Don’t you try and pretend
It’s my feeling we’ll win in the end
I won’t harm you or touch your defenses
Vanity and security
--Simple Minds

Buzz Lite (Updated 02/18/2007 12:16 PM)

Minyanville's Buzz and Banter represents a real time 'stream of consciousness' flowing from the minds of the Minyanville professors.  On the Buzz, the professors are sharing what they are 'thinking and doing' about markets.  Observing the thought processes of experts can be a great way to learn.  However, findings from the first MV project suggested that reading the Buzz at 'full strength' was difficult for many students.  The language was tough to decipher, and many Buzz postings were too 'advanced' for readers with novice levels of market understanding.

As part of our MV2 project, we're experimenting with a 'toned down' version of the Buzz.  During my daily reading of Minyanville content, I'll be on the lookout for postings that would 'add value' to the learning experience.  When I find them, I'll post links to them here along with some comments.  The idea is to help you focus on Minyanville content that provides the biggest ROE (return on effort).

All postings to this page will be time stamped and retained thru the life of this project, with newest postings at the top.

The Vicious Cycle 1/12/06 2:15 pm

Drawing from an article on Japan by the Dallas Fed, Professor Succo reviews the process that has currency printing presses around the world in high gear, net savings at historical lows, and speculation in overdrive.  Previously, Succ developed this graphic that portrays the process.  Savvy market observers should be asking what might stop this cycle and unwind it in the other direction?  

For the Kids 1/12/06 1:50 pm

Over dinner, Toddo offers some thoughts for a friend seeking to invest some funds for his newborn kid including ideas in precious metals, energy, and even an idea from techland, Sun Microsystems (SUNW).  I would add that this appears to be speculative capital that they are discussing.  In other words, this is money that is seeking a fairly high return which, of course, means there is higher than normal risk involved as well.  As Toddo notes, don't speculate with money you can't afford to lose. 

positions in precious metals, SUNW

Volatility Essentials 1/12/06 1:45 pm

A number of posts on this site, and much dialogue in the 'Ville, concerns the subject of volatility.  Professor Succo offers an outstanding intro to the concept of volatility, how it is measured, and how his firm trades it.  As John notes, volatility is essentially movement in an asset's price and is measured by calculating the standard deviation in a series of prices.  For stocks, volatility is probably best expressed through the pricing of options (i.e., calls and puts).  Options are a topic for another day (Professor Succo has written a fine series on the subject, including an intro to derivatives, a graphical tutorial on options that includes the definition of a call and a put, analyzing volatility that includes the notion of 'fat tails'--a key concept in tail risk, and various options strategies).  But if you retain that volatility = variation in the price of an asset, and this volatility is expressed in option prices, then you're doing well at this stage of the game.

Recessions = Good??? 1/12/06 1:35 pm

We're usually led to believe that economic recessions are undesirable.  Not necessarily, notes Professor Succo.  Recessions purge unproductive capital from economic and financial systems and sets the stage for a healthy recovery.  On the other hand, intervening in markets (such as actions taken by central banks that seek to 'speed up' the economy when growth starts to slow) can be viewed as prolonging the inevitable.  Moreover, if you believe that market forces inevitably overcome attempts to 'force' things, then intervention to counter recessionary force may only make the consequences worse when economic contraction finally arrives. 

The Value of Face Value 1/11/06 12:30 pm

This morning Lehman Bros upgraded the mortgage finance sector.  Guess they see value in the sector, right?  Perhaps, but as Professor Succo notes, Lehman also happens to be the biggest underwriter of bonds for these firms on Wall Street.  Reinforces that notion that you want to be critical of information streaming from financial media.

Foreign Banks and US Bonds 1/11/06 12:25 pm

Much attention in Minyanville (and in our discussions here) are focused on the liquidity injected into the financial system by central banks and its effect on asset prices.  Here's another snippet on the huge growth in M3.  It's THAT important for making sense of the current financial landscape.  Professor Succo adds to the thread by drawing from an article in Financial Times (a daily business newspaper published outside the US which offers a different perspective than in-country publications).  One item he notes that I wanted to bring to your attention: foreign central banks, particularly the central banks of China and Japan, have been huge buyers of U.S. bonds.  In fact, foreign central banks currently own more tradable U.S. debt than any other entity.  Why?  One explanation is that foreign governments realize that they need low U.S. interest rates in order to sell their goods and services to U.S. consumers.  And by buying bonds, interest rates stay low (recall that there is an inverse relationship between bond prices and interest rates--when the price of a bond (i.e., demand) goes up, interest rates go down).  As Succ notes, this degree of foreign central bank buying of U.S. debt is unprecedented.  It distorts the structure of the financial system.  For example, what if these central banks decide it is no longer in their best interest to own these bonds, and they begin dumping (selling) them in size?  They'd be stupid to do that, you say?  Perhaps, but to see all sides of the trade try to develop scenarios where they might do just that.  You'll be a more well rounded market participant for it.

Gold Glove 1/11/06 12:15 pm

Currently, gold is hovering near 25 year highs at about $550 per ounce (a nice place for gold bullions quotes is here).  Most market participants today are not well versed on the 'precious metals' (i.e.,  gold and its close cousin silver) and their potential value as financial assets.  After an extended Holiday, Laurie McGuirk, Minyanville's resident professor Down Under, offers his take on the current state of precious metal affairs.

positions in gold and silver

More Money But Less Credit? 1/10/06 7:35 pm

The Fed has been printing a lot of money lately, as measured by M3 (wow!).  But consumer credit growth, one component of M3, has been slowing (see 1/9 'Credit Deflation' post below).  How is this newly manufactured M3 making its way to financial markets if it's not by way of an indebted consumer.  Professor Succo notes that many institutions borrow funds from the Fed, so credit can be created in other ways.  A chunk (perhaps a big one) of these funds are likely making their way into the markets.  All part of the liquidity phenomenon.

Tis the Season 1/10/06 7:25 pm

We are now entering 'earnings season.'  This is the 2-3 week period when most companies report their quarterly results once a quarter has ended (most recently Q4 from 2005).  Thus, four times per year, market observers (and doers) cast their attention to the company reports during earnings season.  Of interest to many is whether a company reports results that meet, exceed, or fall short of investor expectations.  Reports that either surprise to the upside (performance better than expected) or to the downside (performance worse than expected) often fuel big moves in stock prices.  An example of a downside surprise today was Phelps Dodge (PD).  The big copper producer reported sales and profits significantly below expectations (this is sometimes referred to as an 'earnings miss').  The result of the miss was a high volume selloff in the stock which broke a recent uptrend.  A nice example of the volatility that sometimes embodies earnings season.  

The Boo-ish Process 1/9/06 7:45 pm

What should make someone become bearish?  Professor Zucchi suggests that it's time to get bearish when asset prices significantly decouple from fundamentals in a negative way.  For example, the 'fair value' of Google (GOOG) based on a 'true' grasp of the fundamentals (all of these are nebulous, hard-to-quantify factors, btw) may be far lower than the $137 billion market cap implied by today's closing price of $466 and change (market cap = market capitalization = price per share * # shares outstanding).  Professor Succo thinks it's more about recognizing that the markets are significantly underestimating risk.  Increased risk implies that, regardless of whether prices actually DO go down, there is greater POTENTIAL for lower prices.  Professor Depew provides a nice follow-up example with his BB gun analogy.

Credit Deflation 1/9/06

The value of new consumer credit came in much lower than expected in the most recent month measured (Nov '05).  Sounds good, right?  I mean, seems like people are using credit cards less and perhaps paying down some credit card debt.  And you'd be correct, except that much of the consumer spending that's kept the economy going the last coupla years has hinged on increased consumer credit and debt.  If consumers decide to reign in their debt-induced spending binge, then what does that mean for the economy.  Professors Depew and Succo ponder precisely this issue.  

The Fed and Stock Prices 1/5/06 8:15 pm

Much banter on the 'Ville involves the Federal Reserve's influence on stock prices.  Currently, the Fed is not permitted to buy or sell stocks directly (agencies in other countries are permitted to do so, btw...example Hong Kong).  However, they do conduct 'open market operations' officially meant to manage the Fed's stated interest rate target and to provide liquidity.  Do the Fed's open market activities influence stock prices?  Take a look at this graph.  The green represents the value of the S&P 500 index since mid 2001.  The black bars at the bottom represent a measure of Federal Research open market ops.  Is there a relationship?  You tell me...

Not Advice... 1/5/06 8:10 pm

A Minyan asks Todd why there is not more specific advice on the 'Ville.  Todd offers that one-sized-fits all advice is impossible, since each individual has their own risk profile and time horizon.  He does offer some insight into the composition of his two 'bucket' portfolio.  One bucket is longer term stuff (e.g., precious metals, energy, drug stocks) while the other side is shorter term trading based on opportunities that arise.  A nice example that investing and trading are not necessarily mutually exclusive.  Todd's telling us he does some of each.  

position in precious metals

Like Pushing Jello Around 1/5/06 7:55 pm

If house prices go down, won't a lot of money move out of real estate and into stocks?  Maybe, but Professor Succo suggests that the lack of liquidity in housing markets might make it difficult to 'get out' of the real estate market efficiently.

Negative Savers 1/5/06 7:50 pm

The San Francisco Fed reports that consumer saving continues at a negative rate.  Negative saving means that the consumer is a net borrower.  At the end of his comment on this situation, Kevin Depew suggests that the LAST thing the Fed wants is for consumers to suddenly become net savers!  Why?  If consumers save, then they don't spend.  In a leveraged economy dependent on more and more spending just to make payments on the debt, savings is viewed as bad.  A bizarro situation if you ask me...

Is the Fed necessary? 1/5/06 7:45 pm

A Minyan questions whether the Fed is needed.  This is great question that most don't ask but perhaps should.  Why?  Well, Succ's outstanding reply does nicely for starters.  btw, Succ's perspective squares well with the view of economists from the so-call 'Austrian school.'  When it comes to central banks such as the Fed, Austrian economists believe they are an unnecessary evil that should be purged from economic systems (for many of the reasons Succ eloquently cites).  Unfortunately, the Austrian view of central banking gets little face time in most college economics and finance classrooms.  To see all sides of the trade, however, a market participant would be wise to spend some time with the Austrians to understand this point of view.

Credit Spread Pro Con 1/5/06 7:35 pm

Brian Reynolds continues to suggest that tight corporate bond spreads are a positive for the stock market.  Professor Succo shares the other side of this perspective.

Critter View 1/3/06 1/3/06 9:15 pm

Toddo and the critters help us see both sides of the trade as the markets begin a new year.

Final Countdown 12/31/05 8:45 pm

On the back of peculiar price behavior in Fannie Mae (FNM), Professor Succo notes that a key contribution of Minyanville is to discuss the inner workings of the market.  Well said, Succ, as it's hard to find intelligence like this elsewhere.  Happy New Year!

position in FNM

The Great Debate 12/31/05 7:30 pm

Interesting exchange between Professors Miller and Succo on the direction of 'risk premiums' in 2006.  Risk what?  Let's assume a relatively low risk bond returns 5%.  Investor might require stocks to return 10% in order for the extra risk to be worth it.  The risk premium in this case would be 10-5=5%.  If the risk premium shrinks, then investors would be more willing to accept a lower return for stocks over bonds.  Professor Succo observes that premiums assigned to risky assets have been shrinking for a while now (investors are buying riskier assets with less expected return over less risky assets).  Here is an example.  Why is this important?  Well, if investors begin to assign higher risk premiums to risky assets (they demand greater returns over the risk free rate), then there will likely be less demand for risky assets at current prices.  As such, and as Succ astutely observes, the direction of risk premiums is an important topic for market participants to consider.

Future Shock 12/30/05 9:25 am

Professor Succo casts an eye towards 2006.  As he notes, not predictions but factors that could influence asset prices next year.  Some of the details may be hard to follow, but the themes are pretty simple.  Succ suggests that many leveraged market participants may get caught on the wrong side of the trade--perhaps in an extreme way (leverage works both ways--both good and bad).  Liquidity has a significant chance of drying up.  Moves by the Fed to reestablish liquidity (e.g., lower interest rates) may not 'work.'  As always, you may not want to 'believe' these forecasts, but you surely want to see this side of the trade and factor it into your risk profile for the New Year.

Retail Detail 12/30/05 9:15 am

Minyanville Professor Jeff Macke has retail in his blood.  His dad was president of Target, and Jeff spent much of is career in the industry.  This missive on discount retail is superb in a number of ways.  It provides investment info on discount retail's Big Three (Walmart, Target, Kmart).  It also is useful for the student of strategic management, as Jeff lays out how operating decisions such as location contribute to overall business strategy.  In fact, this piece will be required reading in my operations management class!

Pension Contention 12/29/05 9:35 am

Building on a Wall Street Journal article about GM's underfunded pension, Professor Succo offers that similar situations exist throughout corporate America--largely because executives have been drawing from pension funds to manage earnings.  One of the points of Succ's post is this: pension managers need to take on more risk in order to even come close to the assumptions baked into their pension plans.  Like most of us, John, concludes, pension managers are taking on a lot of risk and 'hoping' that the market goes up.  Is this a healthy way to manage risk?  That's for you to decide, cookie.

Credit Fuel 12/29/05 9:10 am

Responding to a Mailbag, Professor Succo opines that growth in credit, not cash, is driving asset price speculation.  Credit growth is a primary factor in creating liquidity.  If indeed there is a relationship between credit growth and asset prices, what happens if credit growth slows???

Inversion Controversy 12/29/05 8:55 am

The yield curve on US Treasuries has slightly inverted (see the 12/22 post 'Inversion Excursion' for more background on inverted yield curves).  Professor Reynolds offers that this is no big deal for stocks, as historical data on eight previous inversion events suggest no pattern in subsequent stock prices (sometimes they've gone up, sometimes they've gone down).  Moreover, he suggests that inverted yield curve situations may spur banks towards more commercial lending.  Tony Dwyer's analysis suggests that stock prices often head higher after inversions.  Not so fast, says Professor Reamer, as analytical approaches such as these can be full of bias (as an academic, I tend to agree with him).  But Professor Goepfert disagrees with Scott and offers that analyses like Brian's and Tony's add value.  Clear as mud, huh?  Perhaps, but such differing viewpoints are precisely what savvy market participants should seek when trying to make sense of the financial landscape.  Perhaps the savviest advice comes from Professor Succo, who suggests that when analyzing historical data, it is very  important to ask 'why' things happened in addition to 'what' happened.  When you do this for the inversion phenomenon, you might conclude that we are in a unique situation with little historical precedent.     

The Other Side of Oz 12/27/05 9:30 pm

Jeff Saut is the chief equity strategist at Raymond James and is regarded as one of the savviest strategists on the Street.  He's also a Minyan.  In a recent investment note, Jeff shares the economic and political allegory that was the Wizard of Oz.  Very interesting.  It seems that the Yellow Brick Road, Scarecrow, Tin Man were part of more than just a kid's story--one that Mr. Saut suspects is still playing out over 100 years later...

Sentimental Journey 12/26/05 9:15 pm

Professor Goepfert shares some data suggesting that investors are quite 'comfortable' holding equities.  The Rydex series of mutual funds have become a popular way to participate in stocks.  When prices are way above the moving average price (as is the case now), Professor Goepfert shows us that stock prices typically peak in the near term.  Will history repeat itself?  We'll have to see what the rest of the holidays hold...   

Deflating Bubbles 12/26/05 9:10 pm

Professor Depew paints a cogent picture of what a deflationary environment might look like.  Deflation is commonly viewed as a general decline in prices.  Austrian economists often consider deflation to be a contraction in credit/money creation (it is this credit contraction which often then leads to falling prices).  As professor Depew notes here, a key element of a deflationary scenario is a general distaste for risk taking.  Lack of spending, hoarding of cash, and lack of speculative activity would be key indicators of a deflationary scenario.  Keep in mind that this scenario is just one of many plausible 'macro' futures.  But you'll want to 'see' it in order to be aware of all sides of the trade. 

Volatility Smorgasbord 12/22/05 7:45 pm

The subject of declining volatility (both actual and implied) continues to permeate content on the 'Ville (see recent posts 12/18 'Vol Fall' and 12/19 'Vol Fall II').  Professor Succo notes the unusually low levels of actual volatility and how he's calculating it--in addition to observing the 'option selling' mechanism that seems a large factor in current low levels of vols.  Professor Reamer observes that many natural systems tend to experience unusually low levels of volatility just prior to extreme periods of variation (very interesting).  Toddo notes the extreme reading of the VXO (the VXO is a 'volatility index' that measures the implied volatility of the S&P 100 index--check out the 3 yr chart) this too.  Professor Sedacca shows the historical relationship between a similar volatility index and price of the S&P 500 index--he notes that when we're at extremes like this, it has consistently paid to 'go the other way'.  Bottom line, when respected market pros are all keying on the same theme, I take notice. 

Inversion Excursion 12/22/05 7:40 pm

Professors Reamer and Sedacca both observe that the spread (difference) in yield between 2 and 10 year Treasury bonds continues to shrink (see the 11/28 post 'A Flat Curve?' for more background).  Currently, the difference in yield between 'Twos and Tens' is only 3-4 basis points (about 0.03 to 0.04 %).  Would you buy a 10 year bond yielding 4.40% if you could by a 2 year bond that yields 4.36% (a difference of 0.04%)?  I know I wouldn't.  But obviously many market participants are doing just that currently.  If the yield of the 2 year rises above the 10 year yield, then a goodly part of the yield curve will be inverted.  As Scotto notes, the yield curve inverted prior to the big decline in stock prices in 2000 (the white line is the 10 yr yield minus the 2 yr yield, red is the S&P 500 index, yellow is the Nasdaq 100 index).  btw, if you want to get a dynamic look at the shape of the yield curve over the past decade, go here and click the 'animate' button--note the inverted (negatively sloped) yield curve in 1999 to 2000 that Scott speaks of.  Scott further observes that inverted yield curves typically forecast both economic recessions and recessions in corporate profits.  Lesson: the yield curve of U.S. Treasuries relates to many things beyond bonds.  Keep half an eye on it!  

2006: A Media Odyssey 12/22/05 7:30 pm

Minyanville President Kevin Wassong peers into his crystal ball and offers his outlook for media companies in 2006.  Kevin is one of the sharpest cookies in media--particularly on the digital side of things.  Particularly intriguing to me were vibes on the 'social networking' area (e.g., facebook.com), which in his view could grow explosively next year. 

Recession = Good? 12/20/05 9:45 pm

How can a recession be a good thing?  Professor Succo argues that recessions wipe away unproductive capital and pave the way for a more prosperous future.  From this perspective, doing things to restrain recessionary forces merely interferes with Mother Nature (the market version, of course).  The question of course, is whether such intervention can go on indefinitely...

Bip Blip 12/20/05 9:40 pm

A student Minyan pinged by today asking what 'basis points' are.  A good example is this post where Todd notes the DRG is off by 30 bips.  Bips stands for basis points.  Usually they refer percentage points, where one basis point = 0.01%.  In that Buzz post, Todd was noting that the DRG was off about 0.3% at that point in the day.   Basis points are often used when discussing bond yields (or interest rates).  For instance, if bond yields increase by 50 bips, then interest rates are 0.50% higher.

Vol Fall II 12/19/05 9:15 pm

Yesterday we discussed the notion of 'volatility' (see 'Vol Fall' 12/18 post below).  If you're not getting the concept yet, don't fret 'cause it often takes a while.  What I wanted to alert you to today is the extreme nature of 'volatility selling' (done by selling an option short) currently taking place--as noted by Professor Succo here, here, and here.  If you're new to the game, it'll surely be awhile before a statement like 'the market's short a ton of vol' will mean much to you.  Right now, just appreciate that, in extreme situations, market prices can move a lot in a hurry when a significant 'short vol' environment exists. 

Fundamentally Sound 12/19/05 9:10 pm

Fundamental analysis involves comparing the actual price of an asset to its 'theoretical' price derived from an assessment of company, industry, and macroeconomic factors.  Fundamental analysis is often a tool employed by investors (as opposed to traders) since investors typically possess a longer term time horizon.  Professor Katsenelson provides a couple of nice snippits of fundamental analysis in these Buzz posts on pharma (drug companies) and retailer American Eagle Outfitters (AEOS).  

Pension Tension 12/19/05 9:00 pm

Revisions to accounting rules may require companies to report pension liabilities on their balance sheet.  Why haven't pension liabilities always been a required line item on a corporate balance sheet?  Good question, cookie--we can only speculate as to why.  Professor Zucchi enlightens us in this regard, noting that the strength of many corporate balance sheets would deteriorate significantly if they had to report their pension liabilities.  You gettin' what I'm sayin'?

Vol Fall 12/18/05 11:15 pm

Professor Goepfert compares market price levels to market volatility.  Market what?  In the context of financial markets, volatility is viewed as price variation (in statistics, variation is commonly calculated as the standard deviation).  Why is this an important concept?  Well, for example, if volatility of stock prices was zero, then prices wouldn't move and many market participants would be unhappy.  I like to categorize volatility into one of two groups.  Actual volatility measures the historical variation in prices.  Implied volatility measures market participant forecasts of volatility--usually derived from option prices.  Implied volatilities are often good measures of sentiment.  When 'vols' are high, market participants expect a large move in prices (often construed as an indicator of 'fear'); when vols are low, participants expect little price movement (often construed as an indicator of 'complacency').  Back to Jason's piece, he's suggesting that current abnormally low actual market volatilites have often immediately preceded periods of abnormally high volatility (often express as lower stock prices).  Current levels of implied volatilities also suggest considerable complacency. 

OPM 12/18/05 11:10 pm

Professor Succo shares some thoughts on what he believes is the market's increasing tendency to misprice (read: underestimate) risk.  One factor involved in this mispricing: OPM or 'Other People's Money' syndrome.  The idea is that managers of mutual funds, hedge funds, pension funds, etc. (i.e., those who manage other people's money) continue to take on more risk, often thru increased leverage, to make up for decreasing market returns.  This idea is consistent with the concept of 'agency theory.'  In agency theory, principals (in this case you or I) tend to hire 'agents' (brokers, financial advisors, and, indirectly, mutual fund managers, etc) to manage our money for us (because we don't have time, because we're too intimidated to do it ourselves, etc.).  But the goals of the principal and the agent are often not fully aligned, and often cause the agent to risk more on behalf of the principal than the principle would like.  From this perspective, OPM increases risk in the financial market system.    

Getting Technical 12/18/05 11:05 pm

A core lesson in developing financial market awareness involves technical analysis.  Looking for more detail on the subject?  Professor Goepfert offers some recommendations.

The Unnatural Factor 12/14/05 9:10 pm

Professor Succo continues to note that the volatility (or variation in prices) of stocks are lower than that of other markets.  Given the relatively risky nature of stocks, Succ notes, this doesn't make sense and suggests that Fed efforts to inject liquidity may be targeting stock prices specifically.  If this is the case, John concludes that market forces will eventually overpower efforts to support prices.

Fed Rates 12/14/05 9:05 pm

In case you missed it, yesterday the Federal Reserve Open Market committee voted to raise the fed funds interest rate target to 4.25%.  Language of the statement also was revised in a manner that has many market participants believing that the Fed is close to the end of this tightening cycle which began in June 2004 when the Fed raised rates from 1% to 1.25%. 

Debt and Deficits 12/13/05 10:05 pm

Another piece that should be read a few times until it starts to sink in.  Is U.S. debt service growing to the point where it crowds out additional borrowing to buy more goods and services from foreigners?  If so, foreigners will likely quit lending at current rates and demand higher returns.  If interest rates head higher, what will that mean for the U.S. and, by extension, global economy?  Looking for symptoms that foreign lenders are already curtailing financing?  Professor Succo offers higher short term interest rates, foreign officials questioning their dollar holdings, and 20 year high prices in gold and silver.

positions in gold and silver 

(Ill) Liquid Consumer 12/12/05 11:50 pm

Many news bites imply that the consumer is in great financial shape--largely due to record highs in net worth.  Professor Sedacca contends that once you factor out the value of illiquid assets such as housing and stocks (which account for much of the net worth value), the consumer is underwater.  Why is this pertinent to the markets?  To the extent that liquid assets are needed to power financial markets higher, then buyers don't have much ammo.  Essentially, they'd have to borrow more to power prices higher.

Point Counterpoint 12/12/05 11:45 pm

Professor Reynolds notes that recent Fed data suggest that stock are 'underloved.'  Professor Succo and Professor Depew disagree.  Who's right?  Not for me to determine, cookie.  Instead, you want to see both sides of the trade (particularly on this important issue) as you assess the financial market landscape and make decisions.

Smart Like a Fox 12/10/05 6:40 pm

A bearish view on central banks (e.g., Federal Reserve) is that they will always error to the side of printing money and debasing a currency when things get tough.  There is, in fact, data to support this thesis.  See, for example, this 200 yr graph of the CPI and note what's happened to the value of the US dollar (USD) since the Fed was created in 1913 (a higher CPI means less purchasing power for the USD).  A Minyan asks why a central banker would want to print money into oblivion and go down on record as the one who destroys the value of the USD (Bernanke, btw, will take over for Alan Greenspan as Fed chairman next month--see 10/24 'New Fed Head' post below).  Professor Succo suggests that it's a matter of 'political will.'  If central bankers cave in to the wishes of politicians, then currency debasement is inevitable.   

Risky Liquidity 12/10/05 6:35 pm

A stream of thought from Professor Succo on Friday regarding central bank liquidity efforts and it 'strange' effect on markets (example 1, example 2, example 3).  This prompted a couple of afternoon mailbags.  Both are interesting but pay particular attention to the first one.  In fact, read it a few times.  The thesis: policy makers want folks to take more risk in order to drive asset prices higher.  The proper response, according to John, is to pay down debt and take less risk.  Again, read this a few times till it sinks in.

Net Worth(less) 12/10/05 6:30 pm

Professor Succo observes that 'record high' levels of net worth have been due to increasing house and stock prices.  Succ also notes that net worth could vaporize quickly if house and stock prices fall.  Why?  We have no traditional 'savings' to speak of to serve as a buffer against a downdraft in these riskier asset prices.  It's up to you to ponder whether this is a desirable situation. 

Cultural Indebtedness 12/10/05 6:25 pm

Do some cultures view debt as 'good' while others view it as 'bad?'  Perhaps, but it may be more of an experience thing.  After all, a generation ago, few in the U.S. viewed high levels of debt as a 'good' thing.  Hard to imagine that view today.  As Professor Succo suggests, do you think that future generations will view debt thru the same sanguine lens as today? 

Fun with Fundies 12/7/05 9:45 pm

Professor Katsenelson offers an excellent example of fundamental analysis in this assessment of Nokia (NOK).  In a recent lesson, we suggested that fundamental analysis often is useful to the investor (as opposed to trader)--often because investors often possess a time horizon the makes fundamental analysis valuable.

Town Hall Redux 12/7/05 9:40 pm

A Minyan suggests that many investors' mistake is that they are not engaged in the financial decision making process and 'outsource' this process to others.  Professor Succo agrees, and evokes a similar thread shared at the recent NKU town hall meeting.  His message then and now: understand the risks involved and get engaged in the process.

Credit Debit 12/6/05 10:10 pm

Just a heads up that if you're making minimum monthly payments on a credit card account, most lenders will be raising those minimum payments significantly (approximately double their current levels) in early '06.  Happy New Year.  From a financial market perspective, among the questions you should be asking is: What effect will these higher payment obligations have on a leveraged, consumption-based economy such as ours?

Chinese Retail Details 12/6/05 10:05 pm

It appears Chinese consumers are making up for lost time and are hitting the malls in record numbers.  Professor Depew looks at some data and concludes that current income levels of "middle class" Chinese doesn't support significant retail purchases.  Instead, it appears Chinese consumers are familiarizing themselves with a favorite U.S. shopping tools: credit cards and debt.

Risky Business 12/5/05 9:45 pm

A Minyan suggests that folks may be underestimating the risk of default (i.e., not paying back debt as promised) on General Motors-related bonds.  Professor Succo answers with a what-else-is-new reply, as he perceives many similar situations in the market right now where investors seem to be underestimating the risk of extreme events.  A nice real time discussion of the core Minyanville lesson of tail risk and tendency to underweight its consequences in financial decision-making.   

Profiling Boo 12/5/05 9:40 pm

Professor Succo paints the bearish picture that is Boo.  About as succinct as it gets.  As is frequently noted at the 'Ville, you don't need to agree with this view but you'll be better off if you 'see' it and respect the other side of the trade when assessing markets and making financial decisions. 

'Flation Nation 12/5/05 9:35 pm

A Minyan wonders whether falling interest rates should be feared more than rising rates.  Huh?  What he's concerned about is deflation--most commonly (although not necessarily accurately) viewed as a general decline in prices.  The basic mechanism of a deflationary scenario is: people become more risk averse->they 'hoard' cash->prices fall since people don't spend (i.e., demand decreases)->interest rates go lower in order to entice folks to take on more risk.  Many believe that this deflationary mechanism a culprit of the Great Depression during the 1930s and of Japan's economic malaise during the 1990s.  Professor Succo notes that there are other possible risky scenarios out there.  One is 'stagflation'.  Stagflation refers to periods of stagnant growth (in the economy and in corporate profits) and simultaneous inflation (rising prices) in basic necessities (food, energy, etc.).  The last serious bout of stagflation in the U.S. was during the Seventies.  A Minyan subsequently observes that there is some anecdotal evidence of stagflation from where he sits.   

Analyst Analysis 12/5/05 9:30 pm

Toddo notes that an influential (and respected) analyst recently upped his price target on the stock market.  Professor Succo subsequently notes that the same analyst was bearish at lower prices, but now bullish at higher prices.  John suggests what plausible rationale for this analyst's behavior?  One reason why a core lesson of Minyanville involves critically thinking through info generated by the financial media.

Miller Time 12/3/05 11:25 pm

Professor Miller reflects on the recent bull/bear thread on the 'Ville.  A number of themes in this piece, but one I wanted to highlight was his thought (which is an extension of an earlier missive on the subject) that while one needs to be aware of tail risk, letting bearish thoughts related to extreme events dominate your thought processes may stand in the way of making money in the meantime.  After all, by definition, chances are low that an extreme event will occur tomorrow.  I'll leave you to ponder this on your own, but will reference you back to the lesson on tail risk and to Professor Succo's piece on regret (a.k.a. 'fear of missing' a nice trade) as you reflect.  

Currency Debasement II 12/3/05 11:20 pm

Followup by Professor Weldon on Succo's Succo's 'Currency Stocks' missive (see 12/1/05 'Currency Debasement and Gold' below).  The rationale here: money/credit creation-->currency devaluation-->increase in value of gold and silver.  Do you follow Professor Weldon's question at the end of his column?

positions in gold and silver

Silver Streak 12/3/05 11:15 pm

This Mailbag by Laurie follows a previous one with the same Minyan the day before.  If you're interested in learning the bullish case for silver, Laurie tosses his viewpoint out there.

position in silver

Costume Time 12/1/05 9:40 pm

Toddo notes that he's legging into the bear costume for a trade.  To manage his risk, he's using a stop above at SPX 1175.  Can you see why?

Two Sided Sight 12/1/05 9:35 pm

An excellent exchange on the 'Ville today that considered both Hoofy and Boo's case.  It started with a morning missive chock full of Mailbags in response to an exchange between Toddo and Tony Dwyer.  This was followed later in the day by cogent observations from a Minyan who suggests much of Hoofy's case is built on linear thinking.  Then, Toddo replies to a Minyan's suggestion that Boo's case 'sounds good' but the markets have yet to express it.  Professor Zucchi completes the circle by offering some data that suggests neither Hoofy or Boo have made out that well over the past 10 years, and suggesting that the 'Ville's 'bearish message is that caution may be warranted if participating in this market--because risks are high.  Which critter is 'right?'  Yet to be determined, cookie.  In fact, both may be correct depending on the time horizon chosen.  Regardless, it's exchanges like these (I'd read thru these a few times were I you) that embody MV's core lesson about seeing both sides of the trade. 

Trivia Meister 12/1/05 9:30 pm

Congrats to NKU student Rob Hensley for scooping the MV trivia question today.  Who says this project doesn't pay dividends? 

Currency Debasement and Gold 12/1/05 9:25 pm

A masterpiece by Professor Succo on the effects of debasing currencies.  John observes that central banks around the world are printing up a storm of paper currencies.  Problem is that their value against gold is dropping.  Ah, therein lies the 'reason' for gold's relevance in an economic and financial system.  It has historically served as a frame of reference for value.  This is why gold has been the only form of money that has endured thousands of years (today, gold closed above $500 per ounce for the first time since 1987).  Key question linked to the end of Succ's missive: What happens to interest rates if/when bondholders decide that the 'inflation' inherent in currency debasement makes their bonds less attractive to hold?  btw, this is another piece that I'd read a few times--maybe even keep it bookmarked.

position in gold

Bears and the 'Ville 11/30/05 9:50 pm

Is Minyanville too bearish?  After all, daily commentary often focuses on risk baked into the market, issues with the Fed, etc.  Toddo offers that Minyanville is about provoking thought and offering perspective often shunned by other channels.  My take?  I've come to appreciate the value of seeing both side of a trade and the 'Ville helps me do that daily.  I can then factor this perspective into my own decision making processes.

The Vapors 11/30/05 9:47 pm

Many folks are wondering what will happen if/when real estate prices start to head lower and money flees the sector.  Where will all this money go?  Professor Reamer suggests it might go nowhere at all--except up in smoke!  If price declines are swift and steep enough, much of this money will never have a chance to flee the real estate market.  Today your house is worth $300,000 and tomorrow it's worth $150,000.  The $150,000 you lost didn't go anywhere.  The wealth vaporizes as asset values decline.

Pension Risk 11/30/05 9:45 pm

If you attended the Minyanville event here at NKU a few weeks back, you heard Professor Succo explain risk as potential for loss.  Not all folks define risk in this fashion.  In fact, as John notes today, some folks (including many academics) define risk as variation in returns (often expressed statistically as standard deviation of returns).  He also notes that many corporate pensions funds that used to be viewed as a cost center now operate as profit centers, since managers can draw from pension fund assets to help achieve corporate financial targets.  Do you see the problem?  As managers 'steal' funds from pensions, pensions fund managers must take more risk in order to make up for the lost assets.  Seems a recipe for future trouble...

Let's Get Physical 11/30/05 9:40 pm

Professor Reamer notes recent research that suggests that our neurological wiring may be partly to 'blame' for our generally poor skills in risk management.  It's beyond the scope of this study, but I should tell you that Scotto is doing some groundbreaking work in modeling market prices based on behavioral concepts.  I'm personally looking forward to learning more from him and his work.

Being Bernanke 11/30/05 9:33 pm

Plucked from Professor Depew's excellent daily morning reading list, this article on the incoming Fed Chairman may be worth a read.  Aggressive title, but a fairly solid piece by the author who draws heavily from past Bernanke and Fed documents to piece together how Boom Boom might behave in extreme market situations.  Extreme events don't happen often, but being aware of them is a must for  managing tail risk.

Two Sided Trader 11/30/05 9:30 pm

Toddo provides a nice example of seeing both side of the trade.  Does he appear to be leaning towards Hoofy or Boo's side of things? 

Bonds and Risk 11/29/05 9:40 pm

Professor Reamer asks this question about the % of high yield bonds in the market place.  Turns out there are many more out there than there used to be.  Why is this interesting?  Well, high yield is usually associated with higher risk (the market demands higher interest rates from corporate borrowers perceived as less capable of making good on their debt payments).  Another way of saying there is more credit risk in the market than in the past.

Fannie's Folly 11/29/05 9:30 pm

Professor Succo discusses an analyst upgrade of Fannie Mae (FNM).  A total rehash of Aunt Fannie's story is beyond the scope of this post (we'd need a few hours to do it justice).  Here, I wanted to highlight Succ's observation that an analyst from Morgan Stanley who slapped a buy rating on the stock today joins 13 of the 15 brokerage house analysts with buy ratings on the stock.  Interestingly, Fannie hasn't reported financial statements to the SEC in over a year due to, ahem, accounting 'issues' and has announced that it won't have financials available until 1500 recently retained accounting consultants can figure out the state of the company's books--with a forecast date of mid 2006 on that project!  So, the question is how can analysts fundamentally analyze the stock and rate its attractiveness when both insiders and outsiders are clueless about Fannie's financial state of affairs???  Chalk up another classic from the financial media, perhaps.  Even if you're a novice on the periphery financial markets, you'll want to keep an eye on the Fannie Mae story...

position in FNM

Golden Sides 11/29/05 9:25 pm

Toddo shares some vibes on gold and how he's involved (note his 'two pronged' long horizon and short horizon approach).  Hopefully as part of this project you've gained some sense that gold (and its cousin silver) may be a viable investment alternative.  Professor McGuirk is the resident Minyanville professor on the precious metals (Laurie is a 'he' and he lives Down Under).  There are also many useful gold-related websites.  The point here isn't to suggest that gold is for you (we don't do advice), but to sensitize you to the prospects.  If you gain an awareness of the metals, you're ahead of most investors out there.

position in gold and silver

Retail Detail 11/28/05 7:55 pm

'Black Friday' data suggest that the retailers got off to a strong start this holiday shopping season.  Professor Vitaliy wonders whether retailers aren't guilty of 'front loading' their holiday sales with deep discounts.  Walmart has been ground zero for the discounting scene.  Sounds like Professor Macke will suggest that low prices will translate into low retailer profits on an upcoming CNBC appearance.  If you want to keep an eye on the share price performance of this group, you can watch individual names such as Walmart (WMT), Target (TGT), or Best Buy (BBY).  You can also track the Retail Holders (RTH)--an exchange traded fund comprised of individual retail names that serves proxy for stock performance in the retail sector.

Of Presidents and Dollars 11/28/05 7:50 pm

Interesting note by Professor Sedacca concerning the relationship between the dollar and the presidential cycle.  The thesis: dollar is strongest in the first year or so after an election and then tanks when administrations lose fiscal and monetary discipline (read: spend on government programs) to gain votes ahead of the next election.  This graph supports the thesis pretty well (note that the time period is from 1971 on).  What's been going on with the dollar, you ask?  On this three year graph, notice that after losing ground for a few years, the dollar has been rallying in 2005.  Next stop?  Stay tuned...

A Flat Curve? 11/28/05 7:45 pm

Let's say the yield on a two year bond is 4.31%.  Now someone offers you a five year note.  Here's a question: Under 'normal' situations investors usually require a yield on a five year note that is a) higher than b) equal to c) lower than a two year note.  If you chose a) you're correct--higher yields help compensate for the risk of holding longer dated paper.  As Professor Sedacca notes, however, something unusual is happening in bond land as the yields on various duration U.S. Treasuries are quite similar.  When the yields on long dated Treasuries equate to short dated yields, we say that the yield curve is 'flat.'  An even stranger phenomenon is when the yields on long dated Treasuries are less than those on short dated paper.  This is called an 'inverted' yield curve and commonly precedes recessions.  Precisely why is a subject for another day.  Right now, just keep in mind that much of the action we see in bonds right now can be filed under the category of 'strange.'

UMV Air Time 11/28/05 7:40 pm

Minyanville's university initiative (a.k.a. UMV) gets some News & Views time.  Noice!  Please be aware that by participating in MV2 you're playing a significant role in making the UMV idea come to life.  Thank you ever so much!

Deficit Spending 11/28/05 7:35 pm

The latest data indicate that consumers continue to spend beyond their means.  Professor Succo asks the trillion dollar question: How can this practice be expected to continue--particularly since it appears that cash obtained from home equity sources (refi's, home equity loans) may have run its course.  Why is this an important question?  Given our debt laden, consumption driven economic model, a slow down in consumer spending would be...bad.  This is one reason why folks cheer last weekend's retail sales number.  Given the 'extended' position of the U.S. consumer, shouldn't we be concerned about how folks are able to gorge on all this retail stuff???

Setting Priorities 11/26/05 5:35 pm

Professor Succo offers more perspective on the problems facing the U.S. economy (society?) going forward and what to do about them.  Please read this missive a few times.  Tons of insight here.  His last paragraph about getting our fiscal and monetary act together, really hits home.  Do you think we're up to the task?

Liquid Tide 11/25/05 9:20 am

Another lesson on how the Fed infuses 'liquidity' into the economy and markets.  Pretty simple, actually.  Fed prints money-->Fed calls up bond dealers-->Fed buys bonds with the newly printed money-->Bond dealer now has money to 'spend'.  As Professor Succo notes, the problem is that the Fed can't control what the dealers do with their new money.  As such, this 'liquidity' is often just directed towards buying stocks and bonds, which pushes prices higher--as Professor Succo suggests is happening now.

China Syndrome 11/22/05 9:25 pm

Vitaliy shares some thoughts on the effects of a potential slowdown in the US economy on China and subsequent ramifications on global growth.  Familiarizing yourself with scenarios such as this that can cause extreme price behavior is good risk management.

Times Square Scare 11/22/05 9:20 pm

Interesting post by Professor Depew on the extreme bullish and bearish views on the future of Times Square over the years.  Classic example of how extremes in sentiment often precede turning points.

Herd on the Street 11/22/05 9:15 pm

Interesting thread on the Buzz today on herd behavior, a key dimension of market psychology.  Here's the thread progression: herds that get rewarded for their behavior take their behavior to greater and greater extremes-->the crowd gains power as more people seek the benefits and safety of large numbers-->once a herd loses ability to feed itself and its needs, the crowd dissolves, often quickly.  Scotto adds that understanding the mechanics of herd behavior may be one of the most important skill sets for a market participant.

Horse Discourse 11/22/05 9:10 pm

Bond maven Brian Reynolds reiterates his case for higher equity prices based on continued bullish conditions in the corporate bond market.  Can you follow the logic?  Solid bond market demand-->higher bond prices and lower borrowing costs for corporations-->corporations issue lots of low cost debt-->corporations use proceeds from debt sales to buy back their own stock and to acquire other companies-->stock market goes higher as a result.  Is this the way things 'will' pan out?  Dunno.  But Brian's been right as rain over the past coupla years.  

Succo Sense 11/21/05 5:55 pm

Thru his Buzz posts today, Professor Succo continues to share some of his concerns about the current 'state of the tape'.  Themes to his comments include the (continued) role of central bank 'liquidity' in fueling this market rally, the 'corner' that Asian holders of US debt have painted themselves into by holding such large quantities of US bonds, general riskiness of today's market environment as compared to 1987 (the last time the US stock markets experienced a major crash), the market's overall lack of concern about big price declines in banks stocks (very little fear in today's market participants).

position in XLF

Ahead of the Herd 11/20/05 1:20 pm

Once again, Professor Succo observes the seemingly insatiable appetite for risk in the financial system.  He also notes that he hopes Minyans are managing their risk before the herd becomes more risk averse.

Trader Toddo Update 11/20/05 1:15 pm

Toddo offers an update on his current trading position (see Paired Piggies 11/10 below).  He's net short in a trade focused on the financial sector.  Once again, he notes that he is also patiently holding longer term positions in select precious metals and energy issues on the other side of his 'book' that he is not actively managing.  I'm not sure that we can visit this issue often enough, since Todd's providing a real time demonstration of categorizing his portfolio according to time horizon (i.e., short term vs. long term), and managing each category accordingly.

position in XLF

Strange Days Indeed 11/17/05 8:25 pm

In this Mailbag, a Minyan notes the counterintuitive price behavior currently evident among various markets.  Professor Succo offers that these disconnects may be due to very large amounts of government/central bank involvement in these markets that are distorting conventional market forces and pricing mechanisms.  Many folks dismiss the presence or impact of government involvement (manipulation?) in financial markets.  Regardless of which side of the fence you might fall on this issue, you're better off if you see the other side of the trade.  

Street of Emotion 11/17/05 8:10 pm

We've noted the value of removing emotion when participating in financial markets.  Toddo notes the growing level of angst and emotion among the financial community.  Why is it important to know about this?  Well, if we have a bunch of emotional decision makers ready to point and click their capital towards any perceived opportunity, how do you suppose this situation might affect market price behavior going forward???  

Golden Riddle 11/17/05 8:05 pm

Professor Succo opines that the price of gold may head much higher at some point based on his understanding of economics.  He notes that, in his view, gold's price will ultimately depend on the extent to which central banks debase currency.  Do you follow this line of thought?  If not, don't worry, as we'll revisit it.  Right now, just note the proposed link between central banks, currency debasement, and the price of gold.  Meanwhile, today gold hit an 18 year high.

position in gold

Rally Roots 11/17/05 8:00 pm

Stock prices have been on a roll recently.  Professor Succo thinks that key buyers have been foreigners.  The proposed mechanism?  Foreigners want to unload dollars they are holding so they are buying large cap stocks (i.e., stocks with a large market capitalization) with those dollars.  In John's experience, this type of buying often takes place late in a rally.  btw, VWAP defined. 

Information Station 11/16/05 10:05 pm

Curious what a trader's desk top environment looks like?  Here's what Toddo's trading 'turret' looks like.  The essence of A.D.D.?

Defining Time Horizon 11/16/05 9:45 pm

In his morning missive, Toddo explains the importance of time horizon in financial decisions.  Traders with a short term horizon usually follow the micro moves of the tape while long term investors should avoid focusing on granular nuances and trends in favor of fundamentals and factors relevant to broader market phases and cycles.  To express this idea, Todd notes that he's split his portfolio into two 'buckets.'  One bucket is 'speculative' and includes that positions that he actively managing in a 'trading' posture to capture near term price moves (currently he has such an 'active' trade going with the financial complex).  The other 'bucket' is longer term in nature and includes positions that he does not actively manage--more of an 'investment posture' to capture what he believes are moves that are 'bigger picture' in nature (such as a secular trend in gold).  The point is that he has clearly defined the time horizons of his various portfolio holdings--which allows him to more effectively manage his holdings.  A great example to learn from...

positions in XLF, gold   

The Fed and Labor Unrest? 11/15/05 6:30 pm

How in the world could one possibly draw a link between the Federal Reserve and social unrest?  Professor Reamer takes out his pen and traces a theory for us.  The gist: the Fed, fearing deflation (defined in this context as a general fall in price levels), cranks up the printing presses and creates huge amounts of money and credit.  However, most of this credit goes into speculative hands which bid up the prices of assets and commodities.  Commodity price increases ultimately raise cost of living for the citizenry.  Meanwhile, a massive increase in the global supply of cheap labor from China, India, and other developing countries effectively puts a lid on wage increases here in the U.S.  A difficult situation results, as U.S. workers face cost of living increases and stagnant (or even decreasing) wages.  The resulting squeeze, Professor Reamer suggests, leads to unhappy citizenry.  

Bank On It! 11/15/05 6:25 pm

As noted in earlier posts, banking sector stocks have been on a tear since mid October.  Professor Succo opines as to why.  Note that, in his view, few reasons have to do with the 'fundamentals' getting better for this sector.

position in XLF 

M3 Redux 11/15/05 6:20 pm

A follow-up to the 'M3 is History' post on 11/11 below.  Here's a look the M3 series.  Now THAT'S a trend!  Here's the question: If the Fed has been raising interest rates which should (supposedly) curtail money and credit creation, then why is M3 heading through the roof???  Do you see why some have raised eyebrows since the Fed announced that they'll do away with M3 reporting? 

Do Energy Costs Matter? 11/14/05 8:15 pm

A Minyan writes that many talking heads are theorizing that higher energy prices likely won't affect economic activity much because the percentage of our incomes spent on energy today are much lower than 20 years ago.  Professors Succo and Reamer agree that energy expenditures as a % of income are lower today and offer this chart as supporting data.  However, they argue that the impact of higher energy costs still matters significantly, if not more so, today.  Leverage, debt, and other factors not in place 20 years ago might amplify effects of historically 'small' changes in energy prices.

Boring Bears 11/14/05 8:05 pm

Nice piece by Vitaliy on bear markets.  As he notes, most bear markets are characterized more by their sideways, grind-it-out character rather that by massive price declines.  This 100 year chart of the Dow Jones Industrial Average reflects the same idea--bear markets commonly reflect sideways price movement.  A coupla questions to ponder.  Why do bull and bear market cycles take so long?  Also, what does Vitaliy suggest is the current state of stock market valuation a) overvalued b) fairly valued c) undervalued?

M3 is History? 11/11/05 3:50 pm

After the market closed yesterday, the Fed announced that it will no longer report the monetary aggregate known as M3.  M3 is the broadest measure of money supply and the best (although not perfect) measure of 'liquidity' in the economy.  Professor Succo weighs in on his concerns about this turn of events.  What I find particularly interesting is that nowhere in the Fed's announcement can I find any explanation of why they are discontinuing M3 reporting.  Inquiring minds certainly want to know...

Paired Piggies 11/10/05 6:55 pm

If you've been watching the tape it's been hard not to notice the rip higher in the banks.  This move may portend an easier road to bank profits ahead.  After all, markets are a 'discounting mechanism' which means that market prices typical lead fundamentals (often by about 6 months or so).  However, others are less able to explain this sudden price move in the financial complex.  Toddo has entered some short side exposure (i.e., a bet that prices will go down) in this group for a trade.  Note that he's paired his downside exposure in the financials with long side exposure (i.e., a bet that prices will go up) in drug and energy companies.  Such a 'paired trade' provides a 'hedge' against extreme losses and thus helps Todd manage risk.

position in XLF

Town Hall Memoirs 11/10/05 6:45 pm

More kind vibes from the town hall chat.  Hope you're looking forward to the return of our NYC friends as I am...

Managers as Investors 11/9/05 10:45 pm

For all of you management majors involved in this project thinking that this finance stuff will never enter into your decision-making calculus on the job, check out this Mailbag by Vitaliy that proposes that managers are generally inept in making financial decisions for their companies.  Further, many of the reasons Vitaliy sites (overconfidence bias, framing, etc.) are among typical reasons why everyone struggles with managing money.  Why am I sharing this?  Just another shred of evidence suggesting that financial market awareness 'matters' no matter what your major, since many decisions you make will have a finance component.   

Retail Detail 11/9/05 10:40 pm

Minyanville professor Jeff Macke specializes in retail insight.  His dad, who is currently dying from Parkinson's Disease, used to be CEO of Dayton Hudson prior to the company's name change to Target (TGT).  If you're interested in retail and how to manage stores, you should like this piece.  It's also a great example of 'strategic positioning' against a formidable competitor--in this case Walmart (WMT).

The Finance Industry: Friend or Enemy? 11/9/05 10:35 pm

If you attended the town hall meeting you heard Todd and John comment on the finance industry that wasn't completely 'complimentary.'  Speaking out about industry 'issues' will almost certainly rankle some feathers with established players (think Fidelity).  Todd tries to address some of this in a morning Mailbag.  Lemme share a passage that seems particularly relevant: "We walk a fine line in Minyanville as we strive to improve fiscal literacy and financial education.  At times, we'll offer opinions that don't sit well with the existing media oligopoly.  Other times, there will be insights that upset our core contingency.  But make no mistake, our goal is to expose the mechanism rather than indict it." 

Printing Press of Savings 11/8/05 5:50 pm

Incoming Fed Chairman Ben Bernanke claims that the rest of the world has a savings glut (i.e., people in other parts of the world are saving too much) and the US is doing the rest of the world a favor by borrowing from those savers.  Professor Succo casts a raised eyebrow at this claim, and offers instead that there is little, if any real savers around the world.  Instead, central banks are merely printing money that others can 'borrow.'  Succ's accompanying chart is worth a look.

The Dow 5000 Thing... 11/8/05 5:45 pm

Professor Succo repeats many key points from the town hall event in this Mailbag response to Jason Goepfert (Jason's a fellow Minyanville professor who operates an excellent site that gauges market sentiment).  Taking personal responsibility for your financial situation, risk management, market sentiment defining risk premium and asset prices, Minyanville as a means for financial education.  We heard this yesterday...   

Town Hall Follow-up 11/8/05 5:35 pm

Toddo's morning missive offers his take on yesterday's town hall meeting here at NKU.  Thanks again to all who participated.  Note Todd's related Buzz post later in the day!

Other People's Money 11/7/05 9:35 pm

If you attended the Minyanville event today, this Mailbag response could have been taken right from Todd and John's talk.  Were I you, I'd read Professor Succo's response a few times (I know I have).  Not the perspective you'll likely get from the mainstream financial media...

Strong vs. Healthy 11/6/05 9:15 pm

In his Friday morning missive, Toddo offers that there is a difference between a strong market and a healthy one.  What does he mean?  He's noting that over the last couple weeks stock prices have been firm and in an uptrend.  At the same time, however, there are myriad potholes out there (interest rates heading higher, money velocity slowing, myriad company 'blow-ups').  Those who are participating in this market would be wise to 'see' the risks as well as the reward and make decisions that aren't clouded by emotion. 

Sentimental Journey 11/3/05 10:10 pm

Are the economic data getting better and driving this market rally?  Succ suggests that once again the media has it wrong, and that the current market rally is largely sentiment-driven (i.e., people are becoming risk seekers), since many macro indicators (e.g., velocity of money) suggest the economy is slowing.

Emotion is the Enemy 11/3/05 10:07 pm

A Minyan emails Toddo noting that he's all twisted around in his trading positions because he lost patience and feared the market would rally without him.  You can read Todd's response.  The bottom line (and Minyanville mantra): Emotion is the enemy when making financial decisions.  

Reactive Research 11/3/05 10:05 pm

Professor Succo suggests the reactive nature of research produced by Wall Street analysts.  Fits nicely with our lesson about casting a critical eye towards the financial media...

Wall Street Games 11/3/05 9:55 pm

Two common perceptions among many investors is that 1) dividend paying stocks are good because they 'pay you to wait' for (presumed) share price increases, and 2) stock splits are good because they lower the nominal share price and should attract more buyers.  Professor Succo paints the other side of the dividend and stock split story.

Back to the Closet 11/3/05 9:50 am

Toddo first removes one leg, then soon after shares the 'self' dialogue that resulted in him disrobing from the bull suit.  Great example of considering both sides of the trade, and then deciding.

Bull Pen 11/2/05 9:00 pm

Toddo's still wearing the Bull Costume.  Once again, note that he is careful to define the time horizon of his trade--which is decidedly short term in this case.  This helps him put on a (bullish) trade that at first glance seemingly conflicts with his bigger picture (bearish) view.  

Back to the Future(s) 11/2/05 8:50 pm

Once again, Professor Succo notes the persistent, 'unnatural' bid underneath the tape.  He notes that it is 'futures led.'  Futures are contracts that allow the participant to buy or sell a specific amount of a commodity or security at a specific price and time.  In the stock market, one of the most common futures contract is the S&P 500 future (a.k.a. 'Spooz').  Professor Succo notes that bids for stocks seem 'soft' until arbitragers trying to game the difference between 'rich' futures contracts and the underlying stocks put a strong bid under stock prices in relatively short periods of time (thereby jacking up what are termed the 'Tick' readings).  The question Succ continues to pose is: Who are these relatively price insensitive futures buyers? 

Fed Speak 11/1/05 7:05 pm

As noted on the Buzz this pm, the Fed's Open Market Committee (FOMC) raised its targeted fed funds rate by 25 bips to 4%.  The Fed's accompanying statement was largely unchanged versus last time, and suggests more tightening ahead.  The statement did note that economic activity should benefit from hurricane rebuilding efforts--something that Professors Succo and Reamer took exception with.  Their argument: how can the destruction of capital be a good thing?  After all, someone must pay to rebuild productive capital that has been lost.  Even if some sectors get some hurricane-induced business, damage caused by a natural disaster should be a net loss for the economy.  This is NOT the perspective embraced by the popular media...

The Pending NKU Fest 11/1/05 7:00 pm

Toddo's touting the upcoming event on 11/7.  A number of Minyans pinged me today expressing interest in attending.  Hope you can be there.

Manipulation Station 10/31/05 11:05 pm

Reference the 10/4 'Support Group' post way down near the bottom of this page.  In that post, we noted that Professor Succo was observing a persistent, 'unnatural' bid underneath the tape that was supporting prices.  He notes this unnatural action again today in this Mailbag reply.  Could government sponsored agencies periodically purchase stock market instruments (which would technically be illegal) to support market prices?  Before you dismiss such a thesis as the stuff of silly conspiracy theory, take a look at some of the evidence offered in the link provides by Succ in his post.  Consistent with seeing both sides of a trade, you don't have to buy into this view, but you should be aware of its plausibility.   

Halloween Costume 10/31/05 11:00 pm

Today found Todd still suited in the bull suit.  Trick or treat?

Cause and Effect? 10/31/05 10:55 pm

The Austrian Economic perspective views central banks (such as the Fed) as price fixers (i.e., they attempt to influence the price of money) and a facilitator of inflation.  This is largely a discussion for another day (we're planning a lesson on central banks), but you should check out this 200 year graph of the consumer price index (CPI) linked inside Scotto's Buzz post.

Home on the Range 10/30/05 9:45 pm

Brian Reynold's Friday morning missive highlights the whippy trading range the market's been in for the last week or so.  Friday, the market rallied strongly back up to the top of the range and is once more knock knock knockin' on the magical resistance defined by SPX 1200 -1205.  We know that prices chew thru more supply each time prices bump up against resistance.  Will this be the time Hoofy's heroes break thru?  Dunno, but we should have our answer before the week gets too far along...

Stop Sign 10/27/05 9:30 pm

Relative to Todd's recent bullish foray with Hoofy and the bull costume (see the 10/25  'Suiting Up' post below), Todd informs us that he has placed a 'stop' at SPX 1175 on his trade.  What's a stop?  It's a price level that will cause you to exit your position.  Why do such a thing?  Risk management, cookie.  Stops remove emotion from the process and help maintain discipline to cut losses while they're small.  For Todd, stops help him stay true to one of his cardinal rules: Never let an investment be the definition of a trade gone awry.

Bull Suit Follow-up 10/26/05 9:10 pm

In this post, Toddo shares some vibe as to why he has a couple legs in the bull costume (see 'Suiting Up' post on 10/25 below) even though his long term views have him bangin' with Boo.  In an upcoming lesson we'll discuss the importance of defining time horizon.  Can you see that Toddo is 'short term bullish (for a trade)' while being 'long term bearish'?

Hitting the Links 10/26/05 9:05 pm

One thing I like about Minyanville is that contributors provide lots of links to financial info and commentary around the world.  I found these links offered by Kevin Depew quite interesting, particularly the NYT Jim Grant piece and the one about the Fed as inflation fighter or inflation creator.

Crash Test 10/25/05 7:55 pm

Professor Succo fields a question about potential for a market crash.  What is the mechanism he considers in a crash scenario?  Note, btw, that this question was submitted by a student after an in-class discussion.  The next question could come from you!

Suiting Up 10/25/05 7:45 pm

This morning, Toddo noted that he was putting a leg in the 'bull costume' for a trade.  What is he telling us?  Later in the day, he added another leg.  You might want to follow along to see how he manages the upside reward and downside risk of this trade.

Critter Convo 10/25/05 7:35 pm

If you're getting the impression that seeing both sides of a trade is a core value of Minyanville, you'd be right.  Toddo provides another great example in this am chat with Hoofy and Boo.

NKU's Town Hall 10/24/05 7:45 pm

Check out the third bullet from the bottom.  Circle November 7th, 2 PM, AC 506.  Hope you can make it!

New Fed Head 10/24/05 7:30 pm

The big news today was President Bush's announcement that he has selected Federal Reserve Chairman Alan Greenspan's replacement: Ben Bernanke (Greenspan retires in January).  The markets appeared to embrace the news favorably and rallied strongly.  There's a perception that Mr. Bernanke will be accommodative to financial markets (read: more prone to keep interest rates low).  This, of course, remains to be seen.  A number of Minyanville professors have expressed reservations of the Bernanke and today's Buzz from start to finish certainly leaves that impression.  Some past missives related to Mr. Bernanke were aggregated in this post.  You might note a number of references to 'helicopters' when MV folks discuss Mr. Bernanke.  This is because of a speech that Bernanke made in late 2002 saying that, if need be, the Fed could print money and drop it from helicopters in order to keep 'liquidity' in the financial system and stave off 'deflation'.  To some, such a spectre does not sit well (btw, Succo nicknamed Mr. Bernanke as 'Boom Boom' about a week ago).

Seeing Both Sides 10/24/05 7:15 pm

One of our recent lessons discussed seeing both sides of the market.  Toddo provides a classic example of both Hoofy and Boo's perspective in his morning missive.

Remove Emotion 10/22/05 5:35 pm

A distrought Minyan seeks advice from Toddo.  Note his problem: he's lost money this year and he's desperate to 'make it back.'  This reveals a common defect in human 'wiring' that works against us in financial decision-making.  Once we've lost money, we are often willing to take on more risk to try to get back to even.  If you think about it, this is exactly what we shouldn't do.  When operating at a loss, an individual should become more risk averse in order to preserve capital for better opportunities down-the-road.  Todd's reply: remove emotion from the decision making process, don't try for a 'quick fix', and wait for an edge.  Sage advice for us all.     

Question Marks 10/22/05 5:20 pm

A potpourri of questions posed by Toddo.  Particularly noteworthy to me were his remarks on seeing both sides of the trade, particularly when the other side is a dire prediction (Prechter), and MV's educational mission to get folks to think for themselves financially, rather than relying on the advice of others.

'Boo'merang 10/20/05 7:55 pm

Well, it didn't take long for the gains from yesterday's impressive Snapper to be totally erased.  Toddo notes that, unlike yesterday, the 3:1 negative breadth (see the 10/19 'Internal Anatomy' post for an explanation of breadth) never budged and actually got worse into the bell.  What to make of this?  Not sure.  Some folks are bullish, thinking that an important stock market low has been established.  Boo's view?  If the markets break significantly lower from these levels, a lot of bulls who are currently buying stocks thinking that a rally is pending will be 'trapped' above.  We'll see what happens. 

Goldfinger 10/20/05 7:45 pm

Wanted to point you towards this article by Laurie McGuirk not as much for its specific content but for the concept.  Laurie focuses on the precious metals markets--gold and silver, and on the companies that mine the stuff (often referred to as 'the miners').  (He also spoke to a group of NKU students last summer during their swing to Australia last summer.  The question I want to leave you with right now is: What is the investment case for gold?  Toddo is initiating a position in the silver miners, so staying close to his posts might provide some insight.  We'll be taking a closer look at the metals in upcoming weeks...

positions in gold and silver 

Internal Anatomy 10/19/05 11:45 pm

Those watching the market observed the intraday Snapper, or 'snapback rally, that took the Dow Jones Industrial Index more than 100 points higher today.  As Toddo notes here, here, and here, a key indicator (or 'tell') of Snapper's presence was the reversal in market 'internals' (also known as 'breadth').  Breadth compares the number of advancing stocks to the number of declining stocks (there are many places to get this info, but I usually check out advancers versus decliners here).  Today, market breadth went from 4 stocks declining for every one advancing in the morning to about 2 stocks advancing for every one declining at the bell.  This is unusual, since intraday breadth numbers skewed 2:1 in one direction are usually difficult to reverse on an intraday basis--so on the surface today's reversal may be significant.  Whether it's an omen of a further rally in prices is something to keep an eye on... 

Fifth Third Rumormill 10/18/05 8:05 pm

Just so you know, there has been chatter on Wall Street that local bank Fifth Third is 'in play' (which means that it could be acquired by another bank).  Nothing but rumors thus far, and today some analysts noted that they don't 'see' a takeover by a couple of potential suitors.

Healthy Choice 10/18/05 8:00 pm

One of the biggest financial news bites so far this week has been GM's renegotiation of more favorable benefit terms with their unions.  Some believe this might mark a significant bottom in the equity markets.  Others aren't so sure...

Inflation Migration 10/14/05 5:55 pm

The inflation (consumer price index, or CPI) came in a bit above expectations today.  Minyanville professors have historically cast a critical eye on how the CPI (and other economic statistics released by the government) is determined.  Here's are some comments from Succo on today's CPI report.

Credit/No Credit 10/14/05 5:50 pm

As Professor Succo notes, our economy has been highly dependent on a very large ($1+ trillion/yr) level of credit creation.  Probs like those at Fannie Mae appear to be reducing credit creation.  In it's place, central banks are printing money like mad.  Kevin Depew adds thoughts on what slowing consumption might do to our leveraged system.  To develop insight into where our economy and markets are headed, you could do far worse than to gather focused intelligence on the issues of credit and consumption.

position in FNM

Good Company vs Good Value 10/13/05 6:10 pm

Great piece by Vitaliy on differentiating a great company from a great stock.  The notion is that if a company is considered 'great' by many folks, then that greatness is probably baked into the stock price already.  The stock will be priced at a premium, which increases risk if the company 'disappoints' in the future.  Reminiscent of an old Wall Street saying: "The difference between a great company and a good investment is the price you pay."

Bond Spreads 10/13/05 1:05 pm

Bond maven Brian Reynolds checks in on the Delphi/GM situation and its effects on the corporate bond market.  I want to keep Brian's work in front of you because of the significant interrelationship between the stock and bond markets.  Often, you'll hear him talk about bond 'spreads'.  For example, Brian notes that spreads on GM debt have 'gapped out' 80-90 additional bp (basis points where 100 bp = 1.00% of yield) since Delphi's Chapter 11 filing last weekend.  I don't have GM bond price data in front of me but let's say that going into last weekend, GM's debt, which is rated right around 'junk' (i.e., risky low quality bond) status, was paying an 8% yield.  Ten year US treasuries are yielding about 4.5%.  The 'spread' in this case would be 8 - 4.5 = 3.5 or 350 bp.  This 350 bp is the premium assigned to risky GM debt when compared to the 'risk free' rate of 4.5% on 10 yr Treasuries.  Using an average of Brian's 'gapped out' value of 85 bp on GM debt since last weekend, GM's bond spreads would now be 8.85 - 4.5 = 4.35 or 435 bp (assuming that 10 yr Treasury yields haven't moved).  Follow?  Bottom line is that buyers are demanding more yield from a GM bond because of the increased risk posed by the DPH situation.  Why is this important?  Well, for companies like GM that depend on the bond market for a large amount of capital (and there are a lot of companies that fit this mold), higher spreads increase their cost of capital--at some point these companies could get 'locked out' of the bond market if they can't afford to pay interest rates demanded by the market.  Also, since bond investors theoretically get paid before stock investors in the case of a financial meltdown, radical changes in bond spreads usually reflect the market's assessment of corporate cash flows.  Increased spreads signal increased bond investor concern about corporate cash flows. 

Fall Classic 10/13/05 1:00 pm

An absolute classic written yesterday by John Succo about risk management and emotion.  Emotion is the enemy when participating in financial markets--which is one reason why successful investing is so difficult.  One mistake that market participants often make is to 'average down' after a position goes against them.  When driven by emotion, this process often results in taking on excessive risk--instead of cutting losses in a losing situation.  Managing a losing position is arguably the most difficult financial decision making skill to learn and the one most correlated to success.  Professor Succo demonstrates this skill for us as he manages his position in Refco (RFX), a securities clearing house now in the news due to allegations of managerial and accounting fraud and the potential of this situation to disrupt markets (note: LTCM = Long Term Capital Management, a highly leveraged, now defunct hedge fund whose losing trades nearly caused a financial market meltdown in 1998).

Fundamentalist 10/11/05 6:15 pm

Determining the value of a stock relative to underlying business prospects is known as fundamental analysis.  Professor Vitaliy Katsenelson offers a nice example of fundamental analysis here.

A Heavy Tape? 10/11/05 4:05 pm

Professor Succo notes that the tape trades 'heavy.'  Huh?  He means that stocks trade as if prices want to go down.  When he wants to sell something (his 'offers'), it takes a while to find a buyer.  However, when he wants to buy something (his 'bids'), his order gets filled quickly.  Indicative of supply.  And from ECON 101, we know that when supply exceeds demand prices go ????

Vol Squall 10/11/05 11:20 am

Volatilty relates to the variation (movement) either observed or expected in an asset price.  There are a number of 'volatility' indices that reflect the extent to which market participants expect stock price movement (these measures are derived by factoring out the implied volatilities baked into option prices, but that's a subject for another day).  As Toddo notes in this post, volatility indices, while up over the last couple of days, have been trending down for a considerable period of time (note the trend of one of the most common vol indices, the VXO).  When 'vols' get really pumped (say, VXO levels of 30 or more), it's usually a signal of fear in the marketplace and a good contrarian indicator.  Todd's point is that vols are currently not close to levels that typically signal excessive fear.

Piggy Banks 10/10/05 6:45 pm (updated 9:55 pm)

Building on the Delphi post below, Succo, Vitaliy, and Toddo offer some thoughts on risk baked into the financial system related to big 'money center' banks such as Citigroup and JP Morgan.  I'm merely reflecting what these folks have taught me when offering that, given the massive amounts of debt and leverage in our economy, price behavior of the financial sector bears watching.  Instruments for for watching financial sector stock prices in aggregate include the BKX index and the XLF.  The financials may hold the keys to the tape (tape = stock market prices) and, by extension, to the economy at large.

positions in C, JPM, XLF

Delphi Downer 10/10/05 5:50 pm (updated 9:50pm)

The most significant piece of financial news on many people's radars today is Delphi's filing for Chapter 11 bankruptcy protection.  Delphi is the former auto parts division of General Motors that was spun off by the parent company a few years ago.  Why is this news a big deal?  For one, DPH has a large underfunded pension that may require a government bailout (read: you and I will pay for it).  Also, parent GM is still liable for many DPH obligations.  Although chatter about these issues has been swirling for a while, the markets weren't totally prepared for this news, as evidenced by the stock pricess of both GM and DPH.  Because of the large amounts of low quality debt out there related to these two entities, it is straightforward to craft a scenario where GM/DPH-related trouble in the corporate bond market spills over into broader markets (btw, an issue that we'll cover in an upcoming lesson is the linkage between bond markets and stock markets).  The odds of such a 'contagion' scenario would greatly increase should GM file for bankruptcy as well (not out of the question).

Against All Odds 10/7/05 3:05 pm

Why do market prices sometimes move in a direction that is opposite of the news flow?  Professor Succo offers one explanation as to why prices might increase (in the short term) in the face of 'bad' news.

Garbage In Garbage Out 10/7/05 9:15 am

How credible are economic statistics published by government agencies?  Some numbers, such as the employment figure reported this am, are of questionable validity.  We'll be talking more about this in upcoming weeks.  Right now, you should be aware that methodology used to generate many key economic series tends to raise some eyebrows...

Paper Chase 10/6/05 10:30 am

Is it wise to blindly follow the advice given by Wall Street analysts (sometimes referred to as 'cheerleaders')?  Here's rationale from someone often willing to take the other side of such a trade.  btw, here's a chart of SWN for reference.

Stated Reasons and Real Reasons 10/6/05 9:30 am

Is the Fed raising rates to quell inflation or to provide a more attractive interest rate for foreign holders of our debt (China and Japan own roughly 1/2 of all tradeable US debt)???

Charting a Course 10/5/05 4:10 pm

The charts are somewhat busy, but Collins is trying to show us that many market indices are at important technical levels.  There are some nice examples of 'technical analysis'--something you'll hear more about as we progress.

Psyched Out 10/5/05 4:05 pm

A 'fiat currency' is one that can be printed by 'fiat' or proclamation by the government.  Kevin Depew notes here that fiat currency is backed almost exclusively by confidence.  Two questions.  1) What happens if people lose confidence in a fiat currency?  2) Some time ago, currencies where backed by something else--what?

Bond Man 10/5/05 10:20 am

Brian Reynolds is one of the smartest fixed income (or bond) minds on Wall Street.  This post is mainly to just introduce you to the topic.  A couple of questions to keep in mind.  1) Why should stock market investors care about what's going on in bond markets? 2) What does the term 'spread' mean relative to bonds?

Support Group 10/4/05 4:05 pm

John Succo is one of the best 'tape readers' on Wall Street.  Tape readers are individuals who possess excellent 'feel' for price behavior in markets.  This sense is obtained from years of watching stock price movement on a minute by minute basis (in the early days, these prices would be printed on a ticker tape to read, thus the term 'tape reader').  In this Mailbag post, Professor Succo shares an observation about the pervasive 'bid' underneath stock prices that has tended to support the tape for the better part of two years.  If indeed such a buyer exists, the question, of course, is who is it and why step in to buoy prices by taking so much risk?

Psyched Out 10/4/05 11:35 am

Interesting observation by Kevin Depew about the relationship between economic activity and psychology.  What happens to market prices if participants become risk averse???    

And Just Like That... 10/4/05 10:30 am

Professor Succo follows up with this Buzz on banks and the carry trade.  Can you see how the carry trade applies to how banks make (or try to make) money?

Carry On 10/4/05 9:25 am

This column by Professor Succo is notable for a couple of reasons.  First, it's a response to a reader's question.  Minyanville professors answer a lot of these 'Mailbags' each day.  As a reader, you're eligible to submit a Mailbag question too!  The other motive for connecting you to this article is the notion of the carry trade.  What is the carry trade and how does it affect economic activity and markets?  A very important question that we'll answer during the next 10 weeks.  Right now, read John's piece and see if you can't get a feel for what the carry trade is about.

Vacation Already? 10/3/05 7:10 pm

Todd Harrison, founder of Minyanville and prolific contributor to the website's content, happens to be off the desk this week visiting loved ones in the Middle East.  Toddo will be back the week of 10/10. 

Copyright© 1999-2009 Matthew W. Ford.