Jan

3

Weekend Reading

Teresa @ 4:18 AM | | Leave a Comment

I’m picking up an old book today — Behavioral Finance and Decision Theory in Investment Management — because of a chapter written by Woody Brock called The Future of Behavioral Finance: A Synthesis of Disciplines. He wrote:

Proponents of behavioral finance point out that real-world data do not fit the efficient markets paradigm very well. The proponents do so, however, by assuming that investors are irrational and biased. But to define someone as irrational is to presuppose the existence of a standard or a benchmark of rationality. This presentation describes a new approach in which the real-world behavior of asset prices is not the result of investor irrationality but of systematic mistakes investors make in their forecasts because of ignorance of the true structure of the economy.

I cobbled together a few paragraphs found at SED, Inc. that summarize why I think Dr. Brock’s views are relevant to what we do. In fact, it is what we do with sentiment cycle analysis:

If you are in the business of understanding changes in news and price, then you had better have an ability to interpret the news better than others do. Or else you had better have an ability logically very different to know how price will react to the news better than others do. It is the possession of either or both of these skills that is the foundation for legitimate strategies of active management.

Our principal goal is to ensure that our clients are less wrong than the consensus for the right reasons, and can thus earn consistently higher returns. How is it possible to be less wrong than the consensus when markets are supposedly “efficient”?

According to classical economic theory, prices will always be ‘correct’ from moment to moment, markets will never overshoot, trend-following behavior cannot occur, and the concept of active asset management will be meaningless. But none of this is true in reality. Why? I shall answer this by drawing upon the new theory of Rational Beliefs developed in the 1990’s by Mordecai Kurz at Stanford University. This new theory brilliantly reveals why markets behave as they actually do.

In the past two decades, the Efficient Market Theory was extensively tested, and was found to be highly deficient in its ability either to explain or to predict market behavior. The fundamental reason for this failure has recently been unearthed by research at Stanford University. This was the failure to distinguish “information” (news) from the interpretation of such news.

More specifically, the Efficient Markets Theory predicted that, since all investors in today’s Bloomberg age now obtain the same information at the same time, the only way for a given investor to outperform others will be to be more lucky. But this is wrong. For in an age of ongoing structural changes (e.g., the rise of China), what matters is not the consensus. The hallmark of SED’s philosophy is to equip its clients with the theories that make superior interpretation of the news possible. In this regard, Einstein was indeed correct: “I like good theories. They work better.” So do we.

More: The World According to Brock (for premium members).

Jan

2

Observations for Monday

Teresa @ 7:40 PM | | 5 Comments

Welcome to 2009! It seems like people woke up this morning and suddenly realized that stocks have been going up since … November! And they are excited.

This is the time of year when the pundits come out in force, but since most of them will be proven wrong, let’s make it easy shall we?

The number one prediction for 2009 is that it’s over for Treasuries, that the recovery will begin in mid-2009, that high-yield is the answer.

Pundits believe that monetization of debt will “work” and inflation (see James Grant Sees U.S. Working Toward “Disastrous Inflation” PODCAST) will be the order of the day by year end.

2009 will also be a tough year for savers as interest rates go to zero. There, I’ve saved you a lot of time trolling for stories on the internet.

Our daily stock scan found 111 winners and 3 losers today. We’ve ranked and sorted them in Trading Ideas for Monday. Let’s take a look at the charts.


Head and Shoulders Bottom? S&P 500 Index, Daily Chart

I’ve seen variants of this chart all over, but the chart below is more like the classic head and shoulders bottom formation seen in textbooks.


“Classic” Head and Shoulders Bottom? X, Daily Chart

So what are the possibilities for the $SPX chart?


Rising Wedge? S&P 500 Index, Daily Chart

How about this? A rising wedge pattern targeting an upside target of around $SPX 1,000. Market barometers will be posted over the weekend. Cheers!

Dec

31

Observations for Friday

Teresa @ 5:01 PM | | Leave a Comment

Pete and I would like to wish all a good and safe New Year’s Eve.


S&P 500, Daily Swing Chart

We end 2008 on a high note:

  1. After the close, our stock scan found 98 winners and 3 losers. We’ve put today’s DAILY WORKSHEET ONLINE for everyone.
  2. Changes to products and services offered in 2009 will go into effect within 24 hours. Hint: If you’ve been sitting on the fence, please sign up ASAP.

May 2009 be a good one for all. Happy New Year!

Dec

30

Observations for Wednesday

Teresa @ 8:00 PM | | 5 Comments

Check out the January 2009 issue of National Geographic, The Real Price of Gold:

For all of its allure, gold’s human and environmental toll has never been so steep. Part of the challenge, as well as the fascination, is that there is so little of it. In all of history, only 161,000 tons of gold have been mined, barely enough to fill two Olympic-size swimming pools. More than half of that has been extracted in the past 50 years. Now the world’s richest deposits are fast being depleted, and new discoveries are rare. Gone are the hundred-mile-long gold reefs in South Africa or cherry-size nuggets in California. Most of the gold left to mine exists as traces buried in remote and fragile corners of the globe. It’s an invitation to destruction. But there is no shortage of miners, big and small, who are willing to accept.

At one end of the spectrum are the armies of poor migrant workers converging on small-scale mines like La Rinconada. According to the United Nations Industrial Development Organization (UNIDO), there are between 10 million and 15 million so-called artisanal miners around the world, from Mongolia to Brazil. Employing crude methods that have hardly changed in centuries, they produce about 25 percent of the world’s gold and support a total of 100 million people. It’s a vital activity for these people–and deadly too.

In the Democratic Republic of the Congo in the past decade, local armed groups fighting for control of gold mines and trading routes have routinely terrorized and tortured miners and used profits from gold to buy weapons and fund their activities. In the Indonesian province of East Kalimantan, the military, along with security forces of an Anglo-Australian gold company, forcibly evicted small-scale miners and burned their villages to make way for a large-scale mine. Thousands of protestors against expansion of a mine in Cajamarca, Peru, faced tear gas and police violence.

The deadly effects of mercury are equally hazardous to small-scale miners. Most use mercury to separate gold from rock, spreading poison in both gas and liquid forms. UNIDO estimates that one-third of all mercury released by humans into the environment comes from artisanal gold mining. This turns places like La Rinconada into a sort of Shangri-la in reverse: The pursuit of a metal linked to immortality only serves to hasten the miners’ own mortality.

At the other end of the spectrum are vast, open-pit mines run by the world’s largest mining companies. Using armadas of supersize machines, these big-footprint mines produce three-quarters of the world’s gold. They can also bring jobs, technologies, and development to forgotten frontiers. Gold mining, however, generates more waste per ounce than any other metal, and the mines’ mind-bending disparities of scale show why: These gashes in the Earth are so massive they can be seen from space, yet the particles being mined in them are so microscopic that, in many cases, more than 200 could fit on the head of a pin. Even at showcase mines, such as Newmont Mining Corporation’s Batu Hijau operation in eastern Indonesia, where $600 million has been spent to mitigate the environmental impact, there is no avoiding the brutal calculus of gold mining. Extracting a single ounce of gold there–the amount in a typical wedding ring–requires the removal of more than 250 tons of rock and ore.

If you are into organic food, recycle, support Fair Trade goods and want to save the world, is there really a place for gold in your investment portfolio?

Dec

28

Observations for Monday

Teresa @ 4:36 PM | | Leave a Comment

I will be in the office for only part of the day on December 29 and 30.

In the meantime, here are a few stories that might be of interest. The first one is a podcast with John Llewellyn that, despite the title, provides some unconventional food for thought.

  • The Richest Hedge Funds: John Paulson Strikes Again
    After Bear sold shares in 1985, Paulson says, he decided he didn’t want to work for a publicly traded company and in 1988 joined privately held Gruss Partners, another risk arbitrage firm. Founder Joseph Gruss taught Paulson an important lesson. “Joseph Gruss used to say, ‘Risk arbitrage is not about making money; it’s about not losing money,’” Paulson says. Paulson & Co, which he founded in 1994, also started as a risk arbitrage firm. Over the years, Paulson launched new funds to exploit market trends. “We always operated with a lot of hedges,” he says. “We try to minimize market correlations. If you don’t, you’re going to be exposed when a market event happens.”
  • Llewellyn Sees Worst Global Recession Since World War II [PODCAST]
    Dec. 22 (Bloomberg) — John Llewellyn, senior economic policy adviser at Nomura Bank International PLC, talks with Bloomberg’s Tom Keene about his essay “The Business of Ageing,” which describes the impact of older workers and consumers on companies. Llewellyn also discusses the outlook for the global economy.
  • Will the Economic Crisis hit Asia Harder than the U.S.?
    Without the housing and credit bubble in the U.S., there may be a long-term glut of global manufacturing capacity. The major exporting countries in Asia can produce far more electronics, clothing, and cars than their own populations can consume, at least for now. The key question is: What happens next? One possibility is that fiscal stimulus–in the U.S. and around the world–will boost demand and get consumers buying again. Then the Asian factories can get back to work.
  • Is Social Security a Ponzi Scheme?
    But there is one enormous difference between Social Security and a Ponzi scheme: Technological change. Over the past century, new technologies have enabled the output of the country to grow much faster than its population. To be more precise, the U.S. population has more than tripled since the early 1900s, while the U.S. economic output has gone up by more than 20 times.

Dec

23

Observations for Tuesday

Teresa @ 6:55 PM | | Leave a Comment

I spent the day troubleshooting video because so many members want to know about three things: oil, inflation and the dollar. Hope to have that solved shortly.

In the meantime, I’ve been thinking what 2008 was good for. Perhaps it was a year of lessons, starting with:

  1. Don’t Invest in Anything You Can’t Understand, Especially if it Pays Well [STORY]
  2. Stock Pickers Rise and Fall With The Market [STORY]
  3. Leverage + Luck + Guts = More Money Than Brains [STORY]

Dec

22

Observations for Tuesday

Teresa @ 5:36 PM | | Leave a Comment

WSJ reports that stock investors are losing faith, citing investors “pulled a record $72 billion from stock funds overall in October alone, according to the Investment Company Institute, a mutual-fund trade group. While more recent figures aren’t available, mutual-fund companies say withdrawals have remained heavy.”

I don’t know if faith should be part of the investing process. We prefer to use something more concrete, you know? Like discipline.


S&P 500 Index, Daily Chart

Today saw the S&P 500 Index creep to the downside under the lower edge of this rising wedge. With volume so light and a setup so obvious, one has to wonder if this little dip down will end up as a trap for sellers. Meanwhile, our stock scan performed after the close found 22 winners and 51 losers.

Laugh of The Day - Or Not
Dan sent us a link to some excellent political cartoons.


Cartoon by Cam Cardow

This one is for Cramer. :)

Dec

20

Obervations and Sentiment for Monday

Teresa @ 7:26 PM | | Leave a Comment

Only a few days left until Christmas, and as we size up 2008, I’m sure there will be a few choice words directed at the investment industry by the public. And never forget that it is an industry.

It was around Christmas time in 1996 when the sales manager at my firm (someone I went to university with) barged into my office and demanded to know why I told the broker trainee class to sell Bre-X. I replied that the stock looked to be breaking down on a technical level and that it was in no way an opinion regarding the fundamentals of the company.

The discussion became so heated that I stepped back and snapped, “Well, if our brokers actually made money for the firm’s clients, there would be no need to cold call and prospect non-stop. People would be beating down our doors to open accounts, don’t you think?”

But of course, the way the firm makes money is to create little pieces of paper known as securities. Commissions are nice, but the corporate finance FEES are what buys the Bentleys and private jets. There is no need to trade when you are the house.

The results were neatly summarized with a Viktor “we hoped for the best, but it turned out like always” Chernomyrdin quote: Bre-X crapped, clients got hosed, brokers continued prospecting and I made a fistful of dollars having defied groupthink to the power of 10. Barron’s reported that I bought a bunch of the stock at something like 16 cents just so that I could take delivery and give the certificates away to friends as a souvenir, registered in the name of A. Bag Holder.

Now you can see why I don’t believe anything that anyone says. I’ve been around too long. No one is above suspicion. In my mind, anyone who claims to have “alpha” is most likely referring to where he would like to be in relation to other managers.

MARKETING THE ALPHA MALE MANAGER
I hope by now everyone has caught on, that the name of the investment management game for so many small firms is sales and marketing, particularly how the product is packaged to have maximum appeal to greed while the stature of the principal manager as ALPHA MALE is carefully groomed to impress prospective clients and intimidate detractors:

Madoff Created Air of Mystery
. . . Mr. Madoff attained fame and fortune with his connections, ingenious marketing and a carefully cultivated image. Referred to as “Uncle Bernie” by friends and investors, he was chairman of the Nasdaq Stock Market, trustee for numerous charities and a legend at country clubs from Palm Beach to Long Island.

Mr. Madoff, now 70 years old, was also highly private and sometimes uncomfortable in social settings, according to friends, colleagues and investors. He could be gruff to the people who gave him money to invest, threatening to expel those who asked too many questions. When he did socialize, it was with a small group of close friends.

The key is to cultivate an image of the venerable gentleman, a leader in the community, someone who fights for truth, justice and The American Way, someone who is beyond reproach. The image must also be strong and fearsome enough to use for stonewalling: “After decades in the industry, Alpha Male Manager IS the repository of sage wisdom, THE keeper of the crystal ball, so don’t try it yourself, because you will NEVER accumulate the experience and know-how that HE alone possesses.” How dare you question him!

And then everyone acts surprised when the truth comes out.

RULES AND REGULATIONS PROTECT INVESTORS
A member wrote to ask what I thought about the following statement made by a popular blogger who is now aggressively prospecting for clients:

One issue is that Canada, my homeland, is the only country in the world apparently where I cannot operate until I obtain some relief from the onerous rules that the securities industry and regulators have put in place.

I say that Canada has seen many stock scams, but relatively few related to registered investment advisers making off with client funds. I say that he who stands for regulation should not be exempt from it. Clients need protection, and if he wishes to operate in Canada, he should DO IT RIGHT. Canada has very strict regulations when it comes to licensing, and those who have been out of the business for years will not find it easy to get back in. Those who want discretionary trading authority over client accounts must jump through hoops of fire. Amen.

Further down the page, he made an interesting statement:

Somebody has referred to me jokingly, I hope, as a knock-off of the Soup Nazi; but, in fact, when it comes to anything personal, I have been known to have a short fuse. Nothing is more personal than managing Other People’s Money (OPM), and I draw the line, both for myself and for the client. Although it hasn’t happened for years, I have been known to return control of accounts to clients after I thought the line was crossed.

It’s one thing to absolutely go the extra mile for people who I think I am helping and quite another to think I’ve been taken advantage of. To me, life is a mutual affair. If I make a commitment, I’ll walk through a wall to live up to it. But, when money is involved, it’s a two-way street. If it’s not, I cut to the chase, perhaps a little faster than the average person.

Very Alpha Male Manager, don’t you think? To think clients pay a 3% annual fee just for the privilege…

FURTHER READING
I found a few more articles that should be added to the reference material from the last podcast. The “Treasuries are in a bubble, so let’s buy corporates” mantra is alive and well:

  • Peters Likes Investment-Grade Corporate Debt in 2009 [VIDEO]
    December 19 (Bloomberg) — Greg Peters, head of credit strategy at Morgan Stanley, talks with Bloomberg’s Betty Liu about the outlook for the credit markets through 2009.
  • Dollar Touches 12-Week Low Against Euro as Fed Cuts to Zero
    “The run-up in the euro is primarily caused by the Fed’s move,” said Carl Forcheski, vice president on the corporate currency sales desk at Societe Generale SA in New York. “Traders began to figure maybe the euro would rebound on higher yields because the ECB continues to keep its rates higher.”
  • Stephen Roach Says Economic Recovery Would Be ‘Anemic’ [VIDEO]
    Dec. 19 (Bloomberg) — Stephen Roach, chairman of Morgan Stanley Asia Ltd., talks with Bloomberg’s Carol Massar and Ellen Braitman about the outlook for the global economy and financial markets. Roach also discusses the U.S. automaker crisis and similarities between the current U.S. recession and Japan’s economic woes in the 1990s.
  • Treasury yield continue to fall
    “One of the main themes we’re talking about is ‘don’t fight the Fed,’” said Michael Pond, an interest-rate strategist in New York at Barclays Capital Inc., one of the 17 primary dealers that trade with the Fed. “They will be buying mortgages; they’ve already started buying agencies. Regardless of what asset class they’re buying, they’re buying fixed-income duration and that should push long Treasury rates.”
  • ECB cuts to 2.5pc and mulls “printing money”
    The Maastricht Treaty prohibits the ECB from injecting stimulus by purchasing the government debt of the eurozone’s fifteen states debt - a method known as “monetizing the deficit”, or more crudely as “printing money”. But it can achieve the same effect by mopping up sovereign debt, mortgage securities, or even company debt on the open market, as the Fed has already begun to do. At the moment the ECB accepts some of these assets as collateral in exchange for loans, but it has not yet hit the atomic button by buying them outright with its own freshly-minted fiat money.
  • One in four couples has bedtime row over money, says survey
    She said: “There are a lot of young men who have not worked through a severe recession and who appear to be in some denial about the risk of redundancy or financial problems. “There are also husbands and wives who still haven’t told each other about debts or savings they have kept hidden after years of marriage. In particular, those on their second marriage are less willing to share financial information. “It is often easier to talk openly about sex than money. There also seems to have been a reversion to a more traditional model of breadwinner versus stay-at-home spouse because of the stability that it brings. Most of us seek greater stability at a time of uncertainty.”

AND NOW, BACK TO THE MARKET
It seems to me that we are waiting for the resolution of this rising wedge on the daily chart.


S&P 500 Index, Daily Chart

THE MAMIS HIGH/LOW BAROMETER
Let’s take a look at our market barometers to see what the market says. Mamis took the 52-week new highs and new lows statistics for the S&P 500 index and plotted the 10-day simple moving average of the net differential.


S&P 500: Mamis 10-day MA of Net New Highs/Lows

He particularly liked to look at the big picture using statistics from the NYSE:


NYSE: Mamis 10-day MA of Net New Highs/Lows

The bottom line? The market is at a standstill, waiting for a catalyst to make the next move.

Dec

18

Observations and Sentiment for Friday

Teresa @ 5:10 PM | | 3 Comments

I watched with interest yesterday when CNBC anchor Bob Pisani noted the eerie stillness on the NYSE floor.


S&P 500 Index, Daily Chart

Could it be that the market is at a “do or die” point? Of course it is. It’s a rising wedge. If buyers do not show up and continue pushing price above the 50-day MA, control goes back to sellers.

Pete and I are lining up a podcast for members that will be posted tomorrow. Until then, rejoice that the myth that you lose most heat through your head has been busted. Yee-ha!

I found a number of on-topic articles that might be of interest:

  • Alan Greenspan: Banks need more capital
    Today, fearful investors clearly require a far larger capital cushion to lend, unsecured, to any financial intermediary. When bank book capital finally adjusts to current market imperatives, it may well reach its highest levels in 75 years, at least temporarily (see chart). It is not a stretch to infer that these heightened levels will be the basis of a new regulatory system.
  • Return of the Living Dead
    After Japan’s asset bubble burst in the late 1980s, their economy took a sharp downturn, prompting government officials to try bailing out banks and investing in infrastructure, much like the activity and proposals floating around America today. The results were terrible. With the government propping up poor business models rather than allowing further job losses, firms wound up operating over the long-term without making a profit or adding any value to society. Their utter lack of vitality earned these perpetual money-leaching entities the moniker “zombie businesses.” And unless American policymakers understand the failures of the Japanese response, we will suffer the same zombie fate.
  • Will printing money help the economy?
    It’s better to inflate than deflate. VS. Runaway inflation would cause far more misery than a bit of deflation.
  • Lessons From the Great Inflation
    Double-digit inflation was not an act of nature or a random accident. It was the federal government’s greatest domestic policy blunder since World War II, the perverse consequence of well-meaning economic policies, promoted by some of the nation’s most eminent academic economists. These policies promised to control the business cycle but ended up making it worse.

The Mamis High/Low Barometer

Let’s take a look at our market barometers to see what the market says. Mamis took the 52-week new highs and new lows statistics for the S&P 500 index and plotted the 10-day simple moving average of the net differential.


S&P 500: Mamis 10-day MA of Net New Highs/Lows

He particularly liked to look at the big picture using statistics from the NYSE:


NYSE: Mamis 10-day MA of Net New Highs/Lows

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