Financial topics

[Gordo]

On page M5 this weeks Barron's is an article called "The Fruits of Endless Labor" which highlights a common misconception about generational finances. With the world suffering from a long-term bear market and too many people over-invested in slumping real estate and equities, one of the most beneficial side effects will be that many of those in the baby boomer generation will be unable to retire. This will enable the global economy to avoid the dire predictions of too low a ratio of working people to retirees, a popular doom-and-gloom prophecy of the generational analysts.

[freddyv]

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

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.

I understand you, Gordo. You are a speculator and you may well be a good one but most of the people who read this are not and need to know the truth so that they can make good decisions.

I consider a gain of 60% over a year to be pretty good when you consider the FACT (one you have continually ignored) that there is no other way for many investors to short the market.

These double short ETF's are the only real vehicle available to those trading out of retirement accounts and they can actually outform their expectations. An example: At one point in November 2008 SDS was trading at 130, intraday, which was a gain well over twice its low of the past 52 weeks; in that time the market never dropped more than 50%, meaning the SDS had outperformed its expectations.

I have pointed out the shortcomings of SDS and the much worse shortcomings of other ETF's here in this forum so that people know what they are dealing with. You painted all short ETF's alike, which was either done out of ignorance or deceit, take your pick. You also ignored my statement that I CANNOT short, like many individual investors who are investing through a retirement account. One thing I have found, Gordo, is that picking and choosing your facts when investing will ultimately lead to dire consequences.

ETF's are easy to understand and can be a good trading tool for any investor, as long as you understand what you are dealing with. I suggest tracking the ETF you wish to use for some time prior to trading it.

But let's compare shorting with using short ETF's:

Q. How much can you lose shorting a stock or ETF? How much can you gain?

A. You can lose an unlimited amount by shorting stocks or ETF's; the gain, however, is limited to the price of the stock when shorted.


Q. How much can you lose shorting the S&P 500 via SDS? How much can you gain?

A. The amount you can gain "shorting" via SDS is unlimited. The amout you can lose with SDS is limited to the amount you initially invested.


The bottom line for any investor should be performance, and SDS, along with other index-shorting ETF's, have good but short records and they are easy to check for past performance. Be aware that they pay out dividends once a year and that causes the price to drop sharply, though you lose nothing because you make up the drop in a cash payout payouts. That drop is late in December for SDS and should be factored in because it comes straight out of the stock price. I failed to do so in my earlier post and that would have made my case even stronger as it took about 5 points off the ending price of SDS.

--Fred

[Higgenbotham]

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.

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.

Where the bubble began is an important fundamental big picture question. From a Fourth Turning/Generational standpoint, the bubble was created in the 1990s and, therefore, stocks will fall to the Dow 3-4,000 level as the bubble deflates.

However, if we look at the restructuring of the banking system that occurred under Roosevelt, it can be argued that the bubble began in the 1930s. Prechter arrives at that conclusion by building fractals and postulating that, based on those patterns, the market is in a "Grand Supercycle Wave 4" that will carry the stock market back to revisit 1930s levels between Dow 41 and 381. One could come to the conclusion that Jim Kunstler arrives at the same thing indirectly by saying that suburbia, strip malls, etc., are the greatest misallocation of resources in history. We know that, fundamentally, bubbles result in misallocations that are erased when the bubble bursts.

There are others who argue that the dissolution of Bretton Woods in 1971 which spawned derivatives is the genesis of the bubble and, therefore, the stock market will fall back to 1970s levels, perhaps Dow 500-1,000.

I'm partial to the first and third interpretations. I believe we are in both a generational bubble and a derivatives bubble and both are popping now and will take the Dow back to about the 750 level eventually. A panic overshoot that drops the Dow to half of that wouldn't be out of the question. I don't believe, though, that all of the progress made since the 1930s is misallocation. So while Prechter could be substantially correct, I don't see evidence yet that the Dow can get under 400 for very long. There's a case that can be made for it fundamentally and what some of it would involve would be looking at how crude our IT development is compared to what IT would look like in a true information age. If we are ~60 years away from developing IT on par with the steam engines that set off the industrial revolution, then Prechter could be right about his ~60 year wave 4. For sure, we can say that computers as they exist today are in some sense crude information age devices as they were invented and produced with industrial age thinking, standardization, etc.

I can't remember exactly what the high in the Dow was in 2007--around 14,700 I think. But if we take that number and reduce it by 1.07 to the 72nd power divided by 1.03 to the 72nd power, that is 946. Seems about right.

[freddyv]

On page M5 this weeks Barron's is an article called "The Fruits of Endless Labor" which highlights a common misconception about generational finances. With the world suffering from a long-term bear market and too many people over-invested in slumping real estate and equities, one of the most beneficial side effects will be that many of those in the baby boomer generation will be unable to retire. This will enable the global economy to avoid the dire predictions of too low a ratio of working people to retirees, a popular doom-and-gloom prophecy of the generational analysts.

I think it's safe to say that no one knows the exact affect the boomer generation will have on our economy going forward but it is certainly possible to make certain predictions:

1. Boomers will remove more from the stock market than they will put into it and this will accelerate over time, peaking just a few years from now.

2. Boomers will live longer, at greater expense, because of advanced medical procedures.

3. Boomers will (will be able to and will have to) work longer than previous generations.

These are 3 simple statements that are impossible to refute and all of them have negative implications for our economy, though they do create investing opportunities.

Number one is obvious and needs no comment.

Number two suggests certain investing opportunities but also suggest that boomers will be a drag on our economy that will last for about two decades; intensifying during most of that time as we spend more and more on drugs and medical procedures that too often will be paid for by the state or their descendants, reducing the purchasing power of the younger generation directly or via taxes.

Number three is the one factor most insidious. Our economy is normally driven forward by young, vibrant workers entering the workforce, causing the economy to expand as they try to live "the american dream". The boomers will likely keep younger people from entering the workforce and allowing the economy to grow as it should. Older people are wiser but are not as innovative and that too will affect growth. I believe that this will have the effect of keeping unemployment down but will cause our "depression" to be much more insidious, as we get stuck in an ever deepening rut caused by aging boomers who suck more and more of our resources out of the economy in efforts to keep them alive at any cost. Insidious because this is counter-intuitive to nature's plan and will, IMO, cause a long, depressed period similar to Japan's lost decade(s), our Great Depression or a mirror image of the period from 1966 to 1982, with deflation being a constant threat to the economy; instead of the economy overheating as it often did during the seventies, it will continue to slowly deflate or grow very slowly because of the boomer factor and the continued unwinding of our massive debt burden taken on during the past several decades.

--Fred

[freddyv]

John, I eagerly await your weekly posting about earnings for the S&P 500. I see they are down another 5% to -20% this week. I think my prediction of -32% might be a little on the optimistic side.

--Fred

[Higgenbotham]

Number three is the one factor most insidious. Our economy is normally driven forward by young, vibrant workers entering the workforce, causing the economy to expand as they try to live "the american dream". The boomers will likely keep younger people from entering the workforce and allowing the economy to grow as it should. Older people are wiser but are not as innovative and that too will affect growth...
...Insidious because this is counter-intuitive to nature's plan and will, IMO, cause a long, depressed period similar to Japan's lost decade(s), our Great Depression or a mirror image of the period from 1966 to 1982, with deflation being a constant threat to the economy; instead of the economy overheating as it often did during the seventies, it will continue to slowly deflate or grow very slowly because of the boomer factor and the continued unwinding of our massive debt burden taken on during the past several decades.

That's the way I see it too. Productivity of high tech workers peaks in their 30s and drops off sharply afterwards. Productivity of managers probably peaks in their early 40s, and income peaks in the late 40s as there is a slight lag time in recognizing and rewarding peak productivity. In the absence of technological change that increases brain productivity, whether boomers retire or work longer won't help the economy much either way.

[John]

Dear Gordo,

> On page M5 this weeks Barron's is an article called "The Fruits of
> Endless Labor" which highlights a common misconception about
> generational finances. With the world suffering from a long-term
> bear market and too many people over-invested in slumping real
> estate and equities, one of the most beneficial side effects will
> be that many of those in the baby boomer generation will be unable
> to retire. This will enable the global economy to avoid the dire
> predictions of too low a ratio of working people to retirees, a
> popular doom-and-gloom prophecy of the generational analysts.

One of the many things that you kids don't know, that we Boomers have
known for a long time, is that there'll never be enough money for us
to retire, and that we'll have to work until we die. However, your
comments are off the mark anyway, since the most important problem is
not retirement but Medicare. The other thing that you don't know is
that the suicide rate for seniors has been growing, and will be
growing even faster.

Sincerely,

John

[John]

Dear Fred,

> John, I eagerly await your weekly posting about earnings for the
> S&P 500. I see they are down another 5% to -20% this week. I think
> my prediction of -32% might be a little on the optimistic side.

I have a sinking feeling that you're right.

Sincerely,

John

[John]

> That’s why he recently sat down with Harry S. Dent of the HS Dent
> Foundation. Dent is the creator of the “Dent Method” and author
> of: The Great Boom Ahead (published 1992); The Roaring 2000s
> (published 1999); and The Next Great Bubble Boom: How to Profit
> from the Greatest Boom in History, 2005 – 2009 (published 2004).

I've always felt that Dent was a charlatan (though I suppose that's
been the norm the last few years), because he was talking about Dow
40,000 at a time when the P/E ratio was already between 50-60. My
feeling is that he was willing to say anything to sell books.

Sincerely,

John

[Gordo]

Not sure I buy it, but here’s an interesting perspective on the current market (and the difference between panics and crashes):
http://www.marketoracle.co.uk/Article8285.html

He makes some good points… Perhaps too many people believe we are in a new Great Depression (I used to be one of them) for it to really be so… pretty much no one is expecting a huge up year for ’09, I think it would take almost everyone by surprise. And yet if you look at other “panics”, this would seem to be the rule.

I'll definitely have to think about this some more...

p.s. Anyone looked at LIBOR recently?