Financial topics

[umoguy]

"ETF's like SDS give a return of 2x so it is easy to use them without exposing as much capital as you might normally do. Simply putting 10% of your portfolio in a short ETF, a bit in gold and the rest in cash would create a very safe investing situation that would allow you to come out in good shape regardless of when the economy turns around or how much it drops." Good idea to short the market, sds is the wrong way to do it. The double short exchange traded funds do not return double negative over the long term, only on a day by day basis. So if there is any volatility, like say an up day or week every once in a while, then you will not make anywhere close to double the overall percentage drop in the s&p 500. In fact if the swings are wild enough it is even possible to lose money due to the time decay volatility on SDS even when the s&p drops big over a long period of time. These are short term (a few days at most) trading vehicles. Be wary of them. Short the long ETF SSO if you want to make this messed up system work in your favor over the long haul.... And yes you can short it.

[Gordo]

"ETF's like SDS give a return of 2x so it is easy to use them without exposing as much capital as you might normally do. Simply putting 10% of your portfolio in a short ETF, a bit in gold and the rest in cash would create a very safe investing situation that would allow you to come out in good shape regardless of when the economy turns around or how much it drops." Good idea to short the market, sds is the wrong way to do it. The double short exchange traded funds do not return double negative over the long term, only on a day by day basis. So if there is any volatility, like say an up day or week every once in a while, then you will not make anywhere close to double the overall percentage drop in the s&p 500. In fact if the swings are wild enough it is even possible to lose money due to the time decay volatility on SDS even when the s&p drops big over a long period of time. These are short term (a few days at most) trading vehicles. Be wary of them. Short the long ETF SSO if you want to make this messed up system work in your favor over the long haul.... And yes you can short it.

I agree, the leveraged ETFs under-perform their targets. There was an article in this week's baron's about these funds. If you want to 2x short an index, then just 2x short the index, why pay someone else a fee to do it for you? You also have to be comfortable with major losses on every counter-trend rally - these happened about every 6 months during the great depression. If you are double short something that goes up 50% you lose 100%. We will have multiple 30-50% rallies before this is over...

[Higgenbotham]

Assuming that Dent's basic assumption (absent the Generational Analysis) is correct, the peak in spending in the economy is from those born in 1959, not 1961, even though just as many people were born in 1961 as in 1959. Therefore, the peak in the economy is actually forecast by a combination of Dent's method and Generational methods to be :

1959 + 48 = 2007.

So my guess is that there will be no strong rebound in inflation next year for the reasons Dent gives. He is still thinking that the Generaton Xers will spend like the Baby Boomers but it's not going to happen.

An excellent bit of information, IMO.

......

--Fred

I had taken that bit of information into account a few years ago and had come to the conclusion that, based on demographics, the real estate bubble would top out in 2005 and the stock market bubble would top out in 2006. Had the stock market actually looked ahead 6-9 months like it does when the prudent generations are in charge, that may have been the case. As mentioned previously, unemployment made its low in late 2006/early 2007, but the stock market roared higher anyway.

So while it is easy to apply that thinking retrospectively, it didn't have any precise predictive ability. For example, if one were to have said that those born in 1959 had assumed significant enough Generation X characteristics to influence spending patterns, then the prediction would have been for a stock market top in 2006. That was actually my thinking and I spent a lot of time watching the stock market in complete astonishment in late 2006 and early 2007. But I think we can say for sure that, for example, 1961 Xers are not going to spend like 1959 Boomers did on a per capita basis when they are at the same age. In other words, a 48 year old in 2009 will not be spending as much as a 48 year old did in 2007. Where to draw the exact line was the problem, but now the market has done it for us.

[StilesBC]

Western Canada had a lot going for it during the recent credit boom. Not only were debt spigots open wide like nearly everywhere else in the world, pushing up asset prices along with them. But the provinces of BC, Alberta and Saskatchewan all had their own commodity booms at the same time, further fueling the demand for housing. In BC the mining (and to lesser extend forestry) industries underpinned a robust economy. In Alberta, the rising price of oil made previously uneconomical tar sands projects profitable. And in Saskatchewan, skyrocketing fertilizer, grain and uranium prices created their own boom in major cities.

More so than anywhere else, the boom story in Western Canada felt legitimate. So even if the rest of the world were to undergo a contraction of sorts, this region would be supported by it's "strong fundamentals." This relative feeling of safety provided the boom mentality even more fuel than elsewhere. Unemployment got as low as 3-4% in some areas, redefining what most economists thought was "full employment."

But Vancouver had yet one more factor providing wind at it's back. They had "won" the right to co-host the 2010 Winter Olympics with Whistler (a nearby ski resort town). The resulting inflow of foreign investment was going to put the city "on the map" in terms of major cosmopolitan international cities. Tokyo, London, New York, Milan, Vancouver. Yes. It was ordained. The International Olympic Committee had declared it so. The provincial government even began an advertising campaign with the slogan "The Best Place On Earth." Old license plates bearing "Beautiful British Columbia" are now exchangeable for new ones with the olympic logo and the new slogan - for a fee of course. All of this is symbolic of a peak atmosphere of social mood. People were made to feel extremely lucky just to be part of such a place. As such, property values needed to reflect this newfound prestige. And of course, "there is only so much land."

Or so went the story.

Read more at:
http://futronomics.blogspot.com/2009/01 ... tting.html

[freddyv]

"ETF's like SDS give a return of 2x so it is easy to use them without exposing as much capital as you might normally do. Simply putting 10% of your portfolio in a short ETF, a bit in gold and the rest in cash would create a very safe investing situation that would allow you to come out in good shape regardless of when the economy turns around or how much it drops." Good idea to short the market, sds is the wrong way to do it. The double short exchange traded funds do not return double negative over the long term, only on a day by day basis. So if there is any volatility, like say an up day or week every once in a while, then you will not make anywhere close to double the overall percentage drop in the s&p 500. In fact if the swings are wild enough it is even possible to lose money due to the time decay volatility on SDS even when the s&p drops big over a long period of time. These are short term (a few days at most) trading vehicles. Be wary of them. Short the long ETF SSO if you want to make this messed up system work in your favor over the long haul.... And yes you can short it.

I agree, the leveraged ETFs under-perform their targets. There was an article in this week's baron's about these funds. If you want to 2x short an index, then just 2x short the index, why pay someone else a fee to do it for you? You also have to be comfortable with major losses on every counter-trend rally - these happened about every 6 months during the great depression. If you are double short something that goes up 50% you lose 100%. We will have multiple 30-50% rallies before this is over...

First of all there are inaccuracies in the above quotes and they need to be clarified. For one, the quote by "umoguy" includes words I wrote mixed in with words I did not write and should simply be dismissed as it is beyond use.

Your suggestion that all ultrashort ETF's are the same, Gordo, are like much of the information going around in financial circles these days: false.

In FACT SDS has performed much as expected over the past year and has allowed me to do quite well in this market.

As for the specifics on SDS, one could have bought it at $55 on January 2, 2008 and it would be worth $80 as of yesterday. That's a 40%+ gain over more than a year, about half the 2x a perfectly efficient trading vehicle would return but still very useful. Knowing the characteristics of this trading vehicle as I do I have found it very effective and have managed to use it to increase my retirement portfolio (which does not allow shorting or margin trading) by over 40% since the fall of 2008. At most times I only have a small percentage of my capital in SDS, or none at all, so my exposure to loss is very limited. Once a panic begins to develop (they're not hard to spot) I ramp it up and then get out early, always keeping in mind that opportunities come along all the time but mean nothing without capital to take advantage.

I can tell you that SRS and DUG are two ETF's that do not perform as expected and should only be used for very short term trading and that seems to be true for ETF's that are more highly focused. There is an excellent article here:
http://www.thestreet.com/story/10454678 ... smart.html
...that provides what appears to be well research, accurate data, and will clear up the inaccuracies posted by Gordo.

Some quotes:

if I look at a broad index, such as the S&P 500, and then look at the returns of the two-times levered long and two-times levered short ETFs, the returns are more or less mirror images, with the two-times short fund only slightly underperforming. This is because the volatility of the S&P 500 on a daily basis is not extreme.

What if I told you that if you were spot-on with your market call, positioned half of your portfolio in each short, you would still be down 23.4% year to date?

That's better than the overall market, sure, but still a little perplexing, I mean, how could you be down for the year with one of the most prescient market calls of all time?

Yet this is exactly what would have happened if you were long the double-levered short-biased ETFs on the U.S. real estate and financial sectors year to date.

On a final note I want to point out to those of you who are trying to educate yourself about investing is that Gordo is a speculator and I am an investor and there is a huge difference between those two things. Most people will lose everything they have sooner or later by speculating. An investor should rely on hard data and experience. If you don't have the experience yet then be patient and cautious so that when the opportunity comes you will have the capital to invest.

BTW, Warren Buffet is an excellent example of an investor. He makes mistakes over time but uses time-tested rules to guide him.

--Fred

[mannfm11]

I have been reading and writing on this bursted bubble subject online since early 2001. The fact that what is happening was going to happen is as easy to understand that 1.03 to the 72nd power doesn't equal 1.06 to the 72nd power. The same goes for the stock market maxim that stocks make X% forever. When one realizes that economic growth as it is measured now days is nothing more than credit expansion, which is always greater than economic expansion then they might realize that one equation eventually dwarfs the other. When you figure that economic growth is 3% and that interest is 7% and that the growth in debt has to be greater than 7% to allow for repayment(debt and money are much the same thing once banking gets started), then you have to figure that one won't compound enough to support the other eventually. The other popular myth, the stock market, is nothing but another debt bubble, expanded mostly out of continued mortgaging of real estate. Once real estate runs out of equity sufficient to support continued monetary expansion, the gig is up.

Why are economists wrong? I believe they were wrong because the entire game is not something that is supposed to be preached to the world or taught in college. If it was, banking would be outlawed and the stock market wouldn't be the game it is. One of the planks of the Communist manifesto was to have a Central bank, which means the left was and is based on creating credit bubbles. This bubble, though it popped in 2007 was basically created in the Clinton administration, I believe by one Robert Rubin and the actions since then have been aimed at keeping the bubble from collapsing. Ditto the bubble of the 1920's, which was created by the advent of the Federal Reserve in 1913 and the expansion of monetary equivalents in World War I to a point that had not been previously seen in the US.

There were plenty of people that I would call economists screaming about what was going on. Of course, they were so far ahead of the curve that idiots like Steglitz and the NY Times guy would basically say that a broken clock was eventually right. Read Robert Prechters works, At the Crest of the Tidal wave. Bob was early, but Bob wrote something in the back of that book that was so right on the money as to what is happening right now that it is clear he knew what was happening, while Greenspan and Bernanke didn't have a clue. I do believe that plenty of people knew we were in trouble, basically because Bernanke was made Fed Chairman, with his supposed ideas on how to defeat a broken bubble.

They will never defeat the financial equation as long as there is fractional reserve banking. When debt equals money, there is the paradoxical method of debt extinction which equates to money extinction. Plus, banks create money. There is very little one putting money in the bank and the bank lending it out. Money doesnt' exist in banks and until someone can understand what this means, they can't even begin to understand the system. All money that comes out of banks is the banks credit, which isn't money at all, but bank IOU's issued at interest. Now, if the banks issue all the money at interest, how do we ever pay them back and if they pay interest on money, then how do those that end up with the money get paid when those that owe the banks can't pay? The entire world is brainwashed on how banks work to the point that not one out of 1000 can see the forest for the trees. If there is a mainstream economist that understands this, you can bet he will not be put on TV or given a Nobel Prize for his work on how to get around this truth.

[The Grey Badger]

The LEFT is creating credit bubbles? Only if you suppose that the financiers, speculators, etc of both the 1920s and the 1990s were secretly working for the Great Leftie Conspiracy in deep cover. BTW, I find that most conspiracy theories are better explained by greed, stupidity, short-sightedness, etc. Or even the desire to stay out of jail and/or provide for relatives whose fate in a free market would be flipping cheeseburgs.

Not that there aren't mini-conspiracies happening all the time. Adam Smith pointed out their existence in the business world. Most of them are in aid of the lovely qualities above, and most cartels break up when it becomes more profitable for a single member to defect rather than cooperate (except for those enforced at gunpoint, such as The Mob is all its manifestations). IN fact, whenever you get a group of 5 or more, you'll get the occasional mini-conspiracy. In high school they were called 'cliques'. But world-wide financial manipulations? Better folks than the current crop have tried it, and where are they now?

Pat, shaving you with Occam's Razor.

[mannfm11]

The LEFT is creating credit bubbles? Only if you suppose that the financiers, speculators, etc of both the 1920s and the 1990s were secretly working for the Great Leftie Conspiracy in deep cover. BTW, I find that most conspiracy theories are better explained by greed, stupidity, short-sightedness, etc. Or even the desire to stay out of jail and/or provide for relatives whose fate in a free market would be flipping cheeseburgs.

Not that there aren't mini-conspiracies happening all the time. Adam Smith pointed out their existence in the business world. Most of them are in aid of the lovely qualities above, and most cartels break up when it becomes more profitable for a single member to defect rather than cooperate (except for those enforced at gunpoint, such as The Mob is all its manifestations). IN fact, whenever you get a group of 5 or more, you'll get the occasional mini-conspiracy. In high school they were called 'cliques'. But world-wide financial manipulations? Better folks than the current crop have tried it, and where are they now?

Pat, shaving you with Occam's Razor.

What do you think started this stuff? You think it was unlimited credit as proposed by Karl Marx or Austrian/American economics? Woodrow Wilson created the stage for the 1920's bubble, not Herbert Hoover. Bill Clinton and Robert Rubin, through the actions of the treasury set up the 2000 bubble. Barney Frank and Christopher Dodd set up FNM and FRE to buy junk debt. The heart of this matter is what happened with FNM and FRE. By the time Bush took over, it was clear that FNM and FRE were both scandals, mistated earnings, rigged earnings grotwh and moral hazard. There was really nothing left over the past decade to do but pretend the game could go on, as it had broken down. If you couldn't see this coming 8 to 10 years ago, you really can't comment on this page because you are commenting out of opinion instead of knowledge. I would laugh at the guys on CNBC who picked on the Japanese because they used the wrong tactics to fix their problem and had failed. Seems they used the same techniques we are forced to use and Obama is going to go right down the line of what Japan did. John references Richard Koo, who worked for the US Fed and the Bank of Japan. Koo was instrumental in getting Japan to recapitalize their banks, the last thing they did. Of course, it was one of the first things done here and it is coming under intense heat. Instead the preferred path is to do what Japan did for 10 years with no real impact, which is Keynesian economics.

I believe Koo is also misinformed, despite being one of the worlds top economic officials. Japan continued because there was a huge credit bubble created in the US, not because their government bailed themselves out. Koo talks about the Japanese consumer saving up money during this meltdown, but wasn't the story in the 1980's how much money the Japanese consumer saved? If anyone hasn't noticed, I will inform you that the relative size of the Japanese trade balances has shrunk significantly over the past 20 years, not grown, which would be indicative of a shift in savings. The other great trick in the debt/savings game is that they are equal. Thus there might be a balance of payments surplus, which would demostrate what the actual savings of an economy was, anything in excess of that is equated as debt. It is rare that savings in a modern economy is kept in the matress, but even if it was, the currency itself is called a note and is backed by debt and noting else. In fact, the entire system is based on absurdity in that one pledges their valuable house for an IOU nothing which derives its value because the guy who pledged his house now is faced with owing more IOU nothings than are in circulation. In short, it was Woodrow Wilson who set the table for the Fed and it was FDR who created the IOU nothing when it pertained to the American consumer. It was HST who put us on the Bretton Woods agreement, but this was actually the works of FDR as well.

As usual, when someone brings up the truth, those that try to dispel it bring up the conspiracy theory game. It doesn't matter whether it is a conspiracy theory or not, to throw that rock is to throw rocks rather than recognize the truth. Everyone wants to go back to idiots who say that you own stocks forever and you get even or ahead by significant amounts and they also convince you that $2 put in a jar can have enough babies to pay off infinite interest. When it is brought to the attention of those that don't understand this, they call you names rather than come to grips that 1.03 to the 72nd power is 8 and 1.06 to the 72nd power is 64. To pay 6% on 64, you need 38.4, which out of 64 leaves only 25.6 to do something real.

Now for the guy who thinks you put your money in the bank and they lend it out to someone else, explain how Citicorp arrived at a $400 billion fed funds liability and continued lending money without creating money out of thin air. They were allowed to pretend they had money. No one with Citi is going to jail, while Bernard Madoff pretended he had $50 billion and we know what is going happen to him. Madoff's failure won't be backstopped by the government, but it is clear that Citi's will or we will suffer the consequences. Does anyone have a clue as to what the ramifications would be should the shortfall of bank credit be found to not exist? We have accounts full of money that doesn't exist and never did supporting stock values that really never existed either.

There are a lot of cries going on about what to do about these problems. The best one is to get rid of mark to market. Then we can pretend everything is okay. But, why allow the banks to have something none of the rest of us have? They already have the capacity to invent money in any fashion possible. They send me a $35 bill if my account is marked to market one cent short, yet they operate on balance sheets in sums that cannot be proven to exist or be collectable.

Money doesn't exist inside the bank. If it did, there would be a lot more money in the bank than can be shown. Yet once they create a loan, it flows into the streets. The complaint that they put money in the banks and they aren't lending it is just as invalid as the money they put in, which was created by a bankrupt. A bank has to have a capital reserve to create money and it has to be sufficient to capitalize the money already on the books. Thus banks either have capital reserves or they don't, but they don't in truth have money itself. All the money is already loaned.

Very few people know the Constitution to any degree. There is a takings claus in the Constitution that was upheld then overturned in the Schecter Poultry case, before and after FDR stacked the court. When it was overturned, it was basically done so under the power of 12USC95a, which suspended the constitution under the Act of October 6, 1917 and moved the US into modified emergency martial law. Thus our property could be pledged and liened to support public debt used for socialistic purposes. It is clear the 5th amendment of the Constitution no longer exists because we operate under the same Rules Adolph Hitler operated and have since March 9, 1933. FDR also took the gold that belonged to the people of the US and gave us notes we owe back to the bank. You might note the Federal penalties now enforced against people that withhold evidence, which in the 5th appears to be their right. IN the 4th, you have to now tell them what you have up front, they get your phone records and everything else. There are also prohibitions of Titles of Nobility, which being the sole creator of money, something reserved to the government itself, is clearly a title of nobility. Otherwise, Bernard Madoff would merely write $50 billion in notes and circulate them with the rest of the notes. I am sure he has as much capital as the typical $50 billion bank, so why not?

Pandora's box is now open. We have a string of absurdities coming to the surface at the same time in regard to the worlds largest economy and reserve currency. The absurdities are so absurd that most people believe them to be true and when pointed out, the one who points them out is called a nut. I think this is admiring the emperors new clothes to the extreme, even when the world is watching in full view. How can all the money be insured, when all the money is all that can pay of all the money? How can banks make loans when all the money is loaned out? Money isn't loaned out by banks, but created through loans that they act as surety for. But, who can act as surety when they are broke? All the money issued by the Federal Reserve is also owed for the debts the Fed holds, which means that the only people that can pay the debts are those that hold the cash. Yet, there is some persistent belief that the deficit could be wiped out and the debt paid off. Even Greenspan wondered what would serve as money in our system once the debt was paid off. The entire bunch of inflationary bullshit that transpired in the late 1990's was based on absurdity and would have required the deflation of debt to the point that the entire economy would have collapsed, which it almost did.

Doubt 12USC95a? Look at Bear Stearns? No consultation of Congress. Look at Rubins bailout of Mexico in 1994. Not one peep out of Congress for $40 billion. Over and over and over again. This is 95b in its entirety: The actions, regulations, rules, licenses, orders and proclamations heretofore or hereafter taken, promulgated, made or issued by the President of the United States or the Secretary of the Treasury since March 4, 1933, pursuant to the authority confered by subsection (b) of section 5 of the Act of October 6, 1917, as amended [12 USCS § 95a], are hereby approved and confirmed.
(Mar. 9, 1933, c. 1, Title 1, § 1, 48 Stat. 1). If you were reading about NAZI Germany, it would be clear this was an enabling act of a dictatorship. Here it is merely conspiracy nut nonsense.

[mannfm11]

John, the post on the trade deficit was right on. I took note of that decline myself when it came out. I believe at one point that would have been bullish news, but not now. The Chinese, Japanese, Indians and OPEC must be sweating bullets, as a good portion of their supply has been cut off. Decembers figure is going to be even more interesting. As for the rest, I focus more on free credit than earnings, as the credit creates the earnings and the flow of cash to inflate stocks. Almost none of the money being loaned or created is being used to expand business or consumption,but to ease the credit vaccuum that could lead to total collapse. As I know you have read much of what I write, I am more focused on dividends than earnings and they too are declining. I also know you read the Shiller data, something which I have analyzed on and off since 2002. I know there are buy and hold forever proponents on this board, but they might change their minds if they examine the long term history of stock data compiled by Shiller. http://www.econ.yale.edu/~shiller/data.htmThe XLS file linked at the top of this page cites the rubber that meets the road in the inflation adjusted dividends column. You might note that the CPI adjusted dividend on the SPX first hit 10 in November 1907. It hit 20 in December 1997, a period of 90 years and 1 month. This doesn't support the idea that stocks will pay 10% forever and as far as that goes, makes no mention of the trillions of dollars lost in issues that never get off the ground. In any case it is clear that the trend of returns in stocks is less than 1% over inflation, not inflation plus 7% minus the dividend rate as marketed. One might examine the PV expansion of dividends during the 1925 to 1932 period compared to 2003 to 2008. The real dividend went up in December despite the nominal one declining. For those that don't know, an SPX point is worth about $8 billion.

[Gordo]

In FACT SDS has performed much as expected over the past year and has allowed me to do quite well in this market.

Fred, I don't really understand you, you started off by basically saying I was a liar for saying the leveraged ETFs under-perform their objectives, and then you go on to basically admit that its true. For the lazy who refuse to look at the numbers themselves, here are some details for SDS:

SDS: "The investment seeks daily investment results, before fees and expenses, which correspond to twice the inverse of the daily performance of the S&P 500 index. "

Did it meet its objective?
Dec 31 '08 dividend adjusted close = 70.94
Dec 31 '07 dividend adjusted close = 44.20
Total return for 2008 = 60%

S&P500
Dec 31 '08 dividend adjusted close = 903.25
Dec 31 '07 dividend adjusted close = 1,468.36
Total return for 2008 = -38%

2 times the inverse of the S&P 500 would be a gain of 76%, and yet SDS only gained 60%, a huge under performance of it's objective to the tune of 16%. You would have been much better off simply shorting on your own with 2x leverage.

Most people will lose everything they have sooner or later by speculating. An investor should rely on hard data and experience. If you don't have the experience yet then be patient and cautious so that when the opportunity comes you will have the capital to invest. BTW, Warren Buffet is an excellent example of an investor. He makes mistakes over time but uses time-tested rules to guide him.

Please don't kid yourself. Warren is one of the most successful SPECULATORS of all time. What is an investor? Most "investors" are fully invested in the S&P 500 at all times. They will probably lose 75% of their money or worse in the current bear market. And if they follow the popular patterns of selling at bottoms and buying back after nice rallies, they will do substantially worse. The terms "investor" and "speculator" are mostly meaningless to me. But I'd love to know how someone who owns a 2x leveraged inverse fund fits your definition of an "investor" but not your definition of a "speculator".