Archive for January, 2009

I thought this article by John Berry was fascinating…What do you think?

By , 22 January, 2009, No Comment
John M. Berry writes,
At some point, politicians are going to have to stop pandering to their constituents and show leadership by explaining why the economy can’t survive without a banking system. Hear we go again. We hear a rising chorus of cheerleaders for “recapitalizing” banks. Instead, let me remind readers of the first suggestion I made, way back in September. That is, the regulators should make use of capital forbearance for solvent banks and close insolvent banks.
Are the banks that are in trouble insolvent or illiquid? If they are illiquid, then capital forbearance would keep them going. Capital forbearance means lowering the capital requirements for the banks to remain in business and to continue low-risk lending.
If the banks are insolvent, then throwing more capital at them is the infamous zombie bank strategy. Propping up zombie banks encourages them to continue to lose money, make risky bets, and make it harder for healthy banks to compete.
The regulators may whine that the “toxic assets” are hard to value, making solvency difficult to determine. However, I think that triage is possible. Based on the best estimates of the value of “toxic assets,” classify banks as either healthy, insolvent, or somewhere in between. If they are insolvent, close them. If they are somewhere in between, give them capital forbearance, but put them on a tight regulatory leash otherwise. Limit their ongoing asset acquisition to low-risk lending. When the dust settles, presumably some of these banks will turn out to be healthy. The rest will cost the taxpayers some money, but presumably the tight regulatory leash will keep the banks from adding to their (our) losses.
It may be a bad idea to try to survive without a banking system. Trying to survive with a banking system that consists of insolvent banks artificially propped up by the taxpayers is an even worse idea.
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a little confidence returns to the market

By , 21 January, 2009, No Comment

ESH9

What a pleasant and profitable day to trade. It was if the market was almost normal again, especially the nice steady move we had this afternoon to the upside. The general consensus was the “Obama” effect and some decent news from some of the financials like Northern Trust. Of course, the market has a very short memory as it seems to have decided that Citicorp and Bank of America are of little consequence at this point. It’s a fickle thing this market.
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I just don’t know what to say these days…and Ray is as baffled as I am…

By , 16 January, 2009, No Comment
As a blogger, I am committing to imparting the small amount of knowledge that I possess to people who might find it interesting or helpful. In the past, this has been a joyous and passionate pursuit for me…that is to say, I have taken a general interest and posted with exuberance.

But the last week has just put me in a state of mind where I find it difficult to find optimism in the events that are currently occurring in our country. You see, I am an optimist by habit, and don’t generally like to dwell on things that are pessimistic or negative. I have found this mindset an effective way to deal with the uncertainties that are part and parcel of any market.

But then I run into a series of economic events of the last 18 months that are genuinely distressing. Like these:

Employment figures that are threatening to fall off a cliff….

An believable drop in retail sales.

Unprecedented upward changes in unemployment claims

An unflattering comparison between the current recession and past major and destructive recessions

So, as a trader I have found myself dealing with some of the greatest levels of pessimism I have ever experienced on our economic climate. I’m a bull by choice, but have learned to trade the market and not the economy. (as I have mentioned in some of my earlier posts). With the exception of the little bear market really a week or so ago, I have found myself perpetually short on everything I trade…and I suppose I don’t really mind being short all that much. But our economy, when taken in aggregate, points to significantly worse developments in the coming months. THE IS A DISTINCT LACK OF ANY INFORMATION THAT WOULD LEAD TO A FAINT RAY OF HOPE FOR OUR ECONOMY.

To make matters worse, this entire situation was brought about by greed and ignorance by both Wall Street and our current administration…you may as well through in, for good measure, a goodly number of Congress. And these factors coalesced to form a real estate bubble that shows no signs of waning in intensity or scope. Worse yet, we have found ourselves in a positive to bail out the very business entities and CEO’s who placed us in peril to start with. And the whole situation makes my stomach churn.

You see, this crisis was not about some external factors, like a World War or catastrophic emergency, no, we PUT OURSELVES in the crosshairs of this crisis through sheer greed and lack of government oversight. We weren’t unwillingly thrust into this disaster against our will….no, we waltzed into our economic disaster with eyes wide open and self-congratulatory smiles upon our faces. It is as if, at this point in time, the executives who engineered this catastrophe find themselves unaccountable. Recent congressional testimony unveils a parade of financial executives who find themselves unwilling and unable to assume any sort of personal responsibility for our current malaise. No, it was someone else’s fault….don’t blame the leadership of the country.

Our president, in his last presidential news conference, claimed his presidency was basically an “unqualified success.” Further, he explained, that certain things did not work as he wished they had, but finds himself without culpability in the general meltdown of the stock and financial markets.

Our secretary treasury, handed out 375 billion dollars to the banking community without any meaningful restrictions on what was to be done with the money, and the banks responded by using the money TO THEIR greatest advantage, not the suffering middle class consumer of our country.

I have never reached the level of disgust I current harbor against the people who are in office to serve the people of our great country, not line their own pockets. And ultimately, it will be the working population of our great country who bear the burden of this administration’s litany of incompetence.

Yes, I am still trading everyday, that’s my job. But it just pains me to watch 10′s of trillions of hard working men an women’s 401(k) programs and other retirement assets suffer losses in excess of 50% and, as I have said, all indicators point to a more pain yet to come.

It’s very hard, almost impossible to obtain any measure of joy and excitement in the current economic climate…only the contrary, I find my days trading a process of mounting frustration.

I’ve been talking with my friend Ray Epley about this. Ray is in management in the automobile sales segment of our economy, which has been among the hardest hit part of the economy. He wonders if there is an end in sight….and I don’t have a good answer for him….because I don’t see an end in sight, only mounting problems.

Ray didn’t like my answer, and I don’t blame him. But it’s the hard working guy like Ray that will ultimately bear the burden of this exercise in futility, and that is a sad fact. After all, all he’s done wrong is go to work everyday and work hard.

Where is the personal accountability in our world? Sure we could make Bernie Madoff the object of our scorn, but you will be amazed in the coming months how many Bernie Madoff’s there are…you see, they were all eating at the same hog trough and no one bothered to tell them that what they were consuming was other’s peoples hope and dreams…of course, that admonition paled in importance to the notion that they might well line their pockets full, brimming with money.

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Trade the market, not the economy

By , 9 January, 2009, No Comment

How is this for some dire employment news?
I was talking with my buddy Ray Epley, who is one of my favorite people to bounce ideas off of, and we were struck by the spate of bad news that has flooded the news of late. Some of the news has been absolutely horrifying, and in normal times would cause investors to panic…

Ray says to me: “Dave, Geez with all this bad news you would think that the market would fall flat on it’s face.”
Dave: “I agree with you, Ray…things sound terrible. I was thinking about getting short on some stocks a month ago. I would have been stopped out with a big loss.”
Ray: “yea, how can the market go up? Aren’t these guys looking at the news?”
Dave: “I don’t have any explanation, Ray….”

And Ray is basically right, with such negative reports on the economy, how can the market rally? Unemployment has been spirally upward, consumer spending is tanking…..what gives?
The truth is, I don’t understand bear market rallies other than they occur and you have to trade them accordingly, whether you understand them or not. Trade the market, not the economy. Sometimes when a spate of bad news floods the market I am tempted to automatically start thinking short, and that is a mistake during volatile times like this…trade the market, not the economy.

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Lets start the new year with pivots….

By , 2 January, 2009, No Comment

I am off and running and ready to start a profitable year. The topic of the day is pivot points which are, to some, the holy grail of investing. Generally speaking pivots are calculated in the following manner:

R2 = P + (H – L) = P + (R1 – S1)
R1 = (P x 2) – L
P = (H + L + C) / 3
S1 = (P x 2) – H
S2 = P – (H – L) = P – (R1 – S1)

Where….”S” represents the support levels, “R” the resistance levels and “P” the pivot point. High, low and close are represented by the “H”, “L” and “C” respectively. Note that the high, low and close in 24-hour markets (such as forex) are often calculated using New York closing time (4pm EST) on a 24-hour cycle. Limited markets (such as the NYSE) simply use the high, low and close from the day’s standard trading hours.

As for my own opinion, I find pivot points of great value on certain days, and of zero value on others. So, if you are going to be a pivot point man or woman, you will need to develop a methodology for determining the accuracy of your own pivot point system.

As for me, I generally chart the pivot points each day, and see what relevance they may have to my own trading techniques.

Closely related to pivots are support and resistance, and this is where the rubber meets the road for me. As many of you are aware, I base most of my trading on chaos theory, which is to say that there are patterns within patterns, but the frequency of these patterns within patterns is random. Ah, that certainly is a mouthful and I am sure that many of you are shaking your heads and wondering I am actually saying. To put it quite simply, I believe trying to apply linear charting systems to a non-linear market is futile. There is nothing, absolutely nothing static about the method in which the market trades.

I am sure the random walkers are standing and applauding at this point, but you can all sit down. Because the most recent market meltdown pretty well puts to rest any notion that the markets are efficient, or that all possible information can be Incorporated into any priced equity. Of course, the standard argument would sound something like this, at least from the Random Walk Cabal….”those equity bubbles are anomalies that occur from time to time…” But if they were aberrations, every member of the risk arbitrage community would have resolved those market inconsistencies within hours. No these bubbles, or masses of mispriced assets suggest that random walking in a fine theory, but nearly useless in actual practice. The creation of bubbles in the market has occurred in a variety of conditions and markets for more than 400 years. Whether it has been tulips, or gold, or Internet stocks, we tend to overbuy and oversell, usually against all logic.

However, support and resistance are of great importance to me…but it is important to remember that support is not static either, and is constantly morphing into new support and resistance levels as the days progresses. What? Yes, I know that most traders strike a line here and a line there and establish there support and resistance based upon those initial highs and lows. Some then apply Fibbonacci retracements to further establish support and resistance. Ah…erm…well….Fibonacci analysis is certainly interesting at some level, but the actual levels of correlation, proven by hundreds of scientific studies, is sketchy at best especially when charting price reversals. Since many of the numbers in the Fibonacci sequence are quite close together, it isn’t hard to point out that the market turned just past a 50% retracement, or just short of a 61.8 retracement….but the fact of the matter remains that super accurate predictions with Fibbonacci numbers is not as accurate as some practitioners would have you believe.

At once point in my career I drew in dynamic support and resistance lines as I traded, but I have found that a program called Decision Bar does an excellent job of pin pointing the ever changing support and resistance lines and have learned to rely on it’s accuracy and save myself a wealth of time and effort….but that’s not the entire story…which we will discuss tomorrow.

So, for today….I have tried to point out the problems of charting non-linear systems with linear charting tools, and suggest that non linear charting systems can greatly enhance you trading success.

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This from Calculated Risk

By , 2 January, 2009, No Comment

The Doris “Tanta” Dungey Endowed Scholarship Fund
by CalculatedRisk on 12/18/2008 06:23:00 PM
From our very own bacon_dreamz:

I’ve established The Doris Dungey Endowed Scholarship Fund at Illinois State University . Donations to the fund will be used for two things: first, to purchase a bench on the ISU campus (we’re hoping to have it placed in or near Milner Library, since Tanta liked to read so much) and second, to endow a journalism scholarship in Tanta ‘s name.

Once endowed, the scholarship will be awarded annually to a student with financial need that has demonstrated academic achievement and a passion for journalism. Tanta ’s work was obviously hugely influential, and I think a lot of people benefited both personally and professionally from her generosity, so for those who would like to give something back in her memory, I think this is a nice way to do it. I know I certainly gained a great deal from her work, but more than that she was also my friend, so I really hope she would be proud to have her name attached to this.

Donations can be made at the link below by entering “Doris Dungey Endowed Scholarship” in the Gift Designation box. Checks made out to the ISU Foundation with “Doris Dungey” in the memo can also be mailed to:

ISU Foundation
attention: Mary Rundus
Illinois State University, Campus Box 8000
Normal, IL 61790.

http://www.development.ilstu.edu/credit/credit.phtml?id=8000

I’ve copied the paragraph I had to write about Tanta below, along with the scholarship selection criteria. … I’m going to be involved in the annual selection process, as will [Tanta's niece] Kate, who will soon graduate from ISU with a double major in journalism and Spanish.

The Doris Dungey Endowed Scholarship Fund
Illinois State University Foundation
Normal, Illinois

Administrative Agreement

The scholarship is given in loving memory of Doris Dungey—known as “Tanta” to her family, friends, and readers—who received her Bacherlor’s degree in English and Philosophy from Illinois State University in 1982 and her Master’s degree in English Literature from the University of Wisconsin-Madison . Tanta spent most of her career working as a mortgage banker, until 2006, when she was diagnosed with late-stage ovarian cancer and began devoting much of her time and energy to writing for Calculated Risk, a finance and economics blog, which she continued doing until she passed away late in 2008. In this short time, she elevated the public discourse surrounding the collapse of the mortgage and housing markets by writing what became a widely read and referenced series of prescient articles explaining the “grim details” of how the mortgage industry functions, and by frequently challenging the rest of the media—often by skewering what she viewed as inept reporting–to dig deeper, ask the right questions, avoid prejudices and cheap moralizing, and above all get the story right. She always did so with humor, a passion for delving into the details, an understanding of people, a strong sense of human decency, and an instantly recognizable style filled with spirit, insight, and literary allusions, which continues to attract, inform, and entertain readers from a wide variety of backgrounds. She enjoyed interacting with her readers and was a generous teacher, touching many lives through her work.

I. Scholarship Candidate Qualifications Each candidate for a Doris Dungey Scholarship must be or have:
A. Accepted for enrollment or enrolled in good standing at Illinois State University .

B. Demonstrated academic achievement, as evidenced by accumulative GPA of at least 3.0 on a 4.0 scale.

C. Have a declared major in Journalism

D. Demonstrated financial need

E. Work experience, extracurricular or volunteer activities (special emphasis for work on high school newspaper, year-book, or related experience)

F. Used for educational expenses.

G. Sample of published writing or graded essay along with a brief description of why it was chosen.

H. Essay explaining why the applicant is interested in pursuing a career in journalism

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