Archive for March, 2009

A little blurb about Paul Krugman, an economist I greatly admire

By trader7757, 29 March, 2009, No Comment

Evan Thomas writes in Newsweek: Obama’s Nobel Headache. An excerpt:

If you are of the establishment persuasion (and I am), reading Krugman makes you uneasy. You hope he’s wrong, and you sense he’s being a little harsh (especially about Geithner), but you have a creeping feeling that he knows something that others cannot, or will not, see. By definition, establishments believe in propping up the existing order. Members of the ruling class have a vested interest in keeping things pretty much the way they are. Safeguarding the status quo, protecting traditional institutions, can be healthy and useful, stabilizing and reassuring. But sometimes, beneath the pleasant murmur and tinkle of cocktails, the old guard cannot hear the sound of ice cracking. The in crowd of any age can be deceived by self-confidence, as Liaquat Ahamed has shown in “Lords of Finance,” his new book about the folly of central bankers before the Great Depression, and David Halberstam revealed in his Vietnam War classic, “The Best and the Brightest.” Krugman may be exaggerating the decay of the financial system or the devotion of Obama’s team to preserving it. But what if he’s right, or part right? What if President Obama is squandering his only chance to step in and nationalize—well, maybe not nationalize, that loaded word—but restructure the banks before they collapse altogether?
emphasis added

Krugman is making the establishment nervous! Probably because they all missed the housing bubble – and Krugman called it correctly.

Krugman foreshadowed the Newsweek article yesterday: The magazine cover effect

I’ve long been a believer in the magazine cover indicator: when you see a corporate chieftain on the cover of a glossy magazine, short the stock. Or as I once put it (I’d actually forgotten I’d said that), “Whom the Gods would destroy, they first put on the cover of Business Week.”

There’s even empirical evidence supporting the proposition that celebrity ruins the performance of previously good chief executives.

Presumably the same effect applies to, say, economists.

You have been warned.

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A different take on it all….

By trader7757, 25 March, 2009, No Comment

“10 financial myths busted

BY JEFFREY R. KOSNETT, KIPLINGER.COM — 03/11/09

We feed conventional wisdom into the shredder.
Before the economic rout, you could rely on certain iron laws of personal finance. For example, it was a given that house values didn’t fall. Money-market funds never lost a dime. And no matter how ugly the market, expert mutual fund managers could protect you from drastic losses.

Alas, in this Hydra-headed global financial crisis, another generally accepted principle of financial strategy or economic logic finds its way into the shredder almost every day. We gathered ten truisms that no longer pass the test.

Myth 1: There’s always a hot market somewhere. When U.S. markets began to blow up, you heard about “decoupling” and “the Chinese century.” The idea is that Asia — or Russia or Latin America — can grow vigorously independent of the U.S. and Europe. Invest there and you’ll offset losses at home. Instead, Chinese, Indian and Russian shares have crumbled. Net investment money flowing into emerging-market economies fell 50% in 2008, to $466 billion, and is forecast to sink to $165 billion in 2009.

Truth: In this age of globalization, economic downturns and bear markets observe no borders.

Myth 2: Real estate behaves differently from other investments. Call it a bubble instead of a boom if you like, but it was supposed to be “proof” that real estate returns don’t strongly correlate with the returns of stocks and other financial investments. The message: Rental properties or real estate investment trusts can make money despite drops in Standard & Poor’s 500-stock index (.SPX).

Wrong. REITs lost 38% in 2008 because the credit crunch and overly aggressive expansion plans hammered profits and dividends. REIT returns used to have little correlation with the stock market. Now they closely track it.

Truth: Real estate won’t overcome other risks when credit problems are harming all investments.

Myth 3: Reliable dividend payers are safer than other stocks. Companies recognized as dividend “achievers” or “aristocrats” — because they could be counted on to increase their payouts regularly — used to perform more steadily than most stocks. That’s because shareholders seeking income tended not to sell. But now shares of dividend achievers can be as volatile as the overall market. One reason: more mass trading of blue-chip stocks in baskets, a la exchange-traded and index funds. Another factor: Banks, insurance firms and real estate companies can no longer afford to pay high dividends.

Truth: Companies aren’t too proud to stop increasing dividends. If you want stable dividends, ignore the past and look for companies with lots of cash flow.

Myth 4: Foreign creditors can drain the U.S. Treasury overnight. Puny Treasury yields suggest that it’s bad business for the rest of the world to lend so much money to the U.S. But think: What else would these investors do? And who has the power to impose this dramatic sell order? Nobody. Foreigners own $3.1 trillion of Treasury debt. Of that, $1.1 trillion is with private investors — mainly pension funds, which cannot safely ignore a class of investment that is absolutely liquid and has never defaulted. Governments and institutional investors hold the rest. On occasion they have sold more U.S. debt than they have bought. But massive private buying has overwhelmed the modest pullbacks.

Truth: If what you want is super-safe bonds, the U.S. Treasury is the go-to place.

Myth 5: Gold is the best place to hide in a lousy economy. In early February, an ounce of gold traded for $910. That’s just where it sat a year ago, when world economies weren’t so bad off. But foreign and domestic stocks, real estate, oil and riskier classes of bonds have all tanked since, and now gold looks — ahem — as good as gold. However, gold does not typically benefit from a recession. As inflation slows, people buy less jewelry, industry uses less gold, and strapped governments sell reserves to raise cash.

Truth: Gold tends to rally in prosperous times, when you have inflation, easy credit and flush buyers (kind of reminds you of real estate…).

Myth 6: Life insurance is not a good investment. This canard spread as 401(K)s and IRAs supplanted cash-value life insurance as Americans’ most popular ways to build savings while deferring taxes. True, the investment side of an insurance policy has higher built-in expenses than mutual funds do. But two factors point to a revival of insurance as an investment. One is guaranteed-interest credits on cash values, which means that if you pay the premiums, you cannot lose money unless the insurance company fails (see “Savings Guarantees You Can Trust,” on page 55). The other is the boom in life settlements. If you’re older than 65, you can often sell the insurance contract to a third party for several times its cash value — and pay taxes on the difference at low capital-gains rates.

Truth: A good investment is one in which you put money away now and have more later. Checked your 401(K) lately?

Myth 7: The economic downturn dooms the dollar to irrelevance. No question, the U.S. is deep in debt and going deeper while the economy contracts. History teaches that when a country can’t pay its bills, lags economically and cannot control inflation, its currency loses value. That’s why currencies in Argentina, Iceland, Mexico and Russia have all crashed within recent memory. The dollar does swoon, and it’s lost punch in places as unexpected as Brazil and India. But — and here’s the surprise — as recession gripped the U.S., the dollar got stronger. For one thing, there aren’t many alternatives. For another, some other currencies were temporarily inflated by oil and commodities speculation.

Truth: The dollar has survived a tough test and remains the world’s “reserve” currency.

Myth 8: Mass layoffs reward investors. In the 1990s, news of layoffs would boost a company’s stock for several weeks. Stock traders lauded bosses for tightening their belts, so it was smart to buy or hold the shares. But mass firings no longer impress investors. Lately, firms as varied as Allstate (ALL), Boeing (BA), Caterpillar (CAT), Dell (DELL), Macy’s (M), Mattel (MAT) and Starbucks (SBUX) have all announced enormous layoffs — only to learn that, if anything, doing so spooks the market even more. For example, on the day in January when Allstate axed 1,000 of its 70,000 employees, its shares fell 21%.

Truth: Don’t buy a stock thinking that a layoff will help profits. More likely, trouble’s brewing.

Myth 9: It’s crucial to diversify a stock portfolio by investing style. Experts say a sound fund portfolio fills all “style boxes,” starting with growth and value. Growth refers to companies with expanding sales and profits. Value describes stocks selling for less than the business is worth. In 1998 and 1999, growth stocks soared and value stocks stalled. Then, for a few years, value rose while growth got crushed. But since 2005, the differences have been melting away. In the current bear market, both styles have been disastrous, and it’s hard even to classify stocks as growth or value anymore. Many former growth stocks, such as technology companies, are so cheap that they act like value shares. Banks and real estate, once lumped into value, are a mess.

Truth: Pick mutual funds that are free to search for good prices on stocks, whatever their labels.

Myth 10: A near-perfect credit score will get you the best loan rate. Before the credit bust, if you could fog a mirror, you could get a mortgage. You know what happened next. But bankers still need to make a buck, so it sounds logical that if you can show a strong credit score, you’ll win the best of deals on any kind of loan. Not so. Mortgage lenders prefer large down payments. Credit-card issuers are just as apt to reduce your credit line or raise your interest rate. And those 0% car loans? Often they last for only three years, which puts the payments so high you’ll need to come up with more upfront cash anyway.

Truth: Credit is going to be tough to get for a while no matter …

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The Truth

By trader7757, 18 March, 2009, No Comment

By Charlie Reese
Politicians are the only people in the world who create problems and then campaign against them.
Have you ever wondered, if both the Democrats and the Republicans are against deficits, WHY do we have deficits?
Have you ever wondered, if all the politicians are against inflation and high taxes, WHY do we have inflation and high taxes?
You and I don’t propose a federal budget The president does.
You and I don’t have the Constitutional authority to vote on appropriations. The House of representatives does.
You and I don’t write the tax code, Congress does.
You and I don’t set fiscal policy, Congress does.
You and I don’t control monetary policy, the Federal Reserve Bank does.
One hundred senators, 435 congressmen, one president, and nine Supreme Court justices 545 human beings out of the 300 million are directly, legally, morally, and individually responsible for the domestic problems that plague this country.
I excluded the members of the Federal Reserve Board because that problem was created by the Congress. In 1913, Congress delegated its Constitutional duty to provide a sound currency to a federally chartered, but private, central bank.
I excluded all the special interests and lobbyists for a sound reason. They have no legal authority. They have no ability to coerce a senator, a congressman, or a president to do one cotton-picking thing. I don’t care if they offer a politician $1 million dollars in cash.
The politician has the power to accept or reject it. No matter what the lobbyist promises, it is the legislator’s responsibility to determine how he votes.
Those 545 human beings spend much of their energy convincing you that what they did is not their fault. They cooperate in this common con regardless of party.
What separates a politician from a normal human being is an excessive amount of gall. No normal human being would have the gall of a Speaker, who stood up and criticized the President for creating deficits. The president can only propose a budget. He cannot force the Congress to accept it.
The Constitution, which is the supreme law of the land, gives sole responsibility to the House of Representatives for originating and approving appropriations and taxes. Who is the speaker of the House? Nancy Pelosi. She is the leader of the majority party.
She and fellow House members, not the president, can approve any budget they want. If the president vetoes it, they can pass it over his veto if they agree to.
It seems inconceivable to me that a nation of 300 million can not replace 545 people who stand convicted — by present facts — of incompetence and irresponsibility. I can’t think of a single domestic problem that is not traceable directly to those 545 people. When you fully grasp the plain truth that 545 people exercise the power of the federal government, then it must follow that what exists is what they want to exist.
If the tax code is unfair, it’s because they want it unfair.
If the budget is in the red, it’s because they want it in the red ..
If the Army & Marines are in IRAQ , it’s because they want them in IRAQ
If they do not receive social security but are on an elite retirement plan not available to the people, it’s because they want it that way.
There are no insoluble government problems.
Do not let these 545 people shift the blame to bureaucrats, whom they hire and whose jobs they can abolish; to lobbyists, whose gifts and advice they can reject; to regulators, to whom they give the power to regulate and from whom they can take this power. Above all, do not let them con you into the belief that there exists disembodied mystical forces like “the economy,” “inflation,” or “politics” that prevent them from doing what they take an oath to do.
Those 545 people, and they alone, are responsible.
They, and they alone, have the power.
They, and they alone, should be held accountable by the people who are their bosses.
Provided the voters have the gumption to manage their own employees.
We should vote all of them out of office and clean up their mess!
Charlie Reese is a former columnist of the Orlando Sentinel Newspaper.

What you do with this article now that you have read it………. is up to you

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One of my posts from Market Watch…do you agree?

By trader7757, 16 March, 2009, No Comment

With so much money idled on the sidelines, the only people that are terribly interested in the stock market seem to be speculators, which doesn’t bode well for any REAL rally in the near future. Like bottom feeders, we speculators are hovering around the market carcass and catching the scraps that come free.

I’m not much of a believer in capitulation, however, I believe the market is in the final leg down and will end with a fairly spectacular blow-off of panic-type selling.

I respectfully disagree with randymartin about becoming a manufacturing giant again, as our country will head in newer technological directions and continue to outsource manufacturing, though the financing and investment banking sector of our economy will take a decade to recover (if it ever does) as all confidence in their risk assessment ability has disappeared.

In my opinion, the breathtaking astounding pace of this deleveraging based recession will leave the country wounded but not dead, as the overleveraged consumer and coroporation will have been forced to clean up his/her act or perish. Though I don’t think we will have any recovery overnight, I see a slower recovery build toward the end of the year. Of course, I point out these are just my opinions, and are worth just exactly what you paid for them….Zero.

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This is a post I made today on another blog as I listened to people bitch about politicians……

By trader7757, 4 March, 2009, No Comment

Boy, this is a pretty salty crowd tonight, and a very forgetful one, at that. For an excellent analysis of governmental debt, you might try reading this article.

http://www.washingtonpost.com/wp-dyn/content/article/2009/03/03/AR2009030303321.html

For those of you who seem to have forgotten the REAL cause of our problems, which is miscalculated derivative risk, you might read this: the story of the implementation of David X. Li’s radical risk management approach to derivative risk management.

http://www.wired.com/techbiz/it/magazine/17-03/wp_quant?currentPage=all

And for those of you who want to understand the the flaw in Li’s Bell shaped Gaussian copula riskmetrics, and why “catastrophic tails” invalidate Bell curve riskmetrics, you might read this book:

Benoit Mandelbrot: The Misbehavior of Markets.

You all want to point fingers and snivel about one politician or another, but the damage was done far before any politicial, or the Fed, or anyone outside the inner sanctum of derivitive theory knew the scope of Li’s formula’s and the uniform implementation of those theories as they related to securitization of CDO’s, credit default swaps and risk.

It’s unfortunate when this board haggles over politics when there is little understanding of what REALLY happened. Arm yourself with some knowledge and then argue the salient point rather than spew partisan blather one way or another. Very few of the above posts are even germane to our current dilemma…instead you argue the symptoms of the problems. But the cause is well understood by those who understand economics…unfortunately we find ourselves in a liquidity trap that offers few alternatives for recovery, save a bit of luck.

Read todays blog from Nobel prize winner Paul krugsman’s blog, then begin the refutation of riskmetrics, liquidity traps, and the pseudo economic views of the Austrian School of Economics:

“My view, which I thought was pretty clear, is that the liquidity trap is real: no matter how much the Fed increases the monetary base, it has no effect, because it just substitutes one zero-interest asset for another. If the Fed could credibly commit to inflation at rates higher than the 2-ish percent target it’s already believed to have, that would be effective. But right now I don’t see that as a realistic option, hence the emphasis on fiscal policy and bank recapitalization.”

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Chew on this thought for a few minutes, from Paul Krugman

By trader7757, 2 March, 2009, No Comment

A quick response to Scott Sumner

OK, I see that Scott Sumner has written an open letter to me. But I’m puzzled. He writes:

I think you have acknowledged that there is some level of quantitative easing that would boost demand. If I am not mistaken you are concerned that if such a policy boosted inflation expectations sharply, the Fed would have to quickly sell off these assets, suffering massive capital losses.

Um, you are mistaken. I’ve never said such a thing. Did you mean to address this letter to someone else?

My view, which I thought was pretty clear, is that the liquidity trap is real: no matter how much the Fed increases the monetary base, it has no effect, because it just substitutes one zero-interest asset for another. If the Fed could credibly commit to inflation at rates higher than the 2-ish percent target it’s already believed to have, that would be effective. But right now I don’t see that as a realistic option, hence the emphasis on fiscal policy and bank recapitalization.

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My apologies

By trader7757, 2 March, 2009, No Comment

I have encountered a serious illness in my family that required a temporary relocation to help with the care of my parents. I am now back and ready to trade, sorry for the inconvenience this may have caused anyone. You only get one mom, and she and my father have been in very poor health.

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