Financial topics

[John]

I just heard on Bloomberg tv that President-elect Obama is now saying that the stimulus
package will cost $1.3 trillion, up from $600-700 billion.

Let's see. Assuming it doubles every two weeks,

Jan 15 - $2.6 trillion
Feb 1 - $5.2 trillion
Feb 15 - $10.4 trillion
Mar 1 - $20.8 trillion
Mar 15 - $41.6 trillion


Just as I'm typing this, I'm hearing a commercial for "Infiniti" automobiles. How appropriate.

John

[freddyv]

Folks, I think we are starting to see the light at the end of the tunnel, though the tunnel will probably be a very long one.

All of a sudden today I have read a number of articles about how there is no way we can buy our way out of this. Even Paul Krugman has an article out that makes a bit of sense. People are starting to realize that the problem is in the greed of the past and can not be turned around now with more greed and debt.

http://clusterstock.alleyinsider.com/20 ... ression-ii

No, that doesn't mean we will not experience hardship and that the market won't go down and that there aren't many more lessons to be learned but it means that there is hope and that soon those idiots on CNBC will be replaced by people who actually use facts and trailing earnings and have a degree of skepticism about anything that sounds too good to be true.

On the plus side, things are about to get even less expensive as China prepares to flood the world with even cheaper crap:
http://clusterstock.alleyinsider.com/20 ... aper-goods
"In other words, 2009 could be a year of trade wars and protectionism."

--Fred

[Higgenbotham]

The price of gold -- in any given currency -- is determined by the
marketplace. Nothing else. The value of a currency -- relative to another currency -- is
determined by the marketplace. Nothing else.

The price of ANYTHING is determined by the marketplace (unless its specifically set by a government).

What both of you are saying is the point when you're talking about the gold standard in the early 1930s. In 1931, while the US government had the price pegged at $20.67, gold was selling for around $28 on the open market in London. As detailed in Garret Garrett's book The Bubble that Broke the World (discussed in one of John's in-depth analyses), that difference between the US government pegged price and the market price allowed European Central bankers to borrow money in New York, then draw the deposits out and exchange them for gold, pocketing the difference or just storing the gold, depending on their preference. There are several pages describing that history in Garrett's book starting on approximately page 110.

"Backed by gold" is totally, utterly meaningless.

Yea, we finally agree on something!! Yes, people that want to return to a gold standard are naive. A gold standard doesn't help you when you have no idea when your government will just abandon it! There are ways to protect yourself against inflation, so just the fact that your money is always decreasing in value alone doesn't necessarily mean a fiat system is "bad". Government abuse can make it "bad" but that can happen under ANY system including a gold standard.

Backed by gold was meaningful in that it created a different set of problems than fiat creates (generally) with different implications for investors who are trying to keep their money safe or pocket discrepancies in the marketplace (specifically). It's true that the way in which the government abandoned the gold standard in the 1930s was not helpful to some citizens who knew what was going on and tried to protect themselves, as they were stymied if they followed the law. However, I read somewhere that only an estimated 20% of the gold was turned in after Roosevelt outlawed it and called it in. One reason for this was that it was still possible to legally own some gold (there was an exemption level) so a lot of people spread their holdings out among family and friends (my best recollection again--do your own digging). And numismatic gold coins were completely exempt, even some that had a small premium over bullion.

Today, most or all of any 1930s equivalent gold price adjustment has probably already occurred. At least that's my view.

edit--The Roosevelt exemption was 5 ounces of gold per person and unlimited numismatic coins as described in the Order from March 1933 reproduced in this article (see footnote 20, item number 2):

http://www.investorsinsight.com/blogs/j ... lsion.aspx

[Higgenbotham]

Folks, I think we are starting to see the light at the end of the tunnel, though the tunnel will probably be a very long one.

All of a sudden today I have read a number of articles about how there is no way we can buy our way out of this.

That's good news. I've been reading the first few of Roosevelt's Fireside Chats to look for markers on the evolution of generational attitudes regarding corruption and other issues. In his first Fireside Chat. Roosevelt tells the American people that, yes, financial wrongdoing occurred, that it is the government's job to deal with it, and the government is dealing with it. I'll be eagerly awaiting a national television address by Obama stating the equivalent, but won't be holding my breath.

http://www.fdrlibrary.marist.edu/firesi90.html

[freddyv]

The latest game-playing I have been hearing lately goes something like this, "The average gain for the stock market after a market crash is 24%."

This is where critical thinking comes into play; don't just accept that "fact" as fact, instead, ask what the specifics mean and play out some scenarios in your mind or do a bit of research. Ask yourself how they define "market crash"? Regardless, don't you have to buy right at the bottom to get that 24%? Of course you do.

So just imagine that it is 1930 and the market is down 40% and someone tells you, "The average gain for the stock market after a market crash is 24%." WOOHOO! TIME TO BUY!!!

...a year later in 1931 someone tells you, "The average gain for the stock market after a market crash is 24%." WOOOOHOOOO! TIME TO BUY!!!

...April 1932 and someone tells you, "The average gain for the stock market after a market crash is 24%." WOOOHOOO! TIME TO BUY!!! And you do and the market drops almost 50% before an above-average gain of 90%...and you've made a few dollars (remember when the market drops 50% it must gain 100% to get back to even), only to lose it all when the market falls again and doesn't get back to even until May of 1933.

...January 1974 and someone tells you, "The average gain for the stock market after a market crash is 24%." WOOOOHOOOO! TIME TO BUY!!!

My point is to be careful about these stats that you've never heard before. They are usually created to get across a point someone wanted to make.

BTW, we're up from the bottom of our most recent market crash by 20%, so hurry up and get that final 4%.

--Fred

[jwfid]

Folks, I think we are starting to see the light at the end of the tunnel, though the tunnel will probably be a very long one. --Fred

Hi Fred,

Have you seen the recent Allstate commercials? I was impressed!

Joe

[Jason]

Regarding the $50 Billion Madoff fraud:

Harry Markopolos , a prophet extraordinaire (52 years old in December 2008) has been a massive pain-in-the-ass to the SEC since 1999 as he tried to inform it that Bernie Madoff’s money management business was actually a $50 billion pyramid scam.

In 2005 Harry Markopolos wrote a 19 page analysis of the Madoff fraud that is breathtaking in its accuracy. The report highlights 29 "red flags" concerning Madoff's business.

http://online.wsj.com/public/resources/ ... 081217.pdf

This is a good read as it outlines many ingenious scams the investment industry has used in the past.

Jason

[Higgenbotham]

And I'd also like to point out to all the GD readers that I have finally completed the final part of my 6 Part preview for 2009 on the financial markets and economy. Do take a look:

I look forward to your comments.

Matt Stiles

Great effort. I'm looking for a catalyst along the lines of the 5 scenarios that Strauss and Howe laid out on pages 272-273 of The Fourth Turning to occur, likely next year. They did some excellent work laying out these catalysts, considering how long ago it was. It seems to me that scenarios 1, 2, 4 and 5 or some combination of these scenarios are likely (especially some variation of 1), as well as others. In some of my work, I have attempted to gauge the market reaction (or panic reaction we might say) to various catalysts. There are many questions that come out of such an exercise. Generally, the reaction would tend to reinforce economic slowdown and debt default of all kinds. For example, the most obvious result occurs in the case of a pandemic, which would would effectively shut down the economy as a first response. It would be an interesting exercise to go through some of these scenarios and others and look at what the response of the various markets you analyzed might be and how the response might be different under different scenarios.

[Higgenbotham]

http://www.columbiafunds.com/Products+A ... ust+shares

The link above contains information about the fund that was designated as the default money market fund for my Banc of America IRA account. Banc is spelled correctly here; that is Bank of America's brokerage business. This is a $53 billion fund. This fund is called Columbia Cash Reserves and this type of fund is what you typically get in your account if you sell stocks. If anyone is so inclined, they can read the annual report for the period ending August 31, 2008 that just came out last month. This report does an honest and thorough job of explaining exactly what the risks are in brokerage money markets. I buy T-bills in this IRA account, but whatever is left over goes into this fund. By the way, Columbia just closed their treasury only fund to new investors. That would make sense because if short term treasuries are paying zero, the fund can't maintain a positive interest rate after expenses. Just one more little glitch out there.

I've made various statement on this forum like:

Some of the commercial paper markets are locked up.
Good money is being diluted with junk money.
Some money market funds dropped below parity.

This report explains what that all means in so many words. Here's the meat of the discussion:

Note 8. Significant Risks and Contingencies

Securities Risks

Since the third quarter of 2007, the asset-backed commercial
paper (“ABCP”) market has been under unprecedented pressure
and scrutiny as concerns over the subprime mortgage sector are
impacting the short-term fixed income markets. ABCP is a type of
commercial paper that is backed by a pool of assets. That pool of
assets is generally a mix of debt obligations, including, among
others, credit card debt, automobile loans and leases, prime and
subprime mortgage-backed securities, student loans, trade
receivables and other asset-backed securities. Structured
investment vehicles (SIVs), a sector of the ABCP market, are
special purpose vehicles that primarily buy highly rated, high
quality longer term debt securities and fund themselves by
issuing shorter-term senior debt (commercial paper and medium
term notes) and subordinated debt or equity. A number of funds,
including the Fund, invest in ABCP, including commercial paper
and medium-term notes issued by SIVs. The value of assetbacked
securities, including SIVs, may be affected by, among
other things, changes in interest rates, the quality of the
underlying assets or the market’s assessment thereof, factors
concerning the interests in and structure of the issuer or the
originator of the receivables, or the creditworthiness of the
entities that provide any credit enhancements.

The ABCP market continues to function, although at wider
spreads and under intense liquidity pressure. The amount of
outstanding ABCP has been declining over the past few
months with pronounced differences amongst ABCP sectors in
terms of liquidity. U.S. bank-sponsored multi-seller conduits have
had the best access to the market. SIVs have experienced
significantly decreased liquidity as well as declines in the market
value of certain categories of collateral underlying the SIVs.
Under current market conditions, certain securities owned by
the Fund may be deemed to be illiquid. “Illiquid securities” are
generally those that cannot be sold or disposed of in the
ordinary course of business within seven days at
approximately the prices at which they are valued. This may
result in illiquid securities being disposed of at a price
different from the recorded value since the market price of
illiquid securities generally is more volatile than that of more
liquid securities. This illiquidity of certain securities may
result in the Fund incurring greater losses on the sale of some
securities than under more stable market conditions.
The current market instability has made it more difficult to
obtain market quotations on certain securities owned by the
Fund. In the absence of market quotations, Fund securities
are valued at their “fair value” under procedures established
by the Board of Trustees. Fair values assigned to the
investments by Columbia are based upon available
information believed to be reliable, which may be affected by
conditions in the financial markets. Different market
participants may reach different opinions as to the value of
any particular security, based on their varying market
outlooks, the market information available to them, and the
particular circumstances of their funds.
As of August 31, 2008, 2.0% of the securities held by the Fund
were valued based on fair values assigned by Columbia (“fair
valued securities”)

There is a certain logic in all this. In simple terms, I understand it as follows. I bank with Bank of America. My neighbor banks with Bank of America. I don't have any debt and saved money in an IRA with Banc of America. My neighbor has credit card debt, auto loan debt, and student loan debt with Bank of America and no IRA. I write a check on my Bank of America account to fund my IRA. In return, I get my neighbor's debt which has been sold by Bank of America to an SPV or SIV which packages debt and resells it to Banc of America's $53 billion Columbia Cash Reserves Fund and other money market funds. My neighbor loses her job and defaults on her credit card, auto loan, and student loan. OK, I think you got the picture.

[Gordo]

U.S. Treasuries continued their recent sharp plunge, perhaps encouraged by
this week's Barron's cover story. Below is another analyst who reached the
same conclusion yesterday, too late to benefit from the strong collapse just
since Wednesday morning:

http://www.dailywealth.com/archive/2009 ... jan_05.asp

It would not be surprising to see a market dip in anticipation of a supposedly
poor earnings season which will "officially" begin next Monday (January 12, 2009).
The actual earnings should produce positive surprises no matter how bad they are;
it will be a classic case of sell on the rumor, buy on the news.

There are many people out there who call themselves contrarians.
However, their reasoning is generally far from sound-and most certainly far
from contrarian.

A true contrarian looks to see what the most knowledgeable people in the
financial markets are doing, and contrasts that with what the least informed
participants are doing. If there is a sharp divergence between the two,
then that is where opportunity lies.

As a simple example, the popular media and amateurs were dumping coal-mining
shares in the summer and autumn. KOL, a fund of such shares, slumped from
more than 60 dollars per share to less than 10. One analyst after another
talked about how President Obama would enact tough environmental controls on
various extraction industries.

Amateurs dumped coal shares in the third quarter and early fourth quarter of
2008 out of disappointment over their sharp collapse, and from media
brainwashing. Hedge funds unloaded since they had bought these shares at or
near all-time highs using borrowed money, and had forced redemptions at the
same time they were forced to repay their loans. Others sold because they
believed that hedge funds would continue to depress the market-monkey see,
monkey do.

However, top executives of coal-mining companies were buying at a rapid
clip. They had been equally heavy sellers near their June peaks, so they
were trading cleverly on both sides to capitalize on these extremes.

Identifying this situation is a typical case of being a true contrarian.

One example of a phony contrarian is a certain person who ranks newsletter
writers. He concludes that if, say, 65% of such writers are bearish on a
particular sector, then it must be correct to be bullish. Or if the
bullishness of gold analysts rises from 30% to 60%, then he concludes that
it is time to turn bearish on gold.

This is a travesty of proper contrarian logic. When the public is becoming
increasingly excited about a particular sector, it is normal for bullishness
to increase significantly. However, this most certainly does NOT mean that
it is correct to turn bearish!

If you sell something short because an increasing percentage of the public
is turning bullish, then you deserve to get badly burned and you probably
will suffer that fate. When public bullishness increases from 30% to 60%,
then it will almost always extend to 80% or 90%, or even higher. Remember
that the final phase of any major rally is often vertical in nature.

Only when the bullish percentage becomes its highest in several years-or
ideally in several decades--does it make sense to take a contrary stance.
Even then, you should only do so if corporate insiders are doing the same;
if there has been a sharp vertical move in either direction to confirm that
amateurs and hedge funds have exhausted their resources; and if other
reliable indicators are confirming this action.

I always distrust sentiment indicators and similar forms of analysis-since
they tell you only what people are saying, not what they are doing. If
people are saying one thing and doing another, then actions always speak
louder than words.

As a simple example, a few years ago there was very heavy insider selling by
the top executives of Countrywide Financial (CFC) and Toll Brothers (TOL).
Meanwhile, these executives appeared frequently in the media to say how
confident they were about the prospects for their company and their
industry.

We know what happened with housing in general and these companies' share
prices in particular. What these corporate insiders were doing meant
everything-what they said meant nothing.

During the Great Depression, dictators were emerging all over the world, as
often happens during a severe economic contraction. Middle-class Americans
were routinely asked during this time by pollsters if they were bullish or
bearish on the stock market. Wanting to appear as patriotic as possible
when these despots were a real threat, they almost always stated that they
were strongly bullish.

However, most of the same people were afraid to actually buy stocks with
their own money, due to equities' extreme volatility during this period.
Many talked a bullish talk-but very few could bring themselves to walk the
bullish walk.

In early 2000, numerous analysts went on record as stating they were bearish
on equities due to the Nasdaq bubble-but as fund managers, they continued to
heavily weight equities in their portfolios! They acted bearish on TV, but
they didn't have the guts to actually invest bearishly. Almost none of
these allegedly bearish analysts actually sold short. Some false
contrarians incorrectly concluded that the pervasive bearishness meant that
stocks would continue higher, and of course they paid dearly for their
misguided deductions.

In this week's Barron's and in other recent publications, there has been
close to a consensus that U.S. Treasuries are a very bad investment at this
time. However, most of these same analysts are keeping a significant
percentage of their clients' money in U.S. Treasuries "for the sake of
diversity", or for some other fatuous reason. That is why an apparently
consensus viewpoint can often come to pass-since people are not putting
their money where their mouths are.

While I follow various sentiment indicators, I only use them when they are
at multi-year extremes-and only then as confirming rather than primary
indicators.

VXO and VIX are truly valuable because they show you what people are
actually DOING, not what they are SAYING. If people are actually willing to
pay five times as much to insure their portfolios against a continued
decline, and if this price represents a 21-year high, then people really are
incredibly bearish, no matter what they say. This translates to VXO near
100 and a powerful buying opportunity as we experienced in October and
November 2008.

Similarly, when VXO and VIX had barely budged from October 2007 through
August 2008, then you knew that even though the media and the public had
allegedly turned more bearish, it was only for show. People weren't acting
more bearishly. They weren't willing to pay a penny more for portfolio
insurance-and so they were really bullish and eager to buy on dips. This
translated to a great short-selling opportunity and so it proved to be.

With an indicator like TRIN which shows actual buying and selling pressure,
it is only useful when it is at a rare extreme. I often see commentary on
the internet saying that since TRIN has been rising for such-and-such a
period of time, or it has crossed above or below some kind of moving
average, that it supposedly has some implication regarding future price
behavior. This is complete nonsense.

Even with TRIN is twice or three times as high or low as its historic
average of 1, it means nothing. Only when TRIN exceeded 10 on December 1,
2008, which was its most extreme close in several years, did it have any
real bullish contrarian implications. Similarly, only an incredibly low
extreme reading would be bearish.

Sometimes the most important contrarian indications occur not in the
financial markets, but in daily life that at first glance may not appear to
be closely correlated with finance.

For example, women's fashion has one of the most reliable correlations with
future stock market behavior. For decades, major market peaks have reliably
correlated with bright-colored, skimpy dress and clearly visible knees,
while major bear-market bottoms have inevitably been accompanied by
floor-length clothing and predominantly dark colors.

Outrageous public behavior is a very reliable signal of a long-term
bear-market bottom. People climbed light poles in 1932 and sat there for
hours; it was all the rage to eat raw goldfish in 1949; while streaking was
amazingly popular in 1974. I have no idea what bizarre activity will occur
in 2010 or 2011, but until it becomes widespread, it's too early to buy
stocks! If we don't get this kind of weird activity in 2011, then don't
conclude that it won't happen-conclude instead that the stock market is
still far from its ultimate nadir. Remember that those who believed a year
ago that we would not have a Presidential cycle low were severely punished.
The world changes, but the financial markets remain the same.

The fact that we had no widespread bizarre behavior in 2008 means also that
the 2010-2011 bottoms will have to be significantly lower than their
respective 2008 nadirs for nearly all general global equity indices. This
does not imply that 2009 will be a bad year for the stock market-we will get
a powerful rebound over the next half year or more, precisely because it
will make the next bear market that much more severe in percentage terms.