + or - .5%, viz. from 1.5% to 2.5%, midpoint 2% for overnight bank lending.

NOTE B - $10 words
For definitions of educe, adduce and conduce, see blog post "The 'duces" for November 19.

NOTE C -
Reminiscing the famous "Cross of Gold" speech of the "Great Commoner", William Jennings Bryan, whose only vice was an inordinate fondness for a third plateful of food :-)) [I think that's a quip from H. L. Mencken - I saw saw it a few years ago & saved it.]

"Having behind us the producing masses of this nation and the world, supported by the commercial interests, the laboring interests, and the toilers everywhere, we will answer their demand for a gold standard by saying to them: You shall not press down upon the brow of labor this crown of thorns, you shall not crucify mankind upon a cross of gold."

Source: William J. Bryan, _The First Battle: A Story of the Campaign of 1896_ (Chicago: 1897), 199-206.

On and on

The Rich Man's Panic continues. Sigh ...

HPQ beats earnings and revenue estimates and guides both up. No recession there. Sigh ...

Fed minutes come out today, plus the increased forecast disclosure. Those might be really interesting.

CFC got hammered again. I suppose that more rumors abound about liquidity and downgrades. I'm thinking about re-buying it. I didn't notice until too late yesterday that it was so low. If I can get a good entry, I'll buy some for a TRADE. I figure that someone will definitely buy them - the question is at what price. I think 18 is the logical minimum, viz. the BAC owned preferred stock strike price for conversion. This will not be a huge position.

I now have fullfilled the "Plan" for my big fin long term purchase program. The positions are BAC, C, WB and JPM in order of position size. The first three [BAC, C, WB] are rather close, though. I don't want to become a "Stakhanovite" here for these. If I decide to become one, I'll be doing it thru options and for a trade.

Otherwise, nothing has changed. Beefers with winning positions are still shedding them in panic to hold onto gains to keep their fees for the year. Find good stocks & groups on buy dips for long term positions. There are quite a few good opportunities out there. Use patient time diversification. This correction will clear soon as time and price are both playing out.

PS: yesterday's S&P drop broke the recent low, hence erasing the potential rally. So we're back to waiting for a new "Day 1"

PPS: This big cap fins position is now my largest group in my Alpha Fund, even larger than the energy stocks. Big cap fins are 33% of the Alpha Fund. Energy stocks including deep water drillers are about 30%.

P^3S: Just so all know I can admit when things go wrong, my Alpha Fund is now up only 43% year to date, vs. 68% at my year high. So that's quite a drop. The sales & partial sales I made for money management around September certainly helped keep my numbers up as all those stocks are under the selling prices. All my early buys in the big cap fins are well under water. :-(( I don't mind the first buys, but the adds in Sept. to Mid Oct. still burn me, as those violated my buying plan.

The 'duces

No, not deuces ! This post is about words formed by adding a prefix to "duce". I seem to have trouble remembering these so I thought that writing a blog & comparing them might help.

Here are the $10 "duce" words that are in my word card file: adduce, conduce, and educe. $0 words are induce and introduce. I wrote about "adduce" a few days ago.

Adduce: to offer as an example, reason, or proof in discussion or analysis; to cite as an instance or as proof or evidence.

Conduce: To lead or tend to a particular end usually desirable result: contribute

Educe: 1. To bring out or develop from latent or potential existence; elicit. 2 infer; elicit a principle, or number from data.

So can I use these words in some sentences about beefers ? :-)

Bunkman's long observations of stock movements educed the "beefer" as a prime mover of markets short term. Bunkerman further adduced recent wild swings in major groups in substantiating the profound effect of beefer actions. Investing tactics such as dip buying that recognize beefer moves conduce better long term results.

A hat trick ! :-)))

Nothing is new; nothing has changed. Be patient, buy dips, wait for the smoke to clear. When the beefers cease stomping the mud around this drying water hole, a new trend will emerge. We are waiting for a "follow thru" day to confirm a rally.

BAC

I read some research on BAC [Bank of America] that was published on Barron's Online. Punk Ziegel & Co. wrote that BAC has a large investment in China Construction Bank with the option to increase it to 19.9%. Under the new accounting rules, they will be able to write it UP in Q4. This gain will flow directly to the bank's equity and increase its capital ratios quite a bit. The total increase is ... $35 billion [sic]. BAC's market cap is less than $200 billion now. So this is huge and that capital can be used to increase loans and earnings power in the future.

Combined with the pain inflicted on the non-bank loan markets, such as CDOs, SIVs, and mortgage companies and other structures that let non-banks s compete with banks, I think BAC's earnings power in the future is really a lot more than today's excessively bearish mindset puts it.

So I am thinking of buying more BAC. I have a lot but have about 17% left to add to the big banks from the "Plan" amount (100%). Either JPM or BAC will get it. JPM is the smallest position of the "four horsemen" in my big fins holdings [BAC, WB, C, JPM]. So I have some real thinking to do.

WSJ story says Russian oil production growth is slowing very much. No surprise. Oil demand is growing and has to ration the relatively fixed supply. Oil demand elasticity is well known to be quite small - it's "inelastic". This means to reduce desired demand just 1% it takes a multiple % move in oil prices. Since oil/energy demand is highly correlated to economic growth, oil prices are going up over time. For example, if economic growth would naturally increase oil demand by 1%, oil prices must increase a lot to cut that demand to 0% as no more supply is available.

This is why oil prices are high. It's not fear or speculators. If those were causing high prices, lots of oil would be moving into storage or OPEC could not sell all it desires. But OPEC is selling every barrel. Boone is correct.

Stocks:
Nothing has changed. Beefer actions can make Ms. Market dance anything they wish short term. Buy good stocks & groups on dips. There have been some good dips in oils and miners and deep water drillers. Take a look if you don't own them.

PS: Per yesterday's late day comment, I bought more C around 34.50

PPS: per the comment posted, on this AM's dip I bought more BAC, WB and JPM. Around 15 I'll add to YRCW.