Archive for August, 2007

A few people have e-mailed and asked why if I’m so sure that the markets will drop, why I don’t short the market. The answer to that question is simple: We don’t have free markets anymore. The announcement by Bush to “swoop” in and save poor helpless home owners with guaranteed loans is exactly the kind of “interference” free markets don’t thrive in.

The Dow is up 150 points as I write this on that news and if I had shorted at any point I’d be at a loss right now. For all the talk about free capitalism that Bush frequently harps on, the audacity to let the government intervene is simply mind boggling.

This little PR stunt really isn’t going to fix anything and while I have previously stated that I might short with DXD, DOG, or SDS, I think I’ll just sit in cash until after the Fed meeting after all. Who knows, next week we might get an announcement that all Truck & SUV buyers will get a bail out because the cost of gas is rising again.

Let’s have subsidies for everyone: farmers, home owners, car buyers, and more! Welcome to the new U.S.S.R, United States of Socialist Republicans.

Geez.  Everyday, a new headline emerges that begins to put things in perspective of how bad the sub-prime mess is impacting financial markets.  The latest headlines, “Freddie Mac plunges as housing crisis rumbles on” and “Leading lender likens US credit crisis to Great Depression” are just a couple this week.

The sad truth however, is that we have yet to see the full impact of the mortgage mess hit the street just yet.  Rumors of massive layoffs at investment banks, massive layoffs at mortgage companies as they implode and the trickle of this poison to other markets: credit cards, auto loans, carry trades, etc will wreck havoc.

Don’t forget that during the Great Depression, it was such a depression because people lost their homes.  If you have no home then you have no point in spending any money on “stuff” because there isn’t any place to put the “stuff” you buy.  What good is an iPod if you don’t have an electrical outlet to charge it up on?   Why would you need a couch if you have no home?  Towels?  Soap? Dishes? Rugs? DVD Players? TVs?  No where to put any of that stuff so why buy it?  Depression feeds on itself as people lose hope.
Survival becomes of tantamount importance and the real problem in my mind is that all of this is happening at a time when we have millions of people getting ready to retire over the next couple of years which will strain already strained systems.

All I can suggest is that you hope for the best but plan for the worst.

If you’ve read my blog for some time now you know that I’m a capitalist at heart but the sub-prime fiasco is bringing back memories of my young high school days in which a group of friends debated the pros and cons of capitalism, socialism, communism. I always liked to play devils advocate so I usually debated in favor of socialist or communist forms of governments citing various examples and when it came to criticizing capitalism, I could only find one great argument against it.
I came to term this argument, “The Fundamental Flaw of Capitalism

My argument was based on a simple premise. Capitalism constantly requires a constant stream of consumption in order for the system to sustain itself. In a communist form of government production is centrally controlled and equally distributed, in theory anyway. In a socialist society, all resources are controlled by the public and distributed accordingly based on need. In either communism or socialism, the production and distribution is limited to what is needed or what is available.

In capitalism, property and production is privately owned for the sole purpose of profit. Those that utilize their property and production in the most efficient and effective manner are rewarded with the greatest profit, in theory anyway. As stated earlier, in order for this system to work, there must be a symbiotic relationship between the producer and the consumer. The producer produces and the consumer consumes. In the event of a failure of the producer, the consumer is unable to sustain himself. The problem also exists if the consumer fails to consume and the producer is left with unsold inventory.

Although everyone in our little debates always agreed this was a valid “flaw” of capitalism, it was always countered with the arguement that consumption would never stop or slow down, with the the implication that it would never slow down enough to cause problems to the capitalist system.

As I read about the credit crunch, I wonder if we are approached the point of the failed consumer. Make no mistake, I know people want a great many things and people could easily consume 20 different iPods if offered the opportunity, but the means by which the consumer has been sustaining his/her consumption (credit cards, home equity, auto loans, carry trades, student loans) might now becoming all undone. Only time will tell.

This nostalgic trip makes me wonder what happened to my high school buddies. They all went off to prestigious schools: MIT, Harvard, Duke, UT, Princeton, but I lost track of most of them over the years.

There are perennial cheerleaders in the finance world. Normally, the perennial cheerleaders are those people that have a direct interest in keeping YOU buying in any market: good, bad, flat. Why? Because they make money when you buy by charging you fees, commissions, and other charges that siphon money out of YOUR account into THEIRS. It’s no surprise that in these scary times the cheerleaders come out with comforting words such as, “over the long haul, stocks earn 10% so you should keep buying.”

Where do you find these perennial cheerleaders: “Financial Advisers”, “Mutual Funds Vendors”, “Financial Planners”, et al.

Of course, when the market tanks these guys disappear along with your money.

Why should you be afraid? Let me lay out my case why I don’t believe stocks will return anywhere near 10% over the next 6 to 10 years much less 10 to 30 years.

Ladies and Gentlemen of the jury, I’d like to submit my first witness for questioning, Mr. David M. Walker. My witness has impressive credentials as US Comptroller for the United States Government
http://www.youtube.com/watch?v=KGpY2hw7ao8

Ladies and Gentlemen, that was some frighteningly honest testimony. I now would like to present my second witness for the prosecution, Mr. Ben Bernake. Your honor, I’d like to treat Mr. Bernake as a hostile witness.

“Mr. Bernake, did you not recently allow several banks to relax its debt collateral rules, allowing borrowers to use distressed debt as collateral to raise emergency funds?” Answer: yes.

“Mr. Bernake, haven’t you injected $130 billion into the banking system to attempt keep the credit flowing to various markets?” Answer: yes.

“Mr. Bernake, aren’t these banks with so many problems hiding billions in losses that we have yet to discover?”

Answer: none.

Ladies and Gentlemen of the jury, I will no present my most damning evidence next. I point you to the peculiar options trading speculation found here http://finance.yahoo.com/q/op?s=SPY

It would appear that a BILLION is being bet on a falling market. If you look at the chart, I count over 132,000 contracts averaging a strike price of $77 with an estimated value of $1,000,000,000.00. Ladies and Gentlemen, I’m not a fancy city boy but it looks to me like somebody out there knows something we all don’t know.

Ladies and gentlemen, if you don’t find for the prosecution, I will be forced to pull some cards from the bottom of the deck. What say you jury? Guilty or Not Guilty?

I await you decision late in the evening tomorrow.

It’s the age old catch-22 for the Fed. Everyone and their mother is begging the Fed to lower rates. Let’s run through the scenarios.

If the Fed lowers the rate from 5.25% to 5% then “easy” money starts flowing again and the speculative bubbles re-emerge but that’s not the worst part. The US Dollar would fall even lower than it has and this wouldn’t bode well for our foreign investor friends who currently finance the war in Iraq, the bridge repair work, and everything else we buy. Our foreign investors would also hope that US Treasuries don’t become completely worthless. But the cherry on top of this sour cake would be runaway inflation as the market is flooded with more money at lower rates which drive up the costs of goods. I wonder if people would assume that if the rate is lowered then the Fed thinks we are headed into a recession, people panic and the market sells off.

If the Fed raises rates from 5.25% to 5.5% to stabilize the USD, attract more foreign investments, and fight inflation then the US Stock market begins a slippery slide downward as “safer” investments in bank instruments become much more appetizing than “risky” stocks. Of course, this would mean that those people struggling with their mortgage ARMS are in much deeper trouble now and this could in turn send more panic on all that CDO and ABS paper floating around. Panic would lead to a market sell off.

Quite honestly, I’m not sure how we will get through September or October without a market sell off which is why I’m in cash right now sitting it out. I’ve sat quietly for a few hours running through all the permutations in my head and I can’t see a way to fix this without some serious hurt on the markets. This could explain the anomaly on calls & puts on SPY.

I am considering shorting the market with some of my favorite ETFs such as SDS, DOG, or DXD but the large fluctuations in the currency market might be a better play as FXY might rally a bit if the BoJ raises rates in September -everyone’s expecting it but who knows what September will bring.

I had a few people asking me questions about the ETF-Cashinator™ and the ETFs that I invest in so I whipped up this quick reference guide.   The main criteria for inclusion in my ETF-Cashinator™ are:

  • Average daily volume of at least 100,000 shares
  • ETF must have an options market
  • ETF is from major market maker

There are some exceptions and some specialized ETFs that I love because of their special capabilities: leverage / short / currency.   Keep safe out there, I’m in cash until the central bank dust settles 😉

This is so strange.  Billions being bet on market falling in September!  Check out the image!   And check out this link.

It’s PANDEMONIUM!

bigbets.png

If the market tanks, don’t say no one knew anything because I’ve never seen this kind of volume on such deep in the money calls.  It’s PANDEMONIUM! As a reminder, I’m 100% cash right now.

I know what you’re thinking. “Rich you idiot, FDIC insures $100,000 and not $44,530.80. Have you gone nuts?”

No, I haven’t gone nuts, while FDIC does technically insure $100,000 per depositor, the real purchasing power of 100k has eroded since 1980 down to $44,530 in today’s 2007 inflation adjusted dollars. Does this surprise you? Ever wonder why everything else is indexed to inflation but not FDIC insurance?

There’s an interesting historical look at FDIC insurance here and I’ve summarized the key time line below:

1933 – After the Great Depression, FDIC is created by Congress
1934 – Insurance set at $2500.0 then raised to $5000 mid year.
1950 – Insurance increased to $10,000
1966 – Insurance increased to $15,000
1969 – Insurance increased to $20,000
1974 – Insurance increased to $40,000
1980 – Insurance increased to $100,000

You’ll notice that there hasn’t been any increase in FDIC coverage in 27 years! With annual inflation of 3%, 100k is now really only worth about $44,530. I suspect that they’ll need to be a dramatic increase in FDIC coverage over the next year or two in order to keep the banking system stable. Keep an eye out 😉

In case you’re wondering what FDIC insurance should be in order to keep things “level” it is $224,563.69.   Oddly enough, FDIC insurance increased to $250,000 in 2006 for IRA accounts ONLY.  Now for the multi-billion dollar question:  Does anyone out there KNOW why FDIC raised the the limit for IRA accounts and NOT deposit accounts?

I have a confession to make, I love reading philosophical, historical and prophetic books. I have an Edgar Cayce book which I need to revisit but I distinctly recalled he had predicted various economic cycles and I dug up this quote while doing some research for this post, “Cayce described a long term economic cycle of 24 to 25 years which predicts depressions and major recessions. Starting with a base year of 1907, every 24th or 25th year precisely describes an economic downturn. Based on Cayce’s definition, the next major depression is forecast for the year 2006 or 2007.”

From a metaphysical point of view, other prophecies suggest 2012 as the great change for humanity. Many Native American tribes believed in the great cycle as described in this link:

This grand cycle of evolution will culminate
winter solstice, December 21, 2012 AD.

This time we are now in has been called “The Time of Trial on Earth,” “Judgement Day,” “The Time of Great Purification,” “The End of this Creation,” “The Quickening,” “The End of Time as We Know It,” “The Shift of the Ages.” It is foretold that the completion of the Precession brings regeneration of Earth, offering awakening to all open, willing hearts. Many peoples spoke of these last days of the Great Cycle, including the: Maya, Hopi, Egyptians, Kabbalists, Essenes, Qero elders of Peru, Navajo, Cherokee, Apache, Iroquois confederacy, Dogon Tribe, and Aborigines.

As avid stargazers, the ancient Maya were keen to an astrological cycle we call the Precession of the Equinoxes. This is close to a 26,000 year cycle in which Earth transits through each of the 12 signs of the zodiac for about 2152 years each. Each of these astrological ages represents one month of the grand, Cosmic Year. Sumerians, Tibetans, Egyptians, Cherokees, Hopi, and Mayans refer to this same 26,000 year cycle in their mystical belief systems and each have developed calendars based on this great cycle.

The Maya messengers, reknowned for their architectural, artistic, mathematical and scientific achievements, left a calling card as a series of super-human sized stone monuments and pyramids with precise calendrical computations. Planted with great intention, these dates were left to ensure that future generations would be alerted to the coming end point of this great 26,000 year cycle. A cycle which corresponds also to a 26,000 year relationship of our Sun orbiting Alcyone, the central star of the 7 Sisters Pleiades constellation. According to the Maya, the “future” which lies beyond this end date is literally “a new world age” – “a new creation.”

It’s all pretty interesting and entertaining stuff. Oh well, back to predicting my FICO score for next month.

Wow, more bashing of Trent at The Simple Dollar but this time by JPL at AllFinancialMatters. There are many interesting comments but this one caught my eye, “Consider that the dozens of comments disagreeing with you were made by folks more objective about the way your post reads than you could be, and that some number of these folks could potentially be more savvy than you on the subject.”

The epitome of  GroupThink and why those bashing Trent will unlikely achieve the wealth and success that Trent (and others who think for themselves) will over the long run.  There are over 40 comments and most of them imply Trent gave the wrong advice.  The funny thing is that HIS ADVICE was solicited and not any of the other people commenting on that blog.   Sounds like a bit of jealously perhaps?

I think all of these symptoms of GroupThink were covered in JPL’s comments and post.

  1. A feeling of invulnerability creates excessive optimism and encourages risk taking.
  2. Discounting warnings that might challenge assumptions.
  3. An unquestioned belief in the group’s morality, causing members to ignore the consequences of their actions.
  4. Stereotyped views of enemy leaders.
  5. Pressure to conform experienced by members of the group who might otherwise disagree.
  6. Shutting down of ideas that deviate from the apparent group consensus.
  7. An illusion of unanimity with regards to going along with the group.
  8. Mindguards — self-appointed members who shield the group from dissenting opinions.

It’s been amusing reading up on it but the important thing right now is to be OUT OF THE MARKET for at least the next month.  If you need a reason why, check out this link.