Buzz Lite Archive (MV3 Spring-Summer 2006)
Media Supply Chain 8/14/06 5:25 pm
Another excellent MIM3 panel discussion concerned upcoming trends in the media sector. Minyanville president Kevin Wassong shares his take on the discussion. A key takeaway for me: the best way to think about the media sector is to divide it up into companies providing content, and those that distribute the content. Placing companies in their appropriate position provides a good take on the industry supply chain (note that some companies like Time Warner do both content and distribution). One theme of the MV discussion is that choices for distributing media content are rapidly increasing. Kevin's provides an example using the i-pod and, more importantly, i-tunes.
The Macro Panel 8/14/06 5:15 pm
Apologies for the laggy posts but have been absorbed in the fabu Minyans in the Mountains III process for the last week or so. Perhaps the best of the best session was near the end of the conference: the 'macro panel'. As Professor Succo recounts, this discussion (which could have gone much longer than the allotted time) concerned the overall structural forces working on the economy and, by extension, the financial markets. Much of the evidence seemed to rest with Boo. You don't have to accept it, but you want to at least 'see it' in order to see the other side of the trade.
Going with Your Gut 8/5/06
6:15 pm
Is it good to make decisions
based on intuition? Building on
Professor Succo’s missive on inductive
vs deductive reasoning, Professor Reamer suggests
that going with ‘gut feel’ often gets investors into trouble.
Why? Intuition is based on
recognizing patterns from the past. While
this can sometimes be a good thing, markets tend to be ‘non-linear,’ meaning
that it is often not effective to extrapolate past behavior into the future.
Scotto concludes that some balance of deductive reasoning and inductive
intuition is probably best when making financial decisions.
For most of us, the developing the deductive reasoning part will be the
tougher of the two.
Temporary Restraining Order
8/5/06 6:10 pm
If there’s stress in the
economic system due to structural
issues, what’s at the heart of problem? Professor
Succo argues that
it’s about bureaucrats doing things that restrain the forces of the business
cycle. To him and Professor
Sedacca, the business cycle is just the natural process that free markets
use to cleanse the systems from unproductive capital. Bureaucratic intervention to dampen this cycle can be viewed
as socialism. Succ wonders
whether we really want to pay taxes so that the government can buy stocks with
our capital, and concludes that, over time, voters will throw off the socialist
structure and return to a more free market posture.
Fed Watch 8/5/06 6:00 pm
Next week, financial market
eyes will be cast to the Federal Reserve Open Market Committee since they will
be meeting to decide what to do with interest rates.
Because of recent data suggesting that the economy is slowing, it is
largely felt that the FOMC will cease it’s interest rate increase program. Interestingly, Professor Reamer
suggests that the Fed will keep raising, claiming that this is the
‘easy’ decision for them. Let’s
see what happens next week.
Is Cash King? 8/5/06 5:50 pm
Professor Goepfert notes that individual
investors are holding more cash than they have in a while.
He wonders aloud whether this is bullish or bearish.
The bullish argument is that investors have become apathetic in the short
term and that a swing in sentiment
the other way will soon send this money back into the stock market, thereby
raising prices. Boo argues that
this may be the beginning of a secular movement towards risk aversion, which
would not be a good thing for risky assets (like stocks).
If you’ve been following the threads on Minyanville (and here in these
writings), you know that there’s some support for the ‘secular risk
aversion’ thesis. Personally, I
don’t know what this means (although I definitely have some opinions). What I do know is that you’ve seen
both sides of the trade here—which is always a good thing.
Nudge 8/5/06 5:45 pm
A gentle reminder from Professor Succo to largely ignore the information flowing from mainstream financial media and develop your own understanding of what’s going on in financial markets.
Mr Practical Weighs In 7/31/06 4:15 pm
Professor Succo noted a number of concerns last week, including about strange buying buying behavior and futures led tapes, tail risk in the banks, and the relationship between leverage and speculation in our economic system. Apparently, he wrote Mr. Practical about his concerns, and his friend responded in this missive. Once again, this is the a 'seminal' type of post--one that you'll want to re-read before you get it. I want to cite just a piece of it below. It's about a proposed shift in US culture from a market-based view towards one of socialism. You don't have to agree with it, but in the interest of balance please 'see' it.
The U.S. now has a culture of “what is the government going to do about it.” When stocks go down, investors scream for the Fed to do something about it. When Medicare gets too expensive, they want to know what the government is going to do about it. When interest rates go up it is the government’s fault.
This is precisely the opposite of what the U.S. is supposed to be about. The markets used to tear down unproductive capital through recessions and then re-allocate that capital to more productive companies. Now the bureaucrats have a better idea and through the extension of easy credit have decided to allocate that capital equally to good and bad companies alike; to conservative and speculative investors alike. The last I looked this was called socialism and it breeds mediocrity and we now see it everywhere. Insiders see it and are bailing out of stocks and getting the shareholders to pay for it through stock repurchases. Government is now all about spending borrowed money because that is what our politicians are getting paid to do.
A persistent thread in the Minyanville dialogue has been related to housing and what might happen to the economy (and by extension financial markets) if housing slows down rapidly (or perhaps even crashes). Professor Reamer offers his take of the deflationary cycle that might occur. No way it can happen, you say? Maybe, but notice that such a cycle would basically be the mirror image of what did happen as the housing market exploded higher over the past few years.
Professor Succo asks whether you make financial decisions based on what you hear from the financial media, or on your own analysis of data? You should be able to surmise what side he thinks makes the most sense...
(Ir)Rational Investing 7/31/06 3:55 pm
Do folks make rational decisions when making decisions in financial markets? Mainstream economic thought is all pretty much based on the rationality assumption. Professor Reamer bids to disagree, suggesting that irrationality rules the day in financial markets. This is certainly consistent with the role of sentiment in the marketplace.
When I first saw the 'Can't Lose' title of this post, I winced. Professor Reamer appears to have done similar, as he takes the author to task for a post that seemed pretty reckless for the 'Ville. Why raise an eyebrow at this? Mainstream financial media is chock full of 'can't miss' propositions. Minyanville, however, is about critical thinking and seeing both sides of the trade. You'll know that you're catching on when you wince at 'can't miss' propositions as well.
This morning, United Parcel Service (UPS) missed earnings estimates and 'guided down' next quarter's performance estimates. Professor Succo suggests that the subsequent decline in UPS stock could be linked to the deflation thesis we've discussed below. Professor Gilmartin questions this, since higher reported UPS revenues did not suggest a deflation-like price decline theme. In Succ's follow-up response, he suggests that markets don't care about past performance; they are focused on the future. And market participants appear to be processing the UPS info along the lines of a deflationary theme. Professor Reamer adds that some academic research finds stock market prices to be very predictors of future economic performance. Despite all efforts to stop it, Succ appears to think that the markets are forecasting a deflationary future. Whether you buy John's thesis or not is one thing--but at least you're seeing that side of things. One thing you SHOULD take away from this discussion is that stock market prices tend to reflect the future rather than the past.
Sage observation by Professor Succo. Do you get what he's saying? An executive announces that he wants to unload a big block of stock. All else being equal, that supply should cause share price to fall (econ 101). At the same time, however, the company announces a big stock buyback. This raises demand. This could be construed as either a) helping the executive unload stock at a higher price, or b) the company trying to prop up the stock during a period of high supply. Succ thinks this shouldn't be allowed. Interesting point.
Many financial 'experts' suggest that an effective strategy is to buy stocks and hold for the long term (a.k.a. 'buy-and-hold'). A Minyan pings Toddo about the validity of a buy-and-hold strategy. What does the chart that Toddo references tell you? It should suggest that there are long periods of time (perhaps a decade or more) where a buy-and-hold strategy doesn't work well. If we're in one of those periods now, then, well, you connect the dots. Note also how Toddo connects this New Zealand Minyan with another professor in the neighborhood. The Minyan network...
There are many important threads woven into the 'Ville's daily commentary, but if I had to select a couple for their uniqueness and for their potential to really 'move' future thinking about financial markets, it would be the following. If you get your arms around these concepts, you'll be near the leading edge of progressive financial market thought.
1) Socialization of markets. Think we operate in a free market system? Think again. If you scroll thru the posts below you'll see that Professor Succo has been particularly vocal in observing that domestic (and by extension world) financial markets appear increasingly dependent on government intervention to 'help' them. In a missive today that you should read and reread until you have these thoughts down cold, Succ argues that nothing could be more harmful to economic systems in the long run--particularly if you believe that pent up market forces will someday overcome any attempts at intervention (think Russia under its former central planning regime). Incredibly (at least to me), there are many who presume an interventionist role for government. Please think long and hard about this.
2) Collective trend
toward risk aversion. Most people realize that in order for risky financial assets to go
up in price, buyers must have access to capital (or credit) to bid price higher.
However, another more psychological condition must be in place as well.
People must be willing to take on risk.
Judging by the huge moves higher in stocks, bonds, real estate over the past
10-20 years (and the corresponding increase related leverage and debt), people
have indeed been risk seeking--in a big way. But what happens if people
lose their taste for risk and become risk averse? Professors Reamer and
Depew have been suggesting that signs abound that risk preferences may be
changing in aggregate towards a more conservative stance. Today, more
evidence that the housing market is cooling (read
#1 and #3 here)--if not downright
cratering quicker than those
pessimistic on the sector could have thought. There are also signs
that investors continue
to bail out of riskier stock sectors for safer sectors (btw, those sectors
perceive as ‘safe’ such as financial stocks may
not be all that safe and their
pummeling may merely be postponed). If this trend becomes 'for real',
the key thing to realize is that the Fed or whoever else tries to stimulate the
economy thru interest rate cuts or other policy means may just be 'pushing
on a string' (read #2 here) if folks do not want to take risk with all that liquidity.
position in financial stocks
Sentimental Journey
7/20/06 6:45 pm
Many market participants like to watch measures of sentiment. When folks get too bullish, perhaps it’s time to be bearish, and vice versa. The underlying thesis is that financial market prices are driven by human emotion (greed and fear) and these emotions often ‘overshoot’ in one direction. One measure of sentiment out today suggests folks are excessively bearish compared to the last decade. Time to buy stocks, right? Well, not so fast. Going back further in time suggests that when bear markets really get moving, sentiment can get much more extreme than current levels.
Big 200+ day on the Dow. Why? Perhaps the markets were just 'ready' to rally after some time lower. However, Fed chief Ben Bernanke's dovish comments during his Humphrey Hawkins testimony (#2 and 3 here) Capitol Hill today had many thinking the Fed is going to stop raising rates soon. Toddo wonders whether the Fed's credibility has been strained (first they' seem hawkish, now they seem dovish). It does appear that the Fed has been providing some markets with some upside fuel over the past couple of days.
How are declines in energy prices inflationary? As Professor Depew suggests, only in the convoluted world of the government's economic data reports. A nice example of economic numbers that may not reflect what you think they do. Before 'believing' an economic statistic flowing from the financial media, make sure you ask 'how' that number was derived. Often, you'll be surprised at the process...
If
you’ve been watching the market action for the last couple of days, you’ve
witnessed a couple consecutive 100+ point down days in the Dow.
Toddo keeps
watching the bank index (BKX) as one of his key ‘tells.’
How come? Well, financials
are the largest sector in the S&P 500 Index (see Piggy Banks 2/9 post
below). Moreover, banks are at
ground zero should we realize a blow up in the housing sector (something that
price action in housing stocks may
be forecasting). A peek at the
chart suggests the BKX is forming what is known as a ‘pennant,’ ‘flag,’
or ‘wedge’ pattern. The
direction of its resolution will likely provide insight on where the overall
tape is headed.
position in financial stocks
Chart courtesy of StockCharts.com
Professor
Reamer provides
recent data on housing inventory increases and price declines in some major
real estate markets. Sign of
trouble? Perhaps, given the amount
of debt piled up in this sector and housing’s influence on overall economic
activity. Professor Succo warns
that if mortgage owners have trouble making payments, they are now liable to
lose more than their homes. If you
get the feeling that an intelligent market participant needs to keep a close eye
on the health of the housing sector, you’re right.
Drawing
from Toddo’s am
missive, what are the 4 'primary metrics' he uses to make sense of the market
environment? Which ones currently seem
bullish and which ones seem bearish? Can
you see that looking at these different factors provides a more balanced
perspective than focusing on just one of them?
Like
Professor Depew, I found this
post amusing. Why?
The Fed (and all central banks, really), thru printing currency by fiat (read: at will), is the principle
culprit in debasing paper currency so that it is distrusted in favor of gold.
position
in gold
Particularly if you’re new to Minyanville, I want to point your attention to the question from Minyan Alan halfway down here suggesting that Todd ‘apologize’ for ‘missing’ a move in the markets. Please note Todd’s reply. Unlike the objective of other financial media outlets, Minyanville is not about giving advice, or about blindly imitating what the pros do. The idea is to observe what MV professors are thinking and doing, and adapt what you learn to better your own market-related thought processes. Ultimately, to survive and thrive in financial markets, you need to think for yourself.
If you’ve been routinely reading this page, you’re familiar with the story by now. The US is burdened with debt and if financial asset prices (such as stocks) drop then our leveraged economy is in trouble. So, how to address? Some believe it is government’s role to prevent markets from falling. In fact, it looks like some government agencies are adjusting their mission to facilitate just that. So, is it ok to rely on government (including the folks at the Fed) to ‘protect’ the financial markets and the economy? Professor Reamer argues that this is a pure socialist notion and bound for failure. Professor Succo adds that folks overestimate the power of regulation and government to control things in a free market system. However, Professor Zucchi observes that many folks do indeed believe in the government’s power to regulate things, and have made sizeable financial bets in support of their beliefs. I'd like to opine that this is a FANTASTIC thread and, in the interest of seeing both sides of the trade, one that you would do well to review until you ‘get it.’
Pros Make Mistakes Too 7/10/06 7:10 am
Toddo
opens up and
shares the tale of a trade that cost his firm millions of dollars.
Don't feel bad if you can't follow all the details of this trade (options
trading takes a while to learn). What you should take away is a lesson in risk
management--particularly with respect to managing risk associated with
events that are unlikely but, if realized, carry tremendous consequences--a.k.a.
tail risk.
Think
for Yourself 7/8/06 10:50 am
Many market participants use financial media outlets as a primary source
for forming their views and shaping their decisions. Professor Succo offers
an example of how his personal assessment of what’s going on in the
economy differs from what the financial media is saying. Yet another example of why you should cast
a critical eye on financial media info flow.
Instead, think for yourself, because as Succ notes at the end of his
missive:
“Remember, only you can protect your money. The more you depend on experts to make your decisions for you, the more unexpected risk you take.”
Most
finance textbooks suggest that valuation (estimated future cash flows from a
business based on fundamentals) is the 'correct' basis for buying or selling
stocks. Professor Katsenelson makes
his decisions in this manner, and suggests that fundamentals win out in the
long run. However, Professor Reamer questions
this wisdom, and cites research that implies market participants rarely
value financial assets rationally. Using
Vitaliy’s
bullish comments on Microsoft (MSFT) as an example, Scott claims that observations
on company products are often of little significance to the price action of
a stock. However, Vitaliy thinks
the stock is cheap based on these fundamentals, and is willing to wait till
the market figures it out.. Scotto
suggests that assuming stock price is a function of product releases can
be dangerous (as in costly). Where
does this get us? Perhaps not
far—other than to suggest that there is more that moves stock prices except
textbook fundamentals and valuation.
How
does current US debt as a percentage of GDP compare to 1929 (the year of the
stock market crash and precedent to
the depressionary 1930s)? Way
higher. One way to think about
that 400% level is that it takes $4 of debt to fund $1 of GDP.
What manager in his/her right mind would fund projects with this payback?
Our dependence on debt can be compared
to drug addiction. This gets to
be especially problematic if (when?) the
holders of US debt decide to sell.
Professor
Sedacca notes
that yields on the 10 year Treasury are pushing through long term downtrend
resistance. Here’s
the chart. Higher yields = higher
interest rates = drag on the US economy—particularly one that is so debt
dependent.
Do
sales of Hamburger
Helper forecast economic trends? Not
sure, but an interesting concept…
Developing Market Awareness 6/26/06 7:50 pm
Near the top of his morning missive, Todd shares his market assessment using what he calls the four primary metrics: fundamentals, technicals, psychological, structural. Although these factors are not mutually exclusive (for example, psychology and sentiment is expressed in technical chart patterns), Todd uses this framework to make sense of the market. Research suggests that developing 'situational market awareness' precedes effective decision-making. By employing a balanced set of metrics, Todd is more apt to see things more objectively. Fill in the blanks: Todd thinks the ____ metric currently exerts the most influence on markets. He thinks the ____ metric exerts the least influence currently.
Fed Farce? 6/26/06 7:35 pm
Were I you, I'd read (and reread) the top part of Jeff Saut's weekly missive. He quotes renowned market observer Richard Russell, who lays out the process by which the Fed creates currency by 'fiat.' If you regularly read the 'Ville you know that a number of professors challenge the validity of central banks occasionally. If you're wondering why, Mr Russell lays out the bulk of the argument against the Fed. Amazingly to me, most college students are never exposed to this perspective during their academic studies. Please understand the 'anti Fed' argument; even if you choose not to accept it you'll come away with a more balanced perspective.
Have and Have Nots 6/26/06 7:25 pm
Professors Depew and Succo both note the growing disparity between upper and lower class. For many, wage growth is not keeping up with cost of living. Lower purchasing power is an attribute of inflation. However, as Succ notes, the psychological impact on individual tendency to invest in risky assets may go down in this scenario, which is deflationary. Seems a recipe for stagflation (i.e., stagnant economic growth, rising prices of things you need), cookie.
Sentimental Journey 6/24/06 7:15 am
A fundamental academic thesis involves the 'efficient market hypothesis' which states that at any single point in time, market prices reflect all available information. Professor Succo offers an example of why markets tend not to be very efficient. In short, sentiment and emotion. It cycles between greed and fear--sometimes in short order.
Stealthy Mover 6/22/06 7:30 pm
Yields on the 10 year bond hit a 4 year high today. Great if you're a saver (higher rates on money markets, CDs, etc.). But bad if you have debt (higher interest rates = higher payments to creditors). Chart (below) suggests resistance around this 5.2% level (remember that on the TNX chart you need to divide by 10 to get the interest rate). Needless to say, the specter of higher interest rates is largely a negative one in light of the high debt levels throughout the U.S. economy.
Chart courtesy of StockCharts.com
Debt Threat 6/22/06 7:15 pm
Another study that shows high debt levels among Gen Exers. Limited (or no) debt may be critical to successfully navigating the forthcoming financial landscape. A smart man once told me, "Debt reduces freedom." Make sure you don't enslave yourself with debt. It's in your control.
Going Stag 6/22/06 7:05 pm
As Toddo notes, all the discussion about inflation and deflation can be downright confusing at times. Did you know there's another option? Stagflation--i.e., stagnant economic growth coupled with increasing inflation (primarily in goods and services). Here's an outstanding primer on stagflation by Professor Depew. Note at the bottom that what might appear to be stagflation in the near term may be a transition to full blown deflation (as folks become risk averse and credit 'deflates) in the longer term. A very interesting thesis...
Money For Nothing 6/15/06 10:10 am
This morning the Bank of Japan says it's not yet ready to raise interest rates from 0%. Zero percent? Yep, for the past few years, Japan's central bankers have been lending money at basically zero borrowing cost in hopes to instill more risk taking. Professor Succo contemplates this, noting that if borrowers don't want to borrow these low cost funds--perhaps because they're already lugging excessive debt--then a deflationary environment exists. In other words, the extent to which an economy inflates or deflates depends primarily not the amount of low costs funds (liquidity) that are made available by central banks, but by the propensity of borrowers to take it.
Vanishing Act 6/15/06 10:05 am
The market story over the past month has been the synchronized decline in stock markets across the world. Some wonder where all the money leaving stock markets is going. Much of it is going nowhere, notes Professor Reamer. As the value of asset markets decline as sellers sell, much of the money just vaporizes. Just depends on the value folks assign to any given asset on any given day, cookie.
Hoofy's Heat 6/15/06 9:55 am
With the recent market meltage things may be getting stretched too far in one direction in a short period of time. Toddo's currently bullish for a trade. Professor Goepfert notes that many sentiment indicators are showing some extreme pessimism. This is often a harbinger of good things to come for Hoofs. However, the concerns raised by Professors Succo and Depew suggest that the context of the market may be changing (from uptrend where it pays to buy pullbacks to downtrends where it's better to sell rallies). If you're involved in this market, please be mindful of risk and its management.
Lockstep World 6/8/06 12:05 am
Check out #1 in todays 'Five Things...'. The first picture shows price movement of various financial assets from 1996 till 2002. The second pic shows those same assets classes from late 2002 till now. Striking, isn't it? Clearly, since late '02, asset classes have been much more correlated. Search around in this piece for the proposed reason behind the increased correlation. Quick quiz: is it a) excessive investor pessimism b) random chance c) coordinated central bank driven liquidity. Yep, c is correct. At issue, of course, is that if asset prices all went up together over the past coupla years, what happens when (the inevitable) downward price movement begins?
Turning Point 6/7/06 11:45 pm
Were I you, I'd read this Mailbag post a few times. Key point to note: inflation = expansion of money and credit. This is a different definition than most are used to. Viewed through this lens, though, the last few years can actually be viewed as 'hyperinflationary' due to the hyperbolic increase in money and credit. Professor Succo posits that at some point, the market doesn't want to take any more credit and the system starts to contract (deflation). He also notes that we may be at that turning point now. Again, read this thought process a few times and let it sink in--it's that important.
Goldbricking 6/7/06 11:35 pm
Gold has been undergoing an inevitable shakeout after a parabolic move (see chart). Professor McGuirk updates us on the gold story and suggests things are in the early innings. Could be, my friend. For those looking for some near term insight from a technical perspective, looks to me that support comes together at $575-600ish. Note that the longer term uptrend line currently provides support at $450. Seems a long way down but observe that bullion was down at that level in the Fall of last year.
position in gold
Chart courtesy of StockCharts.com
Forecasting the Past 6/7/06 11:35 pm
Are credit rating agencies like Standard & Poor's objective, forward looking entities. Professor Succo notes that they seem more backward looking and political to him.
Pure Energy 6/7/06 11:30 pm
If you're an energy sector bull (e.g., Toddo), you'll want to check out Professor Dingman's piece on E&P (exploration & production) names. Nice piece of fundamental analysis that caught my attention.
position in energy stocks
Gamma Goblin 6/7/06 11:20 pm
Professor Succo outlines a potential driver for downside price movement in stocks. The technical details of being short an option may go over your head right now. The main point is that John is trying to make is that many market players appear to be taking sizeable risks to score modest returns.
Homing In 6/5/06 11:45 pm
Some late day comments from Fed Chairman Bernanke made a tough market day worse. Todd notes some of the harder hit sectors including the homies (homebuilders). The chart below of the homebuilder's index (HGX) shows the longer term carnage in this sector. The important thing today from a technical standpoint is that the index sliced decisively down through long term support to values not seen since end of 2004. Why pay attention to the homies? Well, over the past few years, housing-related sectors have powered US economic activity. If housing slows, that removes a key driver of potential economic growth from the mix. The market, being the forward looking mechanism that it is, appears to be forecasting a slowdown (or worse).
Chart courtesy of StockCharts.com
Causality Reality 6/2/06 11:55 am
Professor Warner questions the financial media's reasoning behind a move lower in the markets at the outset of this morning's trading. Once again, Professor Reamer suggests that trying to evaluate market behavior using a 'cause and effect' mindset is largely an exercise in futility. Why, Scott believes (I do too) that markets are 'complex adaptive systems and more subject to emotional, herd-driven behavior than to rational decision-making in the near term.
Bucking the Trend 6/2/06 11:45 am
Note in Toddo's post his comments related to the dollar and financial asset prices. This is basically a reminder for you to brush up on the US dollar's potential impact on financial markets. It's very important that you grasp this notion. See the 5/1 Dollar Squalor post below for more detail...
To Have and Have Not 6/2/06 11:35 am
Toddo takes a step back and reflects on the 'macro' state of things thru a distribution of wealth lens. The interesting question is how the increasing distance between rich and poor (and the debt levels many have employed to keep up with the Joneses) might spill over into the financial market arena. Surely not something we can answer here, but just as surely something to keep on file on your keppe.
Tech Wreck 5/26/06 9:25 am
Still fixated on tech stocks as a hot sector? Professor Schaeffer observes that Wall Street is, and as long as they are so optimistic tech sector stocks are not good buys. Why? From a contrarian point of view, sentiment is too bullish. Professor Schaeffer also offers an example of where nearly the opposite sentiment extreme appears to exist.
Name of the Rose 5/26/06 9:15 am
Almost on cue after our 5/24 'Safety Dance' post below, a columnist touts the upside of bank stocks. Professor Succo informs the columnist that he has ignored the risk side of the equation. Banks are 'spread traders', borrowing funds at a low cost and redeploying them into (hopefully) higher yielding projects (thus earning profits on the 'spread'). Big banks like JP Morgan (JPM) also are highly involved in proprietary trading and derivatives markets. Please don't be sucked into the 'reward only' perspective streaming from much of the financial media. An intelligent market participant considers the risk side of the equation first.
position in JPM
Boxed In 5/24/06 9:55 pm
Markets around the world are falling presumably in part because central banks have started to remove liquidity from worldwide financial systems. Professor Succo succinctly describes the Fed's (and other central banks') problem. Prices have been going up (inflation), suggesting that the Fed has to raise interest rates and choke off liquidity. However, raising rates in a leveraged economy like ours is very dangerous, and the housing market (which has been a core economic growth engine over the last couple of years) has already shown signs of stress. One could argue in fact that the market's recent downward move is a 'cry' for more liquidity. But if the Fed lowers rates, inflation takes off. Plus, all the foreign buyers of our debt will be less prone to buy future bonds that contain a lower coupon. Seemingly, the Fed has painted itself into a corner. Can you spell D-I-L-E-M-M-A?
Statist Static 5/24/06 9:50 pm
Very broadly viewed, economic thought falls into one of two groups. One group believes that markets make better decisions than governments. The other believes that, to at least some degree, a group of bureaucrats in a room 'know better' than the markets. Professor Succo lets you know where he stands. btw, if you think the US operates in a 'free market' environment you'd better think again. Laws restricting trade, price fixing (including the setting of the price of money by the Fed), and many other policies/institutions are interventionist in nature and serve to increase government control over markets. I do plan on joining the Foundation for Economic Education that Succ references...
Safety Dance 5/24/06 9:45 pm
Many feel that investing in bank stocks is relatively 'safe'. Professor Succo argues that modern banks are significantly leveraged, and thus carry a relatively high degree of tail risk. If you're involved with this group, please understand the potential downside.
position in financials
Polar Bear 5/24/06 9:40 pm
US debt (based on Treasury bonds/bills outstanding) stands at over $8 trillion. That's just the tip of the iceberg, as Professor Succo demonstrates. A good 'working number' to keep in mind: current and future US obligations currently clock in north of $40 trillion.
Risky Business 5/22/06 9:40 pm
If you've been watching the markets we're starting to see some eyepopping volatility in global markets. For example, Indian stock markets are down 20%+ in a week or so. Domestic equity markets are down 5%+. What's going on? Part of the factors may relate to lots of short volatility--plus liquidity appears to be decreasing. Whatever may be ahead (and it may be rocky road), Professor Succo suggests doing things to preserve capital such as paying down debt and reducing exposure to risky assets. Pure risk management, cookie.
Flip Flop 5/22/06 9:30 pm
Toddo notes the change in tone in the financial media over the last couple of weeks. Makes you wonder whether there's much value in listening to them. Professor Succo opines that an effective market participant may be off without...
Collective Psychology 5/19/06 9:50 am
Professor Succo fields a Minyan question on whether inflation (generally increasing prices) or deflation (generally decreasing prices) is pending. To me, a key point in his reply is this one:
I come out that we are nearer to deflation because for Ben to be successful, the market must “take” the credit that he offers; if it does not he can offer as much credit as he wants (print money), but it will not get into the system because the system is now busy actually trying to pay back that debt (or else it is already in default). A large piece of evidence is in the housing market, which at the very least will offer no more credit conduit and if there is massive movement back to fixed mortgages as the great ARM period ends, it could cause a massive move toward deflation.
What Succ's saying is that we may not get inflation even if the Fed prints an infinite amount of money IF people don't use it for risk seeking purposes. If people become risk averse and hoard cash, or use it to pay down the mountain of debt we have, then we could very well be in a period of declining prices--at least with respect to risky assets like stocks, real estate. Stated another way, trends toward inflation or deflation may depend more on the collective psychology of market participants than on actions of central bankers!
Danger Zone 5/19/06 9:40 am
Professor Depew explains how he combines two technical approaches, bullish percent (nice mini tutorial on BP in #1 here) and DeMark trend analysis, to assess the technical landscape. What does he conclude?
Poll Position 5/19/06 9:20 am
Toddo polls folks in his network about where the S&P is headed in the near term. Key point to learn here is that even very smart market participants can have very different views on where things are going. Moreover, even if my time horizon is fairly long term, I find it quite useful to learn what guys like this are thinking in the near term.
position in SPX
Reasoning the Rhyme 5/18/06 9:15 am
If you were watching US stock markets yesterday, you know that they took their largest single day dive in a while, with the Dow closing down more than 200 points. Many assigned the 'cause' of the decline to a larger than expected inflation number reported yesterday morning, spooking folks into thinking that the Fed is not yet done raising interest rates. However, Professor Reamer argues that trying to assign a reason to this rhyme is nonsense. Instead, he suggests that the market was 'ready' to go down, and is perhaps in the early throes of a shift from risk seeking to risk averse behavior. Key takeway: trying to assign causes to much of the market's behavior may be an exercise in futility. (postscript: After Professor Somaney suggests reasons for the recent Indian stock market correction, Scotto again suggests the futility in cause/effect analysis).
The Four Metrics 5/18/06 9:05 am
Nice little tutorial by Toddo on using 'four primary metrics' (fundamentals, technicals, psychology, structural) to assess the market landscape. Why use four? As Todd notes, all have their flaws. Evaluating them in aggregate offers a fuller picture and a more balanced perspective for decision-making.
Walmart Pro and Con 5/16/06 7:25 pm
Interesting Bull/Bear exchange on Wal-Mart (WMT) finds Professor Katsenelson diggin' WMT's potential value here, here, and here while retail expert Professor Macke thinks not so much about the retail goliath. Usually, I like to complement such fundamental perspective with a dash of technical analysis. Gazing at a monthly chart of WMT over the past decade (below) finds the stock basically moving sideways for the past few years. Decent multiyear support at $45 suggests that a bullish trader/investor could buy WMT around here and manage risk by setting a stop somewhere in the low $40s. On Boo's side of things, WMT has been testing that $45 support level quite a bit in the last few months, and we know that support gets weaker each time it's tested (as more and more demand gets chewed up at this level). If WMT should break thru this level it's a long way down before we find the next significant level of support. So where does all this leave us? Balanced in perspective, which is a good place to be. Note also that, given Wal-Mart's position as the largest retailer on the planet, it's not a bad idea to stick WMT on your watch list as a decent 'tell' (or proxy) for general consumer activity.
no positions
Chart courtesy of StockCharts.com
Savvy Insight 5/16/06 7:15 pm
Jeff Saut challenges much of the 'common wisdom' put forth by the financial media. Just one more brick in the wall suggesting that you want to view all info flowing from mainstream financial media with a critical eye...
Warning Shot 5/15/06 9:45 am
Last Thursday and Friday, the Dow Jones Industrial Average booked back-to-back triple digit losses for the first time in about a year. Is this weakness an ominous signal? Toddo suggests that calling for a 'crash' based on a couple of days action is premature. As Professor Succo notes, although the days leading up to the 1987 crash (sometimes referred to as Black Monday) experiences weakness similar to last Thursday and Friday, the context was much different then (note the Succ does alude that in some ways the current situation appears much more risky than 1987). Professors Depew and Reamer both suggest that we're in a high risk environment, and bearish technical signals are becoming widespread. At the bottom of his post, Professor Succo advises risk control and market awareness--particularly as related to the structural distortions caused by increased government involvement in financial markets.
Dollar Dissertation 5/15/06 9:25 am
Considerable discussion on Minyanville and on this page surrounds the US Dollar (USD) and its position in the structural mix (see for example 'Dollar Squalor' 5/1 post below). Repetition here is for a reason, my friends. You need to have a good grasp of these USD issues to develop effective market awareness. If you need to brush up on USD issues, the MV staff has assembled a nice synopsis.
Metal Material 5/11/06 9:45 pm
If you've been reading the 'Ville you're familiar with the continued eye-popping move in gold. As shown by the chart below bullion cut thru $700/oz like a hot knife thru butter and continues to ring up 25 yr highs. By most measures, the yellow metal is way oversold. While a correction, perhaps a severe one, seems in the near term cards when you see parabolic, overbought action like this, Professor McGuirk weighs in with the long term bullish thesis for gold and why the current price may be justified fundamentally.
position in gold
Chart courtesy of StockCharts.com
Raised Eyebrow 5/11/06 9:35 pm
As many indices hit all-time highs, the financial media seems to be chanting that Hoofy's train is leaving the station. Color Toddo a bit skeptical as he senses a bit of vuja de here.
Point Counterpoint 5/9/06 5:35 pm
Last night Dell (DELL) guided future revenues down and today the stock sold off to the tune of about 5%. Professor Gilmartin suggests that Dell represents compelling value here. However, Professor Reamer notes that Dell's stock has not tracked business/operational performance (which has been quite strong) for years, implying that fundamentals aren't always a key driver in stock price. Point well taken as other factors, such as sentiment and structural factors, often influence stock price movement in a big way. The key takeway? Before initiating risk, seek understanding of how these various factors might influence your position.
The Microsoft Plunge 5/9/06 5:50 pm
A couple of weeks back Microsoft (MSFT) reported weak quarterly results and guided down in future periods. The stock was clocked for 10-15%. The lower stock price and some interesting fundamentals have both Kevin Wassong and Toddo initiating bullish positions. In the interest of seeing both sides of the trade, I pulled up a long term chart (see below). The pattern indicates a classic high volume 'breakdown' from a long term uptrend. While anything can happen from here, the classic technical interpretation of this type of chart pattern is bearish. Given the backdrop, following the MSFT thread on the 'Ville should prove quite instructive.
Chart courtesy of StockCharts.com
Gremlins 5/8/06 3:10 pm
A central tenet of Minyanville relates to seeing both sides of the trade. Toddo's shoulder-to-shoulder talk with the critters exemplifies this perspective. Notice the outcome as well: Todd decides to do nothing since he perceives no actionable edge. That may seem 'obvious' but rest assured that scores of folks (including professionals) make risky financial decisions each day despite having no edge.
The OJ Train 5/8/06 3:00 pm
Toddo noodles some findings from some newly published Wall Street research reports that conclude that it's a great time to be buying stocks since the current market environment resembles the US in 1995 or Japan in 2005. Professor Depew offers some data that suggests the current market context doesn't look much like those previous periods--at least from where he sits. Nothing like a little data to provide some perspective and to remind us about casting a critical eye towards output from the financial media.
Programmable Logic 5/8/06 2:50 pm
Professor Succo explains the 'futures led' feel to the tape. Read his post a couple times then come back here. Do you understand what he's saying? Under 'normal' circumstances, the stock market is dominated by buyers and sellers of individual company issues. Succ can judge the intensity of demand by offering some stock for sale (read: supply) and see how the tape responds. As he notes in the missive, recently when he's offered stock for sale, the market doesn't want to buy it. However, every so often, a dealer who sells stock index futures (derivative based on the price movement of the Dow, S&P 500 or other index) hits John's offer and buys the stock. The dealer is doing this because he just sold futures to a buyer, and now has to hedge against price movement by buying all the individual stocks that comprise the index. The effect is relatively long periods of little liquidity followed by short bursts of across-the-board buying put in motion by buyers of stock futures. Follow? Note Succ's comments at near the end of his missive: this type of behavior appears to be increasing and the sources behind all this buying are, well, let's just say they're suspicious.
Uncharted Waters 5/7/06 11:35 am
If I had to name one thread in the current Minyanville dialogue that you should absolutely try to get your head around, it would be the structural issues surrounding the declining dollar (USD). Some recent examples of this thread are here, here, here, and here. As previously noted in the 'Dollar Squalor' 5/1 post below, it appears that the Fed is printing money in an attempt to liquify financial market markets and (perhaps) stave off a housing price collapse. Of course, printing USDs increases supply, and ECON 101 tells us should happen to price in this situation. The first chart below shows the USDs significant decline in the past month or so. What has been the effect of all this money printing on the financial markets? Looks like we have the makings of hyperinflation from where Professor Succo sits. From the charts below, stock prices are higher, interest rates are higher (discounting an inflationary situation), and gold prices are going parabolic. Why mention gold? Well, gold has been man's reference currency throughout the ages and when fiat paper currencies get debased (as they have throughout history), investors seek refuge (confidence) in gold. It is quite possible that increasingly more investors are recognizing the confetti-fest being created by central bank printing presses around the world, and they are seeking gold's store of value. Want an example of gold's value retaining properties? Note from the charts below that the Dow is up about 10% or so over the last year while the price of gold is up 60%. In other words, stock prices (as reflected by the Dow) are declining when measured in terms of gold. Declining purchasing power of an asset is, of course, one definition of inflation. Be careful out there, my friends, as the risk flowing from our extreme macro situation is seen by some as quite high and increasing and it has some historically successful market timers like Minyan and hedge fund manager Doug Kass bangin' with Boo with conviction.
position in gold
Charts courtesy of StockCharts.com
Micro-cap Fever 5/3/06 10:10 pm
Scroll down towards the bottom of Todd's randoms here and you'll see his remark that he's been getting hit up with all kind of 'micro-cap' investment ideas. A micro-cap is a stock with a small market capitalization. They often trade at low nominal prices--often less than $1 per share. I would second Toddo's observation as I'm suddenly getting about a half dozen daily emails slipping thru my spam filter that are touting these tiny stocks . I never used to get these things. As Todd notes, when folks come out of the woodwork touting these tiny issues we're usually getting late in the speculative game. In other words, sentiment may be approaching a bullish extreme. Professor Goepfert recently shared some eyepopping data showing just how extreme speculation in 'penny stocks' has become. One final shred of anecdotal evidence along these lines. Over the last couple of months I've overheard numerous conversations among undergrad b-school students here at my institution related to trading to these 'single digit midget' stocks. Call me a snob but when I see members of our student body legging into this kind of risk, I start looking for my bear costume...
Reversal of Fortune 5/1/06 8:10 pm
Last week (see 'Risky Business' 4/27 post below), utterances by Fed chief Ben Bernanke about a potential pause in rate hikes excited stock markets. However, late this afternoon Bernanke was quoted as saying that his remarks last Thursday were 'misunderstood.' The chart below shows the effects, as the SPX immediately let go of half the gains from last week's remark. Toddo raises an eyebrow at this situation, and wonders aloud whether inconsistencies in the Fed Head's remarks reduces confidence in U.S. assets. Good question, bro. Regardless, this yo-yo-like behavior is yet one more shred of evidence that you should be critical of info flowing from the financial media. Subsequently, Toddo's questioning attitude emphasizes this point.
position in SPX
Chart courtesy of StockCharts.com
Dollar Squalor 5/1/06 8:00 pm
The dollar (USD) has been taking a pounding of late (see #1 here). What do the technicals show? The top chart below shows weekly performance of the US Dollar Index (the value of the USD against a basket of foreign currencies) since 2003. You can see that a year long rally in the USD has recently reversed, and the USD now sits on important intermediate support. The bottom chart show longer term performance of the USD. You can see the all time high of 120 in 2001; you can also see the very important long term support at about 80. Why should you care? As the value of the USD declines, owners of USD denominated assets get poorer with respect to purchasing power. If you've been reading the 'Ville (such as Toddo's am missive here) you're catching snippets that suggest the Fed MUST let the dollar devalue in order for the US to pay the mountain of debt owed to foreigners--that is, of course, until these foreign creditors decide they don't want to hold cheaper (and cheaper) USDs anymore...
Charts courtesy of StockCharts.com
Recipe for Manipulation 5/1/06 9:35 am
How can companies manipulate their financial statements to meet or beat their Wall Street-related objectives? Professor Succo counts the ways. The key takeaway? Look at any company's earnings reports like you should any other aspect of financial media: with a critical eye.
Risky Business 4/27/06 6:40 pm
Issues continue to pile up on Boo's side of the ledger, including China's gesture towards liquidity reduction, some ominous technical divergences, more ominous technical divergences, decreasing participation in new highs, and ongoing chatter about a entities who are on the wrong side of the commodity trades. Yet, a few morning words by new Fed Chairman Ben Bernanke about a possible 'pause' in rate hikes found Hoofy's Heroes herding prices higher. The banks popped to all time highs (see graph below), presumably on the assumption that an 'easier' Fed will steepen the yield curve which would allow financial institutions to profit from the carry trade. Todd added some downside exposure in the financials today (obviously a tough trade so far). It's often said that as go the financials, so goes the tape. Until this group weakens, it's hard to see the overall markets heading lower. As Professor Succo reminds us, however, there are issues out there that could weaken this group (and the overall market) in a hurry. Given the issues out there, make sure your risk management practices are sound, particularly with respect to extreme events. You should also keep an eye the financial sector as a key 'tell' of future market direction.
position in financial stocks
Chart courtesy of StockCharts.com
Perma Bull Thinkin' 4/25/06 10:15 pm
Professor Greenberg wonders aloud about the merits of being bullish all the time. It could make life a lot easier than having to engage in critical thought process. Toddo offers that it's not about being bullish or bearish, but being critical enough to see both sides of the trade--a perspective that Professor Depew notes is elusive because of the Wall Street sell side machine.
Credit is Key 4/25/06 10:05 pm
Professor Reamer quotes from an article on credit, collective psychology, and economic cycles. You might want to consider reading the whole article--maybe a few times (I did). I found this one of the more cogent explanations of the relationship between money/credit creation and the economic activity using supporting data. If you 'get' this article, then you understand much about the effects of liquidity and credit on economic activity--and about some of the risks that lie ahead...
Oiled Up 4/24/06 8:50 pm
Wondering about the fundamentals behind the increase in oil and gas prices? Professor Dingman offers an excellent analysis of current factors that are affecting prices. One key point: excess world oil production capacity has been decreasing (the operations guy in me would say capacity utilization rates have been increasing). Here's a couple of stats to hunt for in this piece: a) current daily U.S. demand for crude oil = ___ billion barrels per day? b) Current world supply of crude oil = ___ billion barrels per day? Once you find these numbers, calculate the percentage of world wide supply represented by U.S. demand (by my calcs, it looks like about 18% or about one barrel in five heads to U.S. for consumption).
position in crude
MV3 Wrap Up 4/22/06 5:40 pm
For those students who are exiting NKU's MV3 project this coming week, heartfelt thanks for your participation. We hope you found the project worthwhile. You're welcome in the 'Ville anytime.
Inflate or Deflate Debate 4/22/06 5:15 pm
Although there's much to learn on the Minyanville site each day, Friday's content was particularly rich for those seeking to learn from some of Wall Street's brightest minds. Personally, I really got a lot out of the thread on inflation and deflation. Let me attempt to guide you through the thought stream as it unfolded in the 'Ville on Friday.
Toddo's morning missive is usually chock full of insight and this one was no exception. Todd notes that, after his weekly Succofest, the thought that the direction of the dollar may dictate stock market price direction going forward. If the dollar goes up, equities are likely to get hammered (since an increasing dollar would likely imply a decrease in money supply and by extension a decrease in liquidity). If the dollar goes down, then equities may rally (since a falling dollar is a likely sign of increasing liquidity). He qualifies this by saying 'rates may run' in the dollar down scenario (more liquidity is inflationary which may cause interest rates to rise--rising interest rates in a leveraged economy like ours are undesirable). Finally, note that Todd's conversation with number of market sages reveals that they are quite cautious at this market juncture.
Points #2 and #3 on the 5 Things You Need to Know contrasted data that suggest inflation and deflation. A recent NABE survey indicates that more companies rising material and labor costs in Q1 (rising prices are inflationary). Yet, many companies can't pass these cost increases on. If they can't pass on cost increases, then profits will likely fall. If this occurs, companies may become more risk averse--i.e., less likely to invest and grow businesses. A decrease in risk seeking behavior will likely lead to a credit contraction--which is deflationary. As noted in the missive, such a dynamic appeared to take hold during the depressionary 1930s.
Professor Reamer is amused by a bullish TV interviewee suggest stock market price increase that could take us to Dow 36,000+ in five years (Scott notes this tongue-in-cheek since a similar call was made near the major market peaks in 2000). Toddo follows up with Scott noting that stock markets could take off if the dollar devalues big time (because a lower dollar would likely be a sign of excessive dollar supply which would be inflationary).
Professor Succo then intervenes with some (usual) sage insight. He observes that if the dollar devalues, a rising stock market is ONE possible scenario. Another scenario is that the Fed prints money and increases supply, but markets don't want to take the credit. Moreover, interest rates could increase substantially as the dollar declines (since foreign debt holders would demand higher rates in order to purchase US Treasury debt denominated in a declining currency). Since higher rates would likely slow the economy, the outcome could be deflationary.
Professor Depew chimes in by stating that many believe that the case for deflation is weak because the US is a debtor nation and debtor nations always 'inflate their way our of debt (by printing currency and increasing its supply, you pay back your creditors with currency that is 'worth less', follow?). As Pepe notes, however, this argument assumes that there will always be a demand for credit. (This was a personal 'a-ha moment' for me.) Professor Depew also suggests that, although folks seems to fear deflation more than inflation, deflation's cleansing effects leave an economic system more capable in the long run, while the aftermath of a hyperinflationary event are 'nothing short of grim.'
Scotto reiterates the notion that the Fed can't inflate unless people and corporations accept the credit. While Wall Street types seem always willing to take risk, consumers and corporate America are more prone to bouts of risk aversion--and the data suggest such a period may be pending.
A Minyan asks Professor Reamer what would happen to individuals who a) hold fixed income (i.e. bonds) and those who b) are deep in debt if the dollar devalues substantially in the near term. Fixed income holders will get hammered as interest rates rise and the value of their bonds goes down. Debtors who are the hook with variable rate instruments (e.g., most credit card debt and adjustable rate mortgages) get murdered as their interest rate payments skyrocket. Debtors with fixed rate instruments may be hurt less, depending on their ability to service their loans on an ongoing basis (not a gimme). In short, nearly everyone will be negatively impacted--some much worse than others.
The 'best' solution to all of this? Professor Succo argues that we should let the markets decide where interest rates should be. In other words, abolish the Fed and other who set policy under the assumption that they are smarter than the markets. Unfortunately, as Succ notes, letting markets work for themselves to purge unproductive assets and speculation is political untenable...
Why such a lengthy Buzz Lite post? Well, by stringing together intraday posts from the Minyanville professorship, we've shared some thoughts concerning a central issue facing our economy going forward: the direction of collective psychology. Currently, there's a ton of risk seeking behavior in our economic and financial system, which is inflationary. If you notice signs of that the collective psychology is becoming more risk averse, then probabilities tilt towards a deflationary environment--and there's likely little the Fed or other policymakers will be able to do about it.
Silveroddity 4/21/06 11:35 pm
Price action in many commodities has been pretty crazy. Crude oil printed an all time high $75/barrel today. The chart below shows the recent parabolic frolic in silver--it's up 30% in a month (it was up nearly 50% until a nasty correction yesterday). Toddo's been watching markets for a long time and he suspects that some of this recent action in the commodities smacks of 'forced buying' and that 'someone may be 'in trouble.' Say what? He means that some entity (perhaps an institution or hedge fund) may have been short commodities in big size. Now, as prices move higher, these shorts are getting 'squeezed' and they are slowly buying back their exposure way higher. In fact, others may know that this entity is in trouble and are deliberately bidding prices higher to squeeze them even more. Todd's contacts on the Street suggest that copper (which has a parabolic chart pattern very similar to silver's below) may be the genesis of this trippy action. Why should you care about this? Well, in 1998 a hedge fund called Long Term Capital Management nearly brought the financial system down when they wound up on the wrong side of some highly leveraged trades. That's why the Minyanville folks are keeping half an eye on this weird price action. You should too...
position in silver
Chart courtesy of StockCharts.com
Is the Fed Necessary? 4/20/06 12:20 am
Nearly everyone accepts the Federal Reserve as a 'given.' Very few ask why we need a central bank. Professor Succo suggests that perhaps more people should wonder about this. My favorite questions along these lines: Why do we rely on people in a room to determine the 'correct' price of money? Are these people smarter than the markets? Doesn't a system where policymakers set the price of money resemble socialism instead of capitalism? I am firmly in agreement with Succ when he suggests at the end of this post "We will all pay for this some day." Indeed, perhaps sooner rather than later...
Liquid Tide 4/19/06 11:30 pm
If you've been reading commentary on the Minyanville website, then you should be increasingly aware of this theme: there are signs that we have some serious inflation out there although the mainstream financial media doesn't seem to note it. Some tidbits from today's posts along these lines.
The first three things on the Five Things: Fed signaling end of interest rate tightening near, inflation for the last 200 yrs (note that ramp higher coincides with birth of Fed in 1913), Weimar Wallet.
Succ notes that despite rising Fed Funds rates, under the surface the Fed is pumping liquidity into the system like there's no tomorrow.
The Dollar (USD) buys much less stuff than gold does compared to a few yrs back.
IMF says USD needs to depreciate rapidly to cure global imbalances. If the USD depreciates it loses purchasing power (a.k.a. inflation). I would add, 'Be careful for what you wish' with respect to a rapid USD decline...
Professor Succo notes that the driver of economic growth in the past 10 yrs has been credit expansion (debt). Did you know, ladies and gentlemen, that growth in money and credit USED to be formal definition of inflation 100 yrs ago?
Gold ramping above $640 per ounce today. Why does Professor Depew suggest that central bankers don't like to see this, btw???
Professor Depew reflects on Fed officials suggesting that high commodity prices are a sign of fear and strong economic demand rather than inflation. How the Fedspeak explains the rocketship ride in gold (which is by and large NOT an industrial commodity) is beyond me.
Toddo suggests why the financial media aren't all over this story in his final bullet here.
position in gold
The Yellow Lion 4/17/06 9:15 pm
The eye popping move of the day was gold. The yellow metal was up nearly $17 today and closed at a 25 yr high of $613 per ounce. If you've been reading Minyanville missives and especially those of Laurie McGuirk, then you're familiar with the case for gold. One thesis behind gold's steep ascent recently is that the Fed is pumping huge amounts of liquidity into the financial system, which may lead to 'hyperinflation.' Hyperinflation destroys the value of a currency. Demand for gold may reflect inflationary fears in the marketplace, as Professor Succo notes here and here. Uber Minyan Jeff Saut provides some eyepopping monetary and inflation data as supporting evidence in the first part of this missive. From a technical perspective, gold appears 'overbought' and due for a near term pullback. However, if inflation takes off and we do need the Red Flyer 'wallet' as noted in here (In the post WWI Germany period known as the Weimar Republic, hyperinflation prompted workers to cart home their pay in wheelbarrows), then this gold bull may have room to run...
position in gold
Chart courtesy of StockCharts.com
Risk Watch 4/17/06 9:00 pm
Professor Succo updates his view of the current risk in the marketplace. What's he saying? The US has run up huge debt and deficits. Foreigners have (thus far) been willing to finance our spending binge. What might convert the risk (potential for loss) into actual loss? Succ notes a coupla catalysts: a) foreigners could quit accepting our IOUs, b) financial asset prices (e.g., stocks, real estate) could fall which would reduce paper wealth, reduce spending in favor of saving and debt reduction, and likely cause 'forced selling' as people try to make payments on all their debt-related obligations. As Succ has noted many times (scattered in our posts below), the Fed fears this scenario and appears to be pumping huge amounts of liquidity into the system to stave off a potential crisis. The question is whether their actions will ultimately succeed or whether they might be making a big problem even bigger. Gold appears to think the problem is getting worse (see the post immediately above).
Interest Rate Watch 4/14/06 5:50 pm
Since the markets were closed on Friday, the Thursday action was relatively low key as many traders hit the eject button early. The 'quiet' story that didn't get much press was the continued march higher in the long bond (i.e., 10 yr Treasuries and beyond). As shown by the chart below, interest rates popped above 5% on the Tens on Thursday. As Professor Succo notes , at some point these higher interest rates will leave a substantial mark on the economy and (by extension) the financial markets--particularly given our leveraged state.
position in Treasuries
Chart courtesy of StockCharts.com
Risk Ratio 4/14/06 5:30 pm
Professor Succo notes that the ratio between the S&P 500 and utilities has doubled over the past decade or so. The chart below shows what he's talking about. Since utilities are often considered safe and less risky (stable business, high dividend payout), what does the chart below suggest about the stock market's appetite for risk. Answer: It has increased. btw, plotting ratios of two financial assets can often be enlightening as it can provide insight on relative performance or even (as in this case) on market psychology. To do ratios at StockCharts, it's first symbol:second symbolsecond. Specifically for the case below, it was $SPX:$UTIL.
Chart courtesy of StockCharts.com
Say What? 4/12/06 9:40 pm
In point #1 here, former Fed chairman Alan Greenspan fields a question related to the source of 'ample liquidity' sloshing around in financial markets around the globe. His reply, well, you can read it and the MV interpretation: The source of this excess liquidity is the rising market value of asset values due to excess liquidity. Huh? Perhaps we shouldn't expect more from a guy who's been a major facilitator of this worldwide liquidity. To me, this constitutes one more example of why you should view all financial media thru a critical lens.
Stressing the Test 4/10/06 9:25 pm
Todd asks whether you've 'stress tested' your portfolio for a 5-10% move either way. Nice question. Have you considered the risk (how much you could lose) if prices move against you? Unfortunately, most investors focus much more the potential reward and ignore risk and its management. I've learned to take Toddo's question seriously. Before the market closes each day, I ask myself where each of my positions would be if the prices moved against me by 2%, 5%, 10%, or 20% in the near term. If I'm not comfortable with the answer, then I need to alter my risk profile. It helps keep me honest, and prepares me for extreme events.
Walmart: Bull or Bear? 4/10/06 9:20 pm
Is Walmart (WMT) a good buy here? Yes says Professor Katsenelson--particularly in the wake of the Walmart bank debate (see # 4 here). Professor Macke, however, thinks Walmart has overdone its low cost strategy and needs to clean up its act (literally in some cases). No matter which side you take, it's good to see the other side of the trade...
Crude Ownership 4/10/06 9:05 pm
The energy complex has been on fire (sorry) as crude oil heads back towards $70/barrel (crude closed today at above $68). For most individual investors, the best way to participate in higher energy prices has been to own stock in companies involved in the energy space such as Exxon Mobil (XOM) or Schlumberger (SLB). Today, however, a new exchange traded fund (ETF) launched today that allows investors to own crude oil itself. The US Oil Fund (USO) invests in crude oil futures contracts of West Texas Intermediate crude (WTIC). Why might investors want to own the commodity instead of company shares? There's risk in owning the company shares (poor management decisions, scandals, hurricane damage, etc) that isn't in the pure commodity. Some folks would rather bypass those risks and focus on pure commodity price.
position in energy stocks
GM Contagion 4/10/06 8:45 pm
Minyan (and Raymond James chief strategist) Jeff Saut provides an excellent background on General Motors (GM) and the problems the company faces going forward. One key stat that stuck out to me: there are more GM retirees than there are GM workers! Key message for me from Jeff's piece: If GM winds up in bankruptcy, probability of a 'contagion' spreading thru the economy (and by extension the financial markets) is significant.
House of Cards 4/10/06 8:30 pm
Right on cue after the 'Bond Smackage' post directly below, Professor Succo shares some analysis on potential impact of higher interest rates on housing prices. Succ notes that higher asset (e.g., stocks, housing) prices have fueled more debt accumulation. Higher interest rates make servicing this debt more costly and risky. The Fed is pumping in liquidity to keep these asset prices higher. A crazy situation that finds me mumbling, "If more folks only realized and cared about going on here." Alas, rest assured that awareness will increase if this party does indeed come to an end. Unfortunately, people often don't care until they feel the pain...
Bond Smackage 4/7/06 6:30 pm
Professor Sedacca notes the continued sell off in Treasury bonds (a.k.a. 'govies'), with 10 year yields now very close to 5% (remember, when bond prices go down then their interest rates go up). This morning, Toddo suggested higher interest rates as one (but not the only) bearish catalyst out there. It could be a big one, though, as Professor Succo draws some parallels between now and 1987 (there was a large stock market 'crash' in 1987). In a leveraged, credit driven economy like the US, it's hard to ignore the negatives that higher interest rates bring. The picture below shows levels and trends of 10 yr Treasury rates (divide the TNX number by 10 to get the interest rate). In sessions to come, I for one will be keeping one eye on the govies, and the other on interest rate sensitive issues (such as the financials and homebuilders) as harbingers of what's to come for stocks (and perhaps the economy at large).
position in Treasuries, financial stocks
Chart courtesy of StockCharts.com
Now They Tell Us! 4/7/06 6:15 pm
So, a Wall Street Journal article suggests some concern about the 'easy' credit standards being extended to corporate borrowers. As if this were a surprise or something new? I mean, would it have been possible to run up our current multi $trillion debt tab with 'tough' lending standards???
Vuja De 4/5/06 9:40 pm
If you've been watching the markets, there is a large and growing anticipation of a pending upside move in the stock markets. Toddo notes that he's seen these levels of optimistic sentiment as expressed by the financial media before. It's easy to get caught up in it. Todd's suggestion on how to react to what's going on is so important I'm gonna paste it below to ensure that you read it. In fact, please read it a few times.
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I stand to gain a lot if we're in the throes of a secular bull market. We all do. But I'll caution you to remain aware of the risks and, more so, to question the motivation of your information providers--particularly in the digital age. At the end of the day, the onus is on YOU to make intelligent and lucid decisions. I guarantee that the 'pundits' pounding certain tables won't reimburse you if they're wrong. I know, as I've seen it before. Have a great night and please, hear what I'm saying. My only agenda is to provoke thought, not shape it. |
Fedcasting 4/5/06 9:35 pm
You'll notice of cluster of posts here focused on the financial media. Hey, sometimes the market just throws a theme our way. This morning, transcripts were released from Federal Reserve meetings conducted around the height of the stock market bubbles indicating that monetary policy makers were not concerned about the state of the economy. We know what insued. Professor Succo was amused when he opened the Wall Street Journal and found a headline about those transcripts next to another headline that said markets were higher on optimism about statements made about the current economy made be various Fed heads. While studying the picture below, you should be pondering this question: Based on their statements, are Fed officials reliable forecasters of the future???
Chart courtesy of StockCharts.com
After the Snow 4/5/06 9:30 pm
Today Treasury Secretary John Snow was painting the newswires with positive comments on the pending jobs report. Professor Succo wonders whether Mr Snow might have an advanced copy of the report (which he shouldn't have nor divulge even if he did). His bigger question involves the extent to which government officials need to be sending signals to markets. One thing I am sure of, you should regard government commentary on the economy and financial markets as one vocal dimension of the financial media.
Pareto's Principle 4/5/06 9:20 pm
More than a century ago Italian economist Vilfredo Pareto was an early observer of the lopsided distribution of wealth in most societies. Recent US statistics run true to form, as the top 1% of hold 33% of the nation's net worth. The report also indicates that the top 10% of families hold 69% of the wealth and the top 50% of families hold 97% of the nation's wealth. The question left for a different venue is whether this wealth disparity is 'good' or not. This question, of course, is not a new one...
Compression Alert 4/4/06 7:15 pm
Professor Goepfert notes that the narrow trading range for the S&P 500 Index (SPX) in the past three weeks is extremely unusual. He suggests that this range should break soon. Historically speaking, Jason also notes that the first move is often 'false' and is followed by a greater move in the opposite direction of higher magnitude. Hang onto your hats, as volatility appears to be in the near market forecast...
Interesting Rates 4/4/06 6:50 pm
Rising interest rates are boosting the cost of loans. Just how much so? Below is a long term graph of 30 yr fixed mortgage rates (source: Freddie Mac) versus 10 year Treasury yields. Let's note a few things. One is that there is a very high correlation between movement in 10 yr Treasury yields and 30 yr fixed mortgages. Thus, higher 10 yr yields WILL relate to higher mortgage rates. We can also see that mortgage rates are just starting to turn higher as they follow Treasury yields. Finally, note that mortgage rates are still at historically low levels (check out those 18% rates in the early 80s!). If you believe that a 'reversion to the mean' phenomenon applies to mortgage rates, then the current 30 yr fixed rate at 6.4%ish could go much higher. Why should you care about this series? Well, beyond the chance that you're in the market to buy a home, cheap mortgages flowing from increased liquidity and easy credit have fueled a housing boom (some would say 'bubble'). All else being equal, higher mortgage prices should slow housing growth, thereby weakening a major engine of economic growth over the past few years.
Strange Tape Indeed 4/4/06 6:25 pm
Professor Succo offers some follow-up comments on his 'strange' tape remarks yesterday (see Tale of the Tape 4/3 post below). He notes that this market pattern of 'index buying' followed by 'individual stock selling' is often indicative of major market tops. Liquidity driven. Regular Buzz & Banter readers know that Toddo posts a daily list of questions he really wants to know the answers to. One question I'd like to add: Who are these big index buyers? There are some interesting theories on this matter that we might share on another day. Another question is whether this action is ultimately bullish or bearish? Professor Succo shares a couple of scenarios in this Mailbag response.
Coffee Talk 4/4/06 6:15 pm
New professor Brian Gilmartin offers some thoughts on Starbucks (SBUX). This missive falls under the category of fundamental analysis, which is assessing a security's value according to business or economic prospects. This piece, appropriately titled 'The Upside of Starbucks,' offers some views on why SBUX might be a worthy investment. Admittedly, however, it did leave me wanting to hear 'The Downside of Starbucks.' For every buyer there is a seller; it's a good idea to see both sides of a trade before making a financial decision.
Tale of the Tape 4/3/06 7:45 pm
Professor 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'). When John notes that the current tape is the strangest he's ever seen, I take notice. What he's observing is a tape that seems to be alternating between periods of price advancement due to entities buying index securities such as S&P 500 Depository Receipts (also known as 'Spyders' ticker symbol SPY), and periods of price decline due to entities selling the individual securities that comprise the index (here are the stocks that currently comprise the S&P 500). So the pattern is a) buy the index security then b) sell the individual company shares. Succ concludes that current market demand is coming from buyers who are purchasing the 'market' rather than individual shares. I would humbly add that the number of index buyers creating this demand is likely small compared to the number of individual stock sellers creating the supply (e.g., one index buyer versus hundreds of company stock sellers in the S&P 500 issues). Makes you wonder what happens to prices if these few big buyers go away...
Outside Ink 4/3/06 7:35 pm
You may or may not be aware that media coverage of Minyanville has been growing (here's a bibliography of recent coverage). Another snippet appeared this past weekend (scroll down a bit to find it) in Barron's (Barron's is a prominent financial weekly). Not sure I agree with everything written here or would have emphasized the same things myself, but it's good to read how others perceive the 'Ville. Kinda like seeing all side of the trade...
Stealthy Gold 3/31/06 4:30 pm
Perhaps the most under-reported story this week by the financial media was the strong move in gold. The yellow metal hit a 25 year high this week and ended the week above $580 per ounce. The investment case for gold is oft discussed on the 'Ville--although it is not well recognized among investors at large. Gold's steady march higher in price, as indicated by the strong 4 year weekly chart below, suggests that demand is in control. Why is demand for gold growing? Professor Succo attributes gold's rise to actions of central banks to create liquidity and buoy the economy and asset prices. As these actions unfold, market participants perceive risk building into the financial system, and to manage these risks people are turning to gold as a store of value. Professor Succo fielded a Mailbag about his thoughts today and I'd encourage you to read thru them for further clarity on the mechanism, and what he's doing with respect to gold.
position in gold
Chart courtesy of StockCharts.com
Fiscal Tsunami 3/31/06 3:30 pm
building on the 'Savings Shortfall' post directly below, the comptroller general of the U.S. reports that the nation is headed for an extended period of extended difficulties if it does not alter its deficit spending habits. If you've been reading the 'Ville, you know that these thoughts are not new. What I find interesting is that so few people tend to take notice of these comments even though they are coming from someone who might be considered the CFO of the United States. This sentiment smacks of complacency.
Savings Shortfall 3/31/06 3:20 pm
More data released today suggesting the people in the US are spending more income than they take in (i.e., a negative savings rate). Professor Miller opines that investing should be counted in the savings rate (it currently isn't), thus the savings rate is understated. Professor Sedacca disagrees, and sides with the more conventional definition of savings: not consuming all of your income today in favor of reserving resources for the future (I'm in this camp too, btw). Professor Sedacca also suggests some of the consequences if our savings poor society would decide to begin saving at a higher rate: less consumption, higher real interest rates, and a recession--perhaps a deep one. Can you see why many policy makers tend to want folks to spend, spend, spend? It postpones (but doesn't cancel) pain. In fact, like postponing a required medical procedure, it likely makes things worse in the long run...
Corporate GDP Pie 3/31/06 3:15 pm
Reports indicate that corporate profits account for their largest share of national income in 40 years. Professor Succo questions whether this is a good thing, and suggests that these findings reflect dropping personal income levels, and corporate profit-boosting activities that are unsustainable in the long run (like cost cutting). Professor Reamer adds that corporations have been goosing earnings per share by buying back stock. The problem, as noted by #3 here, is that while managers have been buying back stock for their companies, they have been selling their personal holdings in those same company shares nine ways till Sunday! Doesn't pass the smell test, does it?
Perspective 3/29/06 5:45 pm
If you're like me you frequently get caught up in things that on the surface seem pretty important. After reading this, however, I realize how lucky I have it. Also helps express one of the key reasons I love the 'Ville. Seeing both sides of the trade is not a lesson limited to finance...
What's in There? 3/29/06 5:40 pm
Wondering what names Toddo's holding in his portfolio? He shares some of his holdings here. As he notes, this is NOT ADVICE! He's trying to share the thought process with us.
Fed, Then Red 3/28/06 8:20 pm
Today, the Federal Reserve's Federal Open Market Committee (FOMC) raised the target for the federal funds rate by 25 basis points. For those keeping score, the target fed funds rate now stands at 4.75% (the official Fed announcement is here). Although the move was widely anticipated, initial market reaction to the news was negative as stocks and bonds sold off after the afternoon announcement. An initial interpretation suggests that perhaps the wording in the Fed's statement was too 'hawkish' on the prospects of future rate hikes. Why? Well, a debt-laden, leveraged economy such as ours feeds on the liquidity that low interest rates provide--and hates to think that the Fed won't be accommodative with more low cost funds. As Todd notes, however, the initial move after FOMC announcements is often a false one, and often portends a reversal shortly. Will this time once again rhyme like history? We should know more shortly. Todd suggests that price action in financial sector stocks should be a good indicator of market health in the coming days.
position in financial stocks
Toddo Tidbits 3/28/06 8:15 pm
Toddo's morning missive contains some interesting thoughts on the markets and on his portfolio. Once again, I'd like to draw your attention to his portfolio design. It's split into two buckets. The short term bucket consists of opportunistic positions where he carefully manages risk. The longer term bucket consists of positions with a long term horizon. In other words, he's doing some trading and some investing. Note also his advice in the last para: if you don't know what to do in the financial markets, then sit on the sidelines until you figure it out.
Spending is Saving? 3/27/06 5:45 pm
Professor Depew shares this offer by American Express (AXP) offering a kickback from your credit card spending (American Express card of course) to your savings account (an American Express savings account, natch). Thus the twisted logic motto, "when you're spending, you're saving." Kevin reflects on this some more. Please click the video link he provides--HILARIOUS not just for the SNL humor style, but also for its ability to help us look in the mirror at our debit spending habits.
Structural Influences: A Seminal Example 3/24/06 8:55 pm
Every now and then I read a piece on the 'Ville that I know is a keeper--that I'll want to refer back to over and over in order. Professor Succo's column here is such a piece. Want to get your arms around a key structural factor influencing current market behavior? Read Succ's missive a few times (I've read it 5 times already). When you can answer the questions below, be confident that you have a good grip on an important factor currently shaping the current market landscape--and adding to the risk level.
What is liquidity (here's a big hint)?
How does increased liquidity support Hoofy's view of the world? Boo's?
What is a 'carry trade' (an earlier missive by Professor Succo offers a fundamental definition)?
Where are folks currently getting funds to put on the carry trade?
What actions are market participants doing that increase the risk associated with this flavor of carry trade?
Thus far, what have been key effects of this behavior on the markets?
What can go wrong--particularly as related to extreme events?
Horizon Management 3/24/06 8:40 pm
Frequently Toddo has shared that his portfolio is divided into two 'buckets': one with long term holdings such as precious metals and energy stocks, and short term opportunistic trades (e.g., the 3/23 'Intel Inside' post below). As he notes, since he used to much more short term oriented, he often finds that he has to take efforts to refrain from trading positions in his long term bucket. He also takes different approaches to risk management depending on the bucket. A classic example of coming to grips with the time horizon of your positions--and separating investing from trading. Also note from Todd's example, that it's quite possible to do some of both!
positions in precious metals, energy, INTC
M3: We'll Miss Ya 3/24/06 8:15 pm
The broadest measure of money supply, M3, will no longer be reported by the Fed (some background appears in the Buzz Lite Archive posts below). The Fed cites 'cost cutting' as the rationale, which borders on the hilarious. Many think the real reason is that the Fed doesn't want folks to see just how much they may have to goose money supply in order to maintain liquidity (here's a snapshot of the moonshot trajectory of M3). Professor Reamer notes the explosive growth in M3 under Alan Greenspan's tenure. Given these actions to remove M3 from the public's eye, it appears the Bernanke Fed will be more of the same.
| Buzz Lite
Archive
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? 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... |
The No Worries Market 3/23/06 7:45 pm
As Professor Succo observes, the Dow has gone more than 1000 days without a 10% correction--a record. Succ also suggest that government intervention may be playing a role in this historic low volatility period. Can it last? Professor Reamer observes that natural systems often exhibit periods of very low volatility or movement just before periods of extreme movement. As data like this continue to pour in, I am increasingly sensitive to the importance of managing tail risk. You should be too.
Intel Inside 3/23/06 7:15 pm
Todd notes that he has bought some Intel 'for a trade' (as opposed to a longer term investment). A couple of additional comments on his rationale can be found here and here. The first chart below shows the support line that Todd is using to base his trade. To manage risk, he has set a stop below at about $19ish. The lower chart (shorter term) shows the 'gap' that Todd thinks might 'fill' if the stock rallies. So he see potential 50 cents of downside risk, and perhaps $5 of upside reward--a favorable risk:reward profile in his view.
position in INTC
Charts courtesy of StockCharts.com
Trader's Mind 3/23/06 7:10 pm
Toddo's reveals some mental aspects of trading in this interview. To me, most of this piece probes how to manage risk (the potential for loss) given our emotional and egotistic 'defects' that impair effective risk management. Note that even though Todd is a professional, he is still subject to the same human wiring defects present in all of us (see his description of his 2003 behavior, for instance). Whether you're a trader or investor, it's prudent to be aware that we're often our own worse enemy when it comes to financial decision making.
Mortgage Rate Check 3/23/06 6:30 pm
If you've been reading the Buzz, you've noted Professor Sedacca's ongoing attention to bonds, as many US Treasury bond prices are technically close to 'breaking down' (see here, for example). As you might know, when a bond's price goes down, the effective interest rate on that bond goes up. As we've noted many times here, higher interest rates would be bad news for a highly indebted, credit dependent economy like ours. One place where where the impact of higher rates will be quickly felt is the home mortgage market. Where do mortgage rates currently stand? Currently 30 year fixed mortgages are at about 6.3%. Need a place where you can track mortgage trends? Freddie Mac keeps a nice series of mortgage data for reference.
Bond Bonanza 3/22/06 10:20 pm
Interested in learning more about bonds? Professor Sedacca has posted a nice four part tutorial: bond basics, types of bonds, bond buying and selling strategies, charts and definitions. Why should stock market investors care about bonds? Well, did you know that the bond market is bigger than the stock market? Bonds, of course, can be a way to diversify a portfolio and manage risk. Moreover, stocks and bonds are linked. For example, movements in interest rates on long term US Treasury bonds commonly impact stock prices. Bottom line: get to know the bond market--even if you consider yourself a 'stock' person.
Bad Breadth 3/21/06 5:35 pm
Routine readers of the Buzz will note Toddo's frequent reference to the 'internals' or to 'breadth' (in today's posts see here, here, and here). Internals and breadth refer to the relationship between the number of advancing stocks and the number of declining stocks. Today, for example, at end of day on the New York Stock Exchange there were 900 advancing issues and 2390 declining issues. Some folks like to simply subtract decliners from advancers (900 - 2390 = -1490). Other folks like to look at the ratio of the bigger/smaller (2390 / 900 = 2.7 decliners for every 1 advancer). Thus, when Todd notes that the internals are 2:1 negative, he means there are two decliners for every one advancer. Breadth is Todd's favorite intraday tell (or indicator). In Todd's view, it's difficult for market indices to move significantly without a corresponding shift in the internals. Today, for example, as long as the internals remained skewed significantly negative, then the chances of a rally today were slim (in fact, the market sold off today as the session wore on). See the Buzz Lite Archive post below for a recent example where market indices turned after the breadth turned. btw, there are many places to obtain advance/decline info. When I need a quick check of the numbers, I usually head here.
| Buzz Lite
Archive
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... |
Penny Ante 3/21/06 5:15 pm
I know a few students who like to trade stocks with share prices below $10. Capital starved students like the idea of being able to own stock in conventional 100 lot shares for $1000 or less. Moreover, since low priced shares sometimes enjoy outsized moves, they provide an accessible vehicle for speculation. The extreme in low priced shares are the so called 'penny stocks'--stocks that trade for less than $1 per share. Professor Goepfert shares some data suggesting that speculation in penny stocks has hit a multiyear extreme. In the past, a spike up in the level of activity in penny stocks has often signaled a bearish extreme in sentiment, and often portends a downside move in the markets. So, if you're tradin' in this neighborhood, be aware that you're runnin' with the herd...
Revolutionary Irony 3/20/06 6:45 pm
A shrinking manufacturing base, mountains of debt, dependence on foreign production and capital. Yep, kinda captures some of the issues facing the US economy today. Wait a minute, as Professor Succo notes, this is also the context that helped spawn the American Revolution! If the saying 'history doesn't repeat itself, but it rhymes' has validity, then what do you suppose this means for us? On a related note, what do you think the signers of the Declaration would say if they had a chance to review our economic and financial market policy decisions today?
Dollar Due Diligence 3/17/06 9:35 am
A student Minyan emailed the following question: I read in Todd's "Leaps and Faith" today that if the dollar continues to devalue, assets will rally. Why is that? Why would dollar devaluation (weak dollar) rally equities?
Todd's suggesting that if the dollar (USD) devalues, financial assets MAY rally. Applying ECON 101 principles, USD price will go down if a) demand for USD decreases or b) supply for USD increases. Since the Fed tends to be a money printer (see growth in M3 for example), it's likely that USD supply will increase. This increase may be huge, since policymakers will almost certainly favor devaluing the USD to reduce the real value of the $8+ trillion debt load we're lugging (i.e., we'll pay our creditors with USD that are worth less). On the surface this is highly inflationary, but reducing the value of the USD has been the Fed's trademark since it was created in 1913. One plausible mechanism, then, is that a lot of these newly minted USD pour into financial assets (I'd suggest that this has been a prime mover of financial asset prices for decades) which should push asset prices higher (more demand from all those USD). Another plausible mechanism, and one that some MV profs have been considering, is a deflationary one in which the Fed prints money like there's no tomorrow, but people decide not to take risk with all these new USDs. Instead, folks hoard cash, pay down debt, improve balance sheets. In this scenario, the USD goes down (more supply) and financial assets go down too (less demand for risky financial assets due to risk aversion).
Want more detail on the risky environment outlined in the 'Compressionism' post directly below? This post from Professor Succo provides serendipitous follow-up. The message is that from a risk standpoint we're in uncharted waters--although the action by market participants (and policymakers) suggests that they're either unaware of, or willing to ignore, these risks. Seems particularly true in the context of managing tail risk. Don't let this be you.
Compressionism 3/15/06 10:15 pm
You may have noticed that I've been 'overweighting' recent Buzz Lite posts with items linked to Professor Succo's comments. Why? John's recent missives have focused on the tremendous (and historic) structural forces currently at work in the markets. In my view, gaining an understanding of these forces and their consequences provides newcomers with spectacular insight into what is currently driving financial markets. Succ's post here summarizes the situation pretty well for the newcomer. Let's quote a few lines:
The risk/reward, risk premiums, compression…however you want to look at it relative to the macro situation is astounding. I believe the low volatility in the face of it is due to the immense liquidity being provided; in other words, massive intervention by central banks and governments.
John suggests that the 'compression' built into the system from all the liquidity makes this market juncture very risky. "You gotta have high risk in order to have high reward," argues Hoofy. Seems true, young bull, but the question is whether market participants are paying adequate attention to risk management.
Sammy: Revealed 3/15/06 9:55 pm
If you've been reading Minyanville for any length of time, odds are you've come to know Hoofy and Boo a bit, since they're the 'Ville's marquee critters. A lesser known critter is Sammy the Snake. If you're wondering what Sammy is supposed to represent, Toddo explains here. Basically, Sammy is the poster child for a market that moves sideways with little variation (or volatility). At the end of this post, Todd suggests that the sideways Sammy slither often ends abruptly in a manner that surprises market participants.
Currency Chess Game 3/15/06 9:40 pm
Many folks believe that the Bank of Japan will need to raise interest rates soon as Japan's economy gains traction. As Succo points out, though, Japan can't think of raising their interest rates in a vacuum. They need to worry about what their increase in interest rates will do to the US Dollar (USD). The scenarios Succ offers and some of their potential consequences are outlined below. The long term impact of any of these isn't good. Based on the inflationary history of central banks, one would think that Scenario 3 is the odds on favorite at present time.
| Scenario | Japan policy | US policy | Potential consequences | Bottom line |
| 1 | Raise interest rates | Keep interest rates where they are | Investors are attracted towards Japan because of better relative economic prospects. The Japanese Yen (JPY) strengthens; the USD weakens. This would hurt Japan's export mkt and reduce the real value of all those interest payments Japan receive on the $1 trillion+ in US bonds that they hold. It also snuffs out the 'carry trade' being put on by speculators who are borrowing cheap funds from Japan and then investing them in risky assets around the world. | Deflationary |
| 2 | Raise interest rates | Raise interest rates to maintain relative attractiveness of USD | Rise in rates brakes the Japanese economy and hurts the low interest rate dependent US economy. Both economies suffer slowdowns. | Deflationary |
| 3 | Keep rates where they are | US maintains or lowers rates | Money and credit continues to expand. Japan, US and other economies overheat. | Hyperinflationary |
Are Central Banks Necessary? 3/13/06 7:20 pm
A Minyan asks Professor Succo what financial assets the Fed should be permitted to buy (by law, the Fed can buy bonds but not stocks--although some think the Fed may be covertly involved in stocks as well) . Succ's reply: there shouldn't be central banks, so the answer is 'none.' Most folks take it for granted that central banks such as the Fed are a 'must' in an economic system. But just how necessary are they? At their core, they intervene in markets by influencing the price of money (through their interest rate controls) and providing liquidity. They also influence market prices, as this post implies, by directly buying financial assets. So, instead of market forces setting the price, we have central planners trying to figure out the 'correct' price. Past experience suggests that central planning ineffectively allocates capital and market distortions inevitably result. As you may guess by my tone here, I'm in the same camp as Succ when it comes to central banks. Of course, you need to choose your own view. The objective isn't that you agree with this viewpoint, but in the interest of seeing all sides of the trade you should at least be aware that it exists. Unfortunately, most folks aren't even aware that an alternative perspective exists.
The Fed, Liquidity, and Deflation 3/12/06 12:00 pm
Professor Succo notes that the Fed is doing things that adds lots of liquidity to the system. He questions, however, whether this liquidity will be 'used' by consumers and market participants. Might seem a counterintuitive question, but here's the idea. Suppose you have $10,000+ of outstanding student loans and credit card debt (data suggest that may not be a stretch for many readers here). While walking down the street, a central banker from the Fed comes up to you and amazingly stuffs thousands of dollars in your pocket and walks away (may seem a stretch, but when the Fed prints money and puts it into the system, that's kinda what's going on). You have a few choices don't you? Some of your choices include:
Professor Succo is suggesting that the Fed would like you to do a), b), or c). That way, economic activity stays above the stall out line and a bid stays under financial asset prices such as stocks and real estate. The Fed would hate for you to do d) or e), since very little of the liquidity is getting plowed into new purchases. If you do d) or e), you are thought to be more 'risk averse' since you are hoarding cash and using it to pay down debt. If this happens on a large scale, the result would be deflation. Credit would contract, and general price levels will fall. In a leveraged economy such as ours, the Fed fears this scenario big time. An interesting question: Once people collectively become risk averse, is there truly much that the Fed can do to change this mindset???
Debt Laden 3/9/06 10:50 pm
Debt grew at record rates in Q4 2005, according to the Federal Reserve. No problem, Hoofy notes, since U.S. household net worth increased to $52 trillion. Boo counters that much of that net worth equals the current market value of financial assets such as stocks, bonds, and real estate. The data prompt a few trillion dollar questions worth pondering:
Practical Energy 3/8/06 9:50 pm
Professor Succo's friend Mr Practical shares some thoughts on how to address growing energy supply (and price) issues over the next decade or so. He also suggests that politics will impede the process. Makes one wonder just how much difference exists between the financial economy and the political economy. Given the influence that policy makers exert on financial markets, perhaps not much...
Interest Rate Observer 3/6/06 6:05 pm
Considerable talk on the 'Ville over the past few days about the rise in long term US Treasury bond rates. Let's take a look at what they're talking about. The top chart shows the 10 year US Treasury (a.k.a. 'Tens') yield for the last nine months or so. You can see the 10 yr yield has moved sharply higher over the past couple days, and has cleared near term resistance. The 10 yr yield closed today at about 4.74% (you need to take the TNX value and divide by 10 to get the actual yield--follow?). The bottom chart elongates the time horizon back to 1991. This graphs indicates that 10 yr rates have been in a downtrend for a long time. Although this trend may be nearing an end, conventions of technical analysis suggest that yields would need to cut thru about 55 (5.50%) before we could conclude that the long term downtrend has ended. Why should we care? Because our debt-laden, leveraged economy is dependent on low interest rates. If rates continue their upward path, interest rate sensitive activities (housing, consumer spending, capital investment, etc) should slow, which would likely impart significant consequences on the economy (see here and here for a couple of related snippets from today's newsflow). An interesting question for another day is why are rates suddenly moving higher???
Charts courtesy of StockCharts.com
Q Ball 3/3/06 6:30 pm
One way to value a stock is by what's known as Tobin's q. Tobin's q is a company's price (market value) divided by the replacement cost of the company's assets. The theory is that, over time, stock price should equal asset replacement cost (q = 1). Researchers involved in this area know that there are 'issues' with accurately determining precisely what replacement cost is. Nonetheless, q-based studies can be useful in fundamental analysis. Professor Sedacca suggests that current estimates of Tobin's q finds markets above one (here's a long term graph). So, current estimates of Tobin's q suggests that broad US stock markets are currently a) overvalued b) fairly valued c) undervalued???
Synchronizing Time Horizon 3/3/06 6:15 pm
Toddo wonders aloud whether dualing theses about either a big dollar devaluation or financial asset deflation should be considered if one's time horizon is relatively short term. Probably not, he concludes. Instead, you should be careful to match your risk to your time horizon. Todd adds in the ten trading commandments bullet in this article that he used to be a much more active short term trader; now he's adapted to the market (and perhaps his lifestyle) by elongating his time horizon. He's split is account into longer term buy and hold positions and shorter term trading positions. Seems a great way to express a long term thesis as well as to exploit near term opportunities.
Stock Buybacks: Pro or Con? 3/3/06 6:15 pm
When companies announce that they will buy back their stock, it's often deemed a bullish thing. After all, those shares will be retired from the market, which should leave more 'bang for the buck' for remaining shareholders. Professor Succo notes that what often isn't considered is the price at which those buybacks are conducted, or whether buybacks are a sign that companies are laden with cash and can't find better projects for putting cash to work. Succ also suggests that much of today's buybacks may be liquidity driven.
Taxing Irony 3/3/06 6:05 pm
This is a bit dated but had to share. Last week tax preparation firm H&R Bloch (HRB) announced lower than expected earnings and that they will restate previous years' earnings. Why? Because they miscalculated taxes! Stranger than fiction...
position in HRB
Fight or Flight 3/1/06 8:55 pm
A Minyan worries that a large, leveraged real estate investment may be going against him. Professors Sedacca, Succo, and Zucchi offer a variety of insight, but one common thread runs throughout: manage your risk. In this case, this might mean selling some properties at a loss to prevent even larger losses down the road. Easier said than done, though. Managing risk is the most difficult part of financial decision making--due in large part to our various behavioral defects. Working on the mental aspects of financial decision-making seems warranted.
Baseball and Finance? 3/1/06 8:45 pm
What does baseball homerun king Hank Aaron have to do with successful financial decision-making? As Minyanville's newest professor Tom Hanson points out, success in both venues is highly dependent on mental performance. More specifically, visualizing a) various scenarios that you could plausibly encounter and b) how you'll successfully respond in these various scenarios. This is GREAT stuff because, as Professor Hanson notes, few people pay attention to their mental game. Yet, it's psychological defects that commonly impede financial decision-making effectiveness. Please keep on eye on Professor Hanson's future contributions--I know I will.
Clear as Mud 2/28/06 9:15 pm
Bond maven Bill Gross takes issue with the annual US government economic report. Gross's entire missive can be found here. Mr Gross provides a good example of critical thinking with respect to financial media info flow.
Rich Man Poor Man 2/28/06 8:55 pm
If the economy and markets head significantly lower from here, who gets hurt more: the rich or the poor. Professor Succo suggests that although both will feel some pain, the poor will be relatively worse off.
Put/Call Ratio 2/28/06 8:50 pm
Professor Goepfert provides an excellent primer on the put/call ratio and its capacity for gauging sentiment. Some (simplified) vitals: put = bet on falling prices; call = bet on rising prices; put/call ratio = # puts traded / # calls traded; higher values signals extreme in negative sentiment; lower values signal extreme in positive sentiment. Although this metric has limitations, it is one way to gauge market psychology and sentiment.
Shadow Statistics 2/28/06 8:30 pm
Many Minyanville professors comment on the poor quality of government economic statistics. The Consumer Price Index data are a good example of a tortured data series. I'd highly recommend reading the entire interview with this gentleman. Eye opening. Reinforces the notion that you need to cast a critical high on what flows from the financial media (yes, that includes government info).
Pocketing Profits 2/27/06 10:05 pm
Using gold as an example, Professor Succo explains how he pockets some profits on a trade that goes in your favor. Note his observation that, like a good gambler, a good investor bets more when ahead and less when behind, and knows when to take some money off the table. Most people do exactly the opposite, though. They are quick to take profits when they're ahead and let their loser ride--often betting more as the position moves against them (perhaps you can relate if you've been to the casino recently). This is another article by Professor Succo that you might want to read a few times--tons of insight here.
position in gold
Savvy Soothsayer 2/27/06 10:00 pm
Minyan Jeff Saut provides a cogent view of the state of the tape ('tape' is another word for stock markets). For those trying to get a feel for bulls and bears, is Jeff leaning more towards Hoofy or Boo's camp?
Oil Star 2/27/06 9:55 pm
What is the most valuable company in the world as measured by market capitalization (share price * number of shares outstanding) of its stock? Exxon Mobil (XOM) just passed General Electric (GE) in that record to move into the number one ranking, clocking in with a market cap of about $375 billion. This piece also notes that financial stocks, not energy shares, constitute the largest percentage of the S&P 500 index. Of course, you knew that already if you read the 2/9 'Piggy Banks' post below ;-)
position in financial stocks
Quacking Up 2/23/06 6:20 pm
Toddo shares that he likes to evaluate market environments from a fundamental, technical, psychological, and structural perspective. He notes the 'flaws' inherent to each of these factors. He also notes that he likes the 'quack count', or number of these factors working in your favor, to be high when initiating risk.
Yields and Value 2/23/06 4:50 pm
One way to fundamentally value stocks is by comparing stock's dividend yields to long term averages. Professor Sedacca's presents some data suggesting that, based on current dividend yields, stock aren't cheap.
Banking on It 2/23/06 4:10 pm
We frequently discuss the financial sector as a key one to watch (see 2/9 'Piggy Banks' post below). Yesterday, key financial related indices notched all time highs (see chart of BKX index below). So, does this signal that it's full speed ahead for the markets? Perhaps, but a thread in the Minyanville conversation raises some doubt. Bank executives are feeling the negative impact of the inverted yield curve (see 2/17 'Yield Curve Inversion' post below). Although some banks are less sensitive to inversion effects due to a sizeable fee-based business, the majority of bank business appears vulnerable. Moreover, the current degree of insider selling in financial company shares has signaled soft price action going forward, and shorts interest is pretty low in this sector. On a fundamental valuation basis, prices of many financial market shares are high. Toddo suggests that perhaps the current price action higher is a 'head fake.' Professor Katsenelson suggests that perhaps the market is anticipating better things ahead. Will be interesting to see how things play out. Regardless, keep the bank sector on your radar.
position in financial stocks
Chart courtesy of StockCharts.com
Reasonable Doubt 2/23/06 2:15 pm
When government economic statistics are released do you accept them at face value? Professor Succo offers a few reasons to be skeptical. Lesson: View all government economic statistics the same way you should treat all news flow from financial media--with a critical eye.
Debt Reduces Freedom 2/23/06 2:05 pm
Pondering the recent uptick in discussion about national security, Professor Succo suggests that perhaps we're not focusing enough attention on national economic security. After all, well over half of all tradable US debt (we're talking about $ trillions) is held by foreigners--particularly China and Japan. As John notes, if these debt holders decided to quit buying or (worse) to sell our debt, the consequences would be disastrous on the US economy and financial markets (since our economy and markets are currently highly dependent on debt, leverage, and low interest rates). "Debt reduces freedom." Professor Succo's words still resonate with me more than two years after he offered them over our casual lunch. The more debt we take on, the more we cede control of our economic security to outsiders. Moreover, I would think smart terrorists would recognize this.
All Twisted Around 2/22/06 5:15 pm
Financial market participants commonly presume statements from policymakers as 'accurate.' However, as Professor Reamer notes, history suggests policymakers (such as Federal Reserve chairmen) are often among the last to see a change in trend.
Bulls 'n Bears 2/22/06 5:10 pm
In the spirit of seeing all sides of the trade, Hoofy and Boo swing by at end-of-day to share their points of view. Nice example that there are always cogent views for being a buyer and a seller at any particular time--that's what makes a market...
What's a Buy Stop? 2/22/06 5:05 pm
Toddo notes that a slew of 'buy stops' lie above S&P 1295. A Minyan emailed me asking what a buy stop was. If you’re long a stock and you want to manage risk you can use a ‘stop’ (more properly called a sell stop). Scroll down here to find an example. If you’re short a stock, you can also use a stop—properly called a buy stop (for a primer on shorting see here). Todd’s saying that many folks who are short the S&P are managing risk by placing a stop at about S&P 1295 (easy to see why if check out recent levels which serve as resistance on the SPX chart). If this price is exceeded, shorts will be stopped out of their trade by ‘covering’ or buying back the shares they shorted. This is noteworthy because if lots of folks have their buy stops in the same place and cover at the same time, then that puts a significant source of demand in the market (folks ‘buying’ to cover their shorts), and may cause prices to rise further. This is often referred to as a ‘short squeeze’, or in Minyanville terminology ‘squeezage.’
position in SPX
Strange Days Indeed 2/22/06 12:25 pm
On the back of the market's 'optimistic' response to higher than expected inflation data, Professor Succo opines that markets continue to act extremely 'unnaturally' as if someone (e.g., central banks) are intervening to prop up prices. Toddo's morning column suggests that the Fed has motivation to do just that. Professor Sedacca's comments here and here, and this exchange between Professors Schaeffer and Succo, are also consistent w/ the intervention idea. Many folks dismiss this type of conversation as so much 'conspiracy theory.' You, of course, are free to do the same. I would suggest, however, that being aware of this argument will help you see both sides of the trade. In addition, the above comments are coming from individuals who have spent their professional lives reading market tapes--and they're telling us that they're seeing things that are very unusual in their eyes...
Real Estate Debate 2/22/06 12:15 pm
If you're interested in the real estate sector, you'll want to check out this exchange between a Minyan and Professor Zucchi. In Fil's eyes, leverage via debt and credit growth have driven real estate prices and it seems only a matter of when (not if) a significant occurs.
Reversion to the Mean 2/21/06 6:00 pm
Corporate profits have been strong for the past couple of years. Can they grow further from here? Perhaps, but this graph provided by Professor Katsenelson suggests that corporate profits are 'extended' and tend to exhibit mean reverting behavior. Analysis of corporate profits, btw, is one component of fundamental analysis.
Debt-Driven Ownership 2/21/06 5:50 pm
Uber Minyan Jeff Saut ponders the merits of labeling the U.S. as the Ownership Society. I'd like to use this opportunity to ask a question: If you're awash in debt, what do you truly own? For example, suppose you want to buy a house. Your income and savings levels are so low that the only way you can swing it is by taking out an interest only (no money down) mortgage that floats with the prime rate. Your payments go to the lender and consist of all interest and no principle. Your 'equity' is zero. So, who really owns this house? Although you may be deemed the 'owner', it's the lender's house. It's a balance sheet issue, isn't it? You may report lots of assets, but if you've taken on lots of debt and liabilities, your 'net ownership' (or equity) may not be much (remember: assets - liabilities = equity). In a worse case scenario the assets that you purchase with debt go down in price (think stocks and real estate, for example), and could leave you with 'negative ownership.' Such a spectre worries the Fed.
Yield Curve Inversion 2/17/06 11:45 am
Considerable dialogue on the Minyanville site currently involves the current yield curve inversion. A student just pinged me asking what's an inversion? To answer that question, let's update the yield curve comparison first shown in the 1/30 'Curving the Yield' post below. As of yesterday, the yield on 2 year Treasuries was 4.69% while the yield on 10 year Treasuries was 4.59%. Thus, the 'short end' of the curve is yielding more than the 'long end' of the curve by 4.69 - 4.59= .10 or ten 'basis points' in yield curve lingo. When yields on the short end are higher than yields on the long end, then we say that the yield curve is inverted. This is an unusual situation and a far cry from the 'steep' yield curves of a couple years ago (see the 2004, 2005 lines in the graph below). I've resurrected a couple of posts from the Buzz Lite archive that discuss the ramifications of inversions (see box below). Suffice to say that, historically speaking, inversions have often borne bearish consequences. In his testimony on Capitol Hill the past couple of days, new Fed chief Ben Bernanke has suggested that an inverted yield curve is not necessarily a bad thing this time. Some Minyanville profs have raised an eyebrow at this claim. Will it be different this time around? Professor Sedacca, for one, isn't holding his breath.
Source: US Treasury
| Buzz
Lite Archive 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. Buzz Lite Archive 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! |
Do the Mailbag 2/17/06 11:05 am
Professor Succo fields a question from a college student. The Minyan Mailbag is open to all Minyans--including you. Do you have a question for the Minyanville professors? Please ask them by emailing a particular professor directly, or by submitting the question here. Since the MV professors are here to help you learn, they truly look forward to answering them.
Encouraging Risk: A Procedure Manual 2/17/06 10:45 am
Professor Succo reflects on new Fed chair Ben Bernanke's early public utterings and on the Fed's protocol for forcing market participants to take risk. Here's my take on the basic progression outlined by Succ:
Professor Succo argues that this process represents the 'socialization' of markets. History suggests that this process always results in severe misallocation of capital and economic distress. The Fed's role in money, credit, and liquidity creation--and its effects--is one of the core threads woven into the Minyanville thought process. In my view, any attention you can dedicate towards understanding what is going on here will greatly enhance your ability to navigate financial markets.
When Doves Cry 2/17/06 10:10 am
I wanted to revisit Professor Peterson's post for a comment about former Fed head Alan Greenspan. Tom finds it interesting that Mr Greenspan's reputation is often linked to being an 'inflation hawk' (someone who fights inflation). A peek at M3 shows money supply exploded during his tenure (Greenspan began as Fed chair in 1987). As reflected by huge increases in debt at all levels (individual, corporate, national), credit growth also exploded during Greenspan's reign. Indeed, when you look at money and credit growth during the Greenspan age, it's hard to see anything other than a period of massive inflation and liquidity generation. Mr Greenspan must have one heck of a PR person. Bernanke may want to look this individual up...
Get Real 2/17/06 10:05 am
Professor Zucchi offers his view on the health of the real estate market. It should be clear that he sees some potential problems. Professor Peterson adds that any problems could be exacerbated by the amount of leverage (thru gigantic mortgages, ARMs, and Zero Money Down) or taken on by home buyers (and lenders!). This system is extremely vulnerable to rising interest rates and/or lower asset prices. Can you see why the market (and the Fed) tend to obsess over these issues?
Free Markets? Hardly 2/15/06 9:40 pm
New Fed Chairman Ben Bernanke gave his first major speech today. A Minyan quotes a passage from the speech in which Bernanke claimed that 'maximum sustainable employment' is a mandate for the Fed, and then questions whether this really is a Fed mandate. Professor Succo suggests that the Fed has gone far beyond any 'mandate' in the frequency and depth of its market intervention activities. John further notes that the Fed is considering even more extreme measures (such as buying stocks to support prices, and penalizing savings via a 'savings tax') if necessary. Central planning in the making (see 2/9 'Socialism in the Making' post below) and yet, as Succ notes, few seem to be questioning what is going on here.
Tell Me 2/15/06 9:25 pm
Snapper advises folks to watch the price action in the financials, as they are one of Toddo's key 'tells.' What's a tell? A tell is a key indicator--one that serves as a proxy or perhaps a predictor of market price action. Rather than trying to assimilate the myriad individual variables at work in the markets, market participants often focus attention on a few indicators (tells) thought to accurately reflect general price action or direction. Because of their weighting and overall influence in a leveraged financial system (see the 2/9 'Piggy Banks' post below), financial indices such as the BKX or XLF, or key individual financial stocks such as Citigroup (C), Bank of America (BAC), or JP Morgan (JPM) offer worthy 'tells' of overall market health. And recently, this set of tells has to make Hoofy feel pretty good about the state of the stock market.
positions in XLF, JPM
Return of the MBA 2/15/06 9:15 pm
Demand for b-school grads appears to be strong. USA Today reports MBA demand at a 5 yr high, with many turning towards careers in finance.
Deflation Dissertation 2/14/06 9:25 pm
Deflation has many definitions--most of them point towards an environment in which prices generally decline (i.e., the opposite of inflation driving a general increase in prices). While most of us would welcome lower prices of the things we buy, decreasing financial asset prices (e.g., stocks and real estate) is a nightmare for policy makers like the Federal Reserve in a leveraged economy like ours. A different twist on deflation is to view it as the hoarding of cash. People are less prone to spend and would rather save (thereby reducing demand for goods and services and causing prices to fall). Professor Depew shares one data point suggesting that perhaps people are cutting back on excessive consumption in favor of a more frugal lifestyle. Anecdotal to be sure, but to see all sides of the market you should elevate your awareness of the 'deflation thesis' and respect its potential consequences should this scenario unfold (I know I have). We'll talk much more about it here in days to come...
Savings Isn't Investment 2/14/06 9:15 pm
Some of you may be aware that the national savings rate was negative in 2005, meaning that we spent more money than we took in. Some have argued that this is ok--capital gains in stocks and bonds essentially replace savings (as this reference (top bullet) to a recent Financial Times article suggests). Don't drink this kool-aid. As Professor Depew notes, one definition of 'savings' is money you don't want to lose. Investing in stocks and bonds, however, is laden with risk. From an economic standpoint, savings means setting aside resources today so that they can work for you in the future. We are doing little of that today. Rather than a vehicle for savings, the proper way to view stock ownership is as a risk venture with potential downside as well as upside. After all, when you own stock, you own a piece of a business. Business ownership, as we know, is wrought with risk.
Cash is King 2/14/06 9:05 pm
Professor Goepfert's column on current low levels of mutual fund cash reserves builds on a previous post here (see 'Cashless Funds' 2/1 post). As he notes, low levels of cash suggest that mutual funds have used up most of their buying power already, thereby eliminating a significant source of potential demand that could drive stock prices higher. The graphs shown by Jason suggest that, historically, mutual fund cash at these low levels have corresponded well to intermediate-term stock market peaks.
The Golden Reference 2/13/06 7:35 pm
A core concept in the Minyanville 'Body of Knowledge' relates to the place of gold in the economic and monetary system. As many of you may know, gold has been valued as money for thousands of years. A Minyan asks the logical question: Why should gold be valued as a currency? Professor Succo suggests that it's due in part to gold's relatively finite supply--as compared to paper money (also known as 'fiat currency' since it can be manufactured by command or fiat). The US Dollar (USD), for instance, can theoretically be printed infinitely (a peek at the meteoric rise in suggests something along those lines may actually be taking place). Given it's finite supply, gold offers a frame of reference for the value of fiat currencies. The chart below indicates the strong multiyear uptrend in gold--as priced in USD. Back in early 2001, an ounce of gold cost about $220. Today, an ounce of gold will set you back over $500. If gold provides a frame of reference for a fiat currency's value, and it now takes more than twice the number of dollars to buy an ounce of gold today as it did five years ago, then what does this suggest about the value of the USD over this period of time? Many investors own gold for just this reason: to hedge against a potential decline in a fiat currency's value and the decrease in confidence that often coincides.
position in gold
Chart courtesy of StockCharts.com
Socialism and the Markets 2/9/06 7:45 pm
Professor Succo argues that increasing frequency and magnitude of government intervention (via central banks and other agencies) in financial markets smacks of socialism. Great point. Capitalism relies on the 'invisible hand' of the markets to make investment decisions and allocate capital. There's a compelling case to be made that this process is being distorted by actions of the state. Central planning rather than market-based decision-making. What will be the long term effects of this phenomenon? Not sure, but history has not been kind to economic and financial systems grounded in central planning--significant misallocations of capital are likely.
Piggy Banks 2/9/06 7:15 pm
Sifting thru Toddo's commentary finds that he's constantly monitoring price action of the 'piggies' or banking sector (examples from today's Buzz here and here). Why is he so focused on the banks? For one, financials are currently the largest sector in the S&P 500 index (see table below). In fact, financial sector weighting in the S&P has approximately quadrupled since the early 1980s. The other reason the financials are so important relates to the large amount of debt and leverage currently in the economic system. The financial sector is both a prime beneficiary and holder of this leverage. Any smoke billowing from this sector ought to be a harbinger of larger problems. If you'd like to track the financial sector, the Bank Sector Index (BKX) is the most widely followed proxy. There's also the S&P Select Financial Spider (XLF). You'll also find Todd using some of the big banks such as Citigroup (C) and JP Morgan (JPM) as proxies for the sector. As Toddo is apt to say, "So go the piggies, so goes the tape." Keep an eye on 'em.
positions in XLF, JPM
Sector Breakdown of S&P 500 as of 2/8/06
| Sector |
% Total |
| Financial | 20.86 |
| Technology | 18.85 |
| Heath Care | 13.27 |
| Industrial | 11.12 |
| Consumer Discretionary | 10.33 |
| Energy | 9.88 |
| Consumer Staples | 9.38 |
| Utilities | 3.32 |
| Materials | 2.99 |
Source: http://www.spdrindex.com/
Salty Media 2/9/06
Professor Succo provides a nice example of why you should always take info streaming from the financial media with a grain of salt.
Harvard Town Hall 2/8/06 10:15 pm
Snaps to Laura T and all those who made yesterday's town hall chat at Harvard so successful. Professor Succo fields some post-chat questions, including what a hedge fund does.
Cover Contra 2/8/06 10:10 pm
Nice post by Professor Depew regarding the contrarian nature of magazine cover stories. Magazine covers often reflect peaks in sentiment. Will this particular BW cover be consistent with the theory? We'll have to see what happens.
Homing in on the Trend 2/8/06 10:05 pm
Professor Sedacca shares a nice example of an uptrend related to the homebuilders index (HGX). Being able to identify a trend is a core tool of technical analysis. As shown by the chart, and as noted by Professor Sedacca, the HGX is approaching the 'support' provided by the trendline at about 250ish (see it?), and a break of this support would be bearish for the homies.
Revenue Reps 2/7/06 5:20 pm
Which type of business is more attractive as an investment: one with revenues that tend to recur or one with revenues that are basically 'one off'? Professor Katsenelson votes for the former, arguing that a business with disposable products that require frequent replacement are more interesting than businesses with little potential recurrence in revenues, such as homebuilders. An interesting thought that can be linked to fundamental analysis.
Dandruff Problem 2/6/06 5:20 pm
Early last week, Toddo noted the 'dandruff problem' in International Business Machines (IBM). Say what? Dandruff is Minyanville jargon for a 'head and shoulders' formation--a pattern in prices that often has bearish implications. The current six month chart of IBM (below) reflects a textbook example of a head and shoulders pattern. Note the shoulder-->head-->shoulder progression. Why should such a pattern result in a bearish resolution? The pattern can be viewed as three successive tries by Hoofy to move prices higher; each time these tries failed. After the third try, the optimists run for the hills and Boo's crew takes control--tilting the supply-demand dynamic towards lower prices. That appears to be what's happening in this case, as Todd notes prices are now creeping falling below the right shoulder (defined by the $80.50 support line).
position in IBM
Chart courtesy of StockCharts.com
Word to the Wise 2/6/06
Professor Succo adds to the discussion about the inverted yield curve (see 1/30 'Curving the Yield' post below) by noting that the curve could get WAY more inverted if the right combination of events came along. If you're a newcomer to financial markets, thought, the meatiest portion of this post may lie near the end. Succ notes that there is a lot of hype in the financial media that promotes the upside of a situation and ignores the potential downside. Much of Wall Street (and policymakers for that matter) has a vested interest in you taking on more risk. But at the end of the day, it's your money, and you need to be the one looking out for it. If you emerge from the Buzz Lite with that notion burned into your financial decision-making processes, then we've been pretty successful.
Letter to Mr Practical 2/4/06 4:05 pm
Professor Succo shares his thoughts on the market with his good friend Mr Practical. Many things I could highlight about this masterful exchange (such as Succ's bearish view, his asset allocation and diversification, the ultility of gold in a portfolio). Instead, I'd just advise you to read this column three or four times (it's that important). Appreciate the additional perspective gained from doing what John demonstrates here: sharing your thoughts and views with someone who you respect.
Fade That Fund 2/2/06 7:35 pm
We've noted that when economic/financial themes reach magazine covers it often marks the end of a trend (see 1/31'Cover Story' post below). The same contrarian theme may apply to new fund launches. Professor Goepfert shares some data suggesting that when fund companies roll out new funds tailored to specific customer needs, the launch often coincides with an extreme in sentiment. Not a lot of data here, but an interesting observation nonetheless.
Secret Agent 2/1/06 10:45 pm
Betcha thought the Federal Reserve was a government entity. Nope, it's a privately held institution!
Cashless Funds 2/1/06 10:40 pm
Professor Sedacca notes that mutual fund cash levels are at a record low of 3.6%. This is the percentage of mutual funds assets that are in liquid cash instruments rather than in illiquid securities like stocks and bonds. Low cash levels are generally considered bearish, since without much cash, funds lack the 'firepower' that provides a source of demand that would take market prices higher.
It's About Influence 2/1/06 10:35 pm
Ben Bernanke began his first day as Federal Reserve Chairman today, as Alan Greenspan heads off to retirement. Professor Sedacca offers some thoughts on the environment that the new chairman faces. One theme: lots of debt in the system inherited from Mr. Greenspan's policy decisions. Professor Succo adds that because of zero savings (debt) and waning incomes, the Fed needs to keep asset prices (like stocks) high in order for the economy to function. However, Succ adds, the Fed can only pump liquidity into the system; it can't control where the liquidity goes. Indeed, data suggest that liquidity-driven effects in some asset classes, such as housing and real estate, may be decreasing. The observation from this thread that really stuck with me: the Fed has more perceived power than real power over financial and economic market direction.
Tame Inflation? 2/1/06 10:20 pm
A Minyan suggests that inflation seems to be a lot higher than the reported numbers suggest (the reported CPI is currently increasing at 3-4% annually). Toddo concurs and points Minyans towards a stream of archived articles for readers who want to catch up on this thread.
Retail Detail 2/1/06 10:15 pm
Using Gap (GPS) as an example, Professor Jeff Macke explains why specialty retail stores are often poor long term investments (i.e., fashion cycles come and go--as do the CEOs running them). They can make nice trades, though. Reinforces the importance of defining an appropriate time horizon.
Managing Risk: A Real Time Example 1/31/06 6:45 pm
Todd provided an excellent real time trading lesson today. When the markets opened this morning, Napster (NAPS) 'gapped higher' on chatter that Google (GOOG) might be interested in acquiring the company. The price action and the story caught Todd's attention. After checking the story further and observing the price action for a while, Toddo bought some NAPS in the $4.40 position, and set a stop loss below at about $4.25. The stop loss helps Todd manage risk and remove emotion. Late in the morning, newswires reported that GOOG denied being in talks with NAPS. This news sent the stock price falling. Todd's stop was triggered and he was out with a small loss. Textbook example of risk management, cookie.
Chart courtesy of StockCharts.com
Corks on Silver Forks 1/31/05 6:30 pm
Yesterday Todd noted that he had sold the majority of his silver mining stocks, sensing that although there are plenty of reasons to be bullish on this group in the long term, the large share price increases in recent days appeared a bit 'frothy' and worthy of some profit-taking. On the back of more analyst upgrades and media coverage, however, silver equities shot higher once again today (see the action in Pan American Silver (PAAS) for instance). Frustrating? It always stings when price moves opposite your decision. But as Todd notes at the bottom of this list of randoms, it's not a good idea to complain after you've made some nice coin on a trade (Todd's been long silver equities for quite some time). Interestingly, he noted that his in-box was filled with critiques of his sales. What does that imply about current sentiment in this group?
position in PAAS
Fed Time 1/31/06 6:25 pm
Every six weeks or so, the Federal Reserve's Federal Open Market Committee (FOMC) meets to set monetary policy. Today was one such day. As expected, the FOMC raised the Fed Funds rate to 4.5% (a 25 'basis point' or 0.25% increase). Many folks think that changes to the language of the accompanying the FOMC statement (when compared to the last FOMC in December) signals that the Fed is nearing the end of it's tightening cycle. This was also Alan Greenspan's last FOMC meeting as he's retiring. The new Fed Chairman is Ben Bernanke. For some flava on Mr Bernanke, I rummaged thru the Buzz Lite Archives and reposted the tidbit below.
| Buzz Lite
Archive 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). |
Get Shorty 1/30/06 8:10 pm
The ability to assess levels of market sentiment can be a valuable skill, since extreme levels of sentiment often precede changes in market trends. There are various gauges of market sentiment. Professor Goepfert shares one related to Oddlot Short Sales. Say what? As Jason notes, short sales are trades made by someone who borrows shares from someone else and then sells them, hoping to buy them back later (thereby 'covering' their initial sale) at a lower price. It’s the exact opposite of a typical trade where we buy first and sell later (which is often referred to as going 'long'). Thus, a short sale is a bet that a security will fall in price. Odd lots are simply trades of less than 100 shares. Small retail traders who can't afford to trade in 100 share increments (such as many college students), often initiate odd lot trades. This is often a good measure of extreme sentiment because history suggest that small retail investors frequently get caught on the wrong side of the trade--by becoming too bullish or bearish at the wrong times. Professor Goepfert's data indicate a significant relationship between high odd lot short sales, and trends toward higher prices. This constitutes a feather in Hoofy's cap.
Trade Deficits: Good or Bad? 1/30/06 7:45 pm
You may be aware that the US trade deficit has been growing significantly more negative. A Minyan notes that some economists argue that a negative trade balance is a good thing since it helps create a market for worldwide goods. Professor Succo notes that this is flawed, circular reasoning. The process that drives the trade deficit involves debt driven capacity formation (in China and other exporting countries) and debt-driven consumption (here in the US). Succ also suggests that government intervention to facilitate this process appears to be increasing, and may involve regular intervention in financial market prices (something that is largely illegal in the U.S.).
Curving the Yield 1/30/06 7:25 pm
The recent round of earnings reports reflected lower earnings by the big banks such as Citigroup (C), Bank of America (BAC), and JP Morgan (JPM). One reason may relate to flattening yield curve. The what? The yield curve normally refers to the spectrum of interest rates offered by US Treasuries of different duration. A yield curve is 'steep' when the difference between near term and long term rates is high; a yield curve is 'flat' when there is relatively little difference between interest rates of different duration. Using end of day U.S. Treasury data, I plotted yields at durations ranging from 3 months to 10 yrs. I did this for end-of-January periods over the past three years. As you can see, the yield curve has been flattening for a while and now is pretty much flat as a pancake. Why does this matter to banks? One way banks make money is thru what's often labeled the 'carry trade.' They borrow money at the short duration end of the curve (lenders include the Federal Reserve, you and me, etc) and invest in instruments that yield higher returns than their 'cost of carry' (thus the carry trade moniker). When the yield curve is steep, can you see that this can be almost a license to make big money? Using the green Jan 2004 curve below as an example, banks could theoretically borrow short duration funds at 1-2%, and then invest in 10 year Treasuries yielding 4%--and pocket the roughly 2% difference. Nice work if you can get it, no? Can you also see that today's yield curve pretty much negates the attractiveness of the carry trade? A question for another day is why the yield curve is so flat. Stated another way, why would an investor pay a 10 yr bond yielding about 4.5% when virtually the same yield is available on paper with a shorter duration? Hint: current levels of liquidity likely play a role.
position in JPM
Exxonerated 1/30/06 7:15 pm
Exxon (XOM) reported stellar 4th quarter earnings results today. It may not seem like much on a per share basis, but it amounts to quarterly earnings of $10.7 billion on quarterly sales of almost $100 billion. Note that's for a single 3 month quarter ending 12/31/05. Both of those numbers are U.S. (and I would think world) corporate single quarter records.
Bull and Bear 1/27/06 7:05 pm
In the spirit of seeing both side of the trade, Hoofy and Boo offer their takes of the current state of the tape.
Fannie's Follies 1/27/06 5:45 pm
Fannie Mae (FNM) is probably the largest facilitator of home ownership in the U.S. It does this by buying and selling mortgages, and related activities. It is also highly leveraged, with perhaps $20 billion or so in equity supporting perhaps $1 trillion ($1 trillion/$20 = 50 to 1 leverage) or more in assets (mortgages, securities, derivative contracts, etc). These numbers are becoming more like guesses each day because Fannie hasn't filed financial statements with the Securities and Exchange Commission (SEC) for going on two years. This is in violation of SEC rules, which require publicly traded corporations to file quarterly financial statements. Fannie's saga includes other 'interesting' data points, such as the firing of many top managers including former CEO Franklin Raines, billions of dollars of earnings restatements (back in the days when Aunt Fannie reported earnings, that is), and the hiring of more than 1000 consultants to make sense of Fannie's books. If I were to ask you to guess where Fannie's stock should be, many of you might start thinking Enron levels (scroll down to chart on this page), or perhaps that the stock doesn't trade at all. Nope, as you can see, the stock is alive and well. In fact, Fannie bulls appear encouraged by news today that oversight committee (OFHEO) investigating the Fannie debacle are indefinitely postponing any reports of their findings, and that Fannie stock won't be delisted from the New York Stock Exchange. This doesn't pass the smell test with many (yours truly included). Professor Succo, weighs in, noting that he can only conclude that the OFHEO doesn't want us to know what is going on with their investigation. Moreover, Succ notes that this delay may indeed suggest that Fannie is bankrupt which, if true and released to the public, would likely cause financial market turmoil. Professor Sedacca adds that permitting a company to skirt SEC rules just because they're 'too big to fail' is unfair as market participants have the right to know what is going on (information should flow freely in free markets). Succ wraps up this thread by noting that his firm's previous work found several scenarios that the Fannie could indeed be insolvent. Why am I sharing this? The Fannie case appears to be an example of policy makers 'bending the rules' to protect an influential company and to avoid a potential market dislocation. Due to Fannie's size and leverage, major problems with this entity would likely impact world markets. You'd be wise to keep half an eye on the Fannie story if for no other reason than to maintain sensitivity to tail risk.
position in FNM
Mexican Spin 1/26/06 6:50 pm
Many folks who eat at Chipotle don't realize that the restaurant chain is owned by McDonald's (MCD). Today, McDonald's sold an approximate 12% stake in Chipotle (CMG) in an initial public offering (IPO). This means that McDonalds still owns a controlling share of the company while a minority stake is owned by public entities. Why would MCD do such a thing? One reason is to raise some funds. The deal priced 7.88 million shares at $22/share, meaning that MCD and the Chipotle concern collected a cool $173 million (7.88M * $22) before fees (to the investment bankers that 'placed' the deal among initial buyers). Noice. Looks like the MCD/CMG duo left a bit of money on the table, however. The price of CMG closed at $44 per share today--a 100% gain in one day of trading. The real question is why didn't the deal price higher--theoretically MCD/CMG could have collected another $100+ million on the sale. Follow? Ponder that issue for a while...
Wal-Mart National Bank? 1/26/06 6:35 pm
It's possible. Wal-mart (WMT) has filed paperwork to open a bank in the state of Utah. Although WMT has stated that they don't intent to open bank branches, the spectre of banks sprinkled into the Wal-mart store network is certainly making some in the finance industry 'nervous'. Fed Chairman Alan Greenspan, as well as others, are protesting the application of having an 'industrial bank'. I find these protests amusing, given the prominence of financial institution-like profit centers in many (most?) large 'industrials' such as General Electric (GE), Ford (F), and General Motors (GM).
Bubblevision 1/26/06 5:55 pm
Lots of talk about 'bubbles' in various financial markets. Just what is a bubble? Professor Robert Shiller of Yale suggests that bubbles are periods of extraordinarily high prices in a market likely caused by 'irrational exuberance' among buyers. The term bubble is used because at some point, it 'pops' and sends prices cascading lower. Many associate the rise in stock prices in the late 1990s with bubble-like tendencies; stock prices peaked in early 2000 and then started a nasty decline. By using Intel Corporation (INTC) as a proxy for tech stock prices in the late 1990's and Toll Brothers (TOL) as a proxy for housing stock prices today, Professor Sedacca suggests bubbly parallels between the two in this graph. Do you see some similarity?
Fil the Gaps 1/25/06 10:05 pm
Professor Zucchi offers a nice example of fundamental analysis in this assessment of Portfolio Recovery Associates (PRAA).
Risky Business 1/25/06 9:45 pm
Newcomers will find the details of Professor Succo's post hard to follow. What should be relatively clear, however, is that he's suggesting the many market participants are taking lots of risk for relatively less and less reward. If a 'tail event' shocked the market (e.g., geopolitical event, issues in China's economy, etc), Succ is suggesting that we may see some real fireworks (read: volatility) in the marketplace.
How to Invest $3 Million? 1/25/06 9:15 pm
This Mailbag question seems a pleasant problem to have, no? Toddo responds by sharing how he's allocating his personal capital. Let's see if we can catch some highlights:
Todd is also quick to mention that this is NOT a recommended portfolio for everyone. Time horizon and risk tolerance are some variables that determine each individual's unique investment profile. An instructive example nonetheless...
position in precious metals
Cover Story 1/23/06 10:05 pm
One way some savvy market participants gauge lopsided sentiment is by assessing the number of magazine cover stories and newspaper headlines that support a trend. The thinking is that by the time trends make headlines in the mass media, it already requires wide acceptance (and therefore ripe for a reversal). Professor Depew shares this line of reasoning related to housing prices.
Walking the Plank 1/22/06 11:15 am
If you can follow the details of Succ's post here, great. But I wanted to point newcomers to theme of his comments: many money managers (and individuals) currently appear to be taking 'stupid risks.' Relative to historical behavior, people are currently risking a lot in order in hopes of making a little. In Professor Succo's view, the potential for reward doesn't justify the risk (remember, risk = potential for loss). An observer doesn't have to agree with this view, but, to maintain a balanced perspective, an intelligent market participant factors views offered by smart cookies like Succ into their financial decision-making calculus and risk management activities.
Analytical Vacuum 1/22/06 11:05 am
Studies suggest that, on average, college students lack ability analyze problems. Just so ya know, UMV was created to help turnaround just this type of situation when it comes to fiscal literacy.
Citi Follow-up 1/22/06 10:30 am
Following up on our post on Citigroup (C) below (see 'Support Group' 1/19 below). Earning season didn't treat Citi well on Friday, as the bank's quarterly report appeared to disappoint Wall Street. This disappointment was expressed via a selloff in the stock. As you can see below, our aforementioned $48 support level is now dust in the wind. Note also the big volume (about three times historical levels) associated with the sell off. Citi's decline contributed to one of the larger stock market down days in a while, with the Dow Jones Industrial Index (DJI) down over 200 points. btw, can you see that Citi's stock price is quickly approaching another meaningful level of support at about 45ish (then another at 44ish)? Analyzing graphs of asset price behavior over time is a large part of what is known as 'technical analysis.' Graphs of asset prices over time such as the Citi chart below are expressions of what is going on in the market: supply/demand, greed/fear, natural ebb and flow in economic and behavioral activity, etc. As such, possessing at least some basic technical analysis skills, such as identifying levels and trends, is a useful tool when making sense of markets.
Chart courtesy of StockCharts.com
Mortgage Broke-er 1/21/06 10:50 am
With housing prices ripping higher over the past few years, many folks have been taking on bigger mortgages. They've also been resorting to more 'adjustable rate' mortgages (ARMs) to reduce monthly payments in the near term. The risk with ARMs is that the interest rate and monthly payments 'adjust' higher if market interest rates increase. As noted by Professor Depew, mortgage loan delinquencies are on the rise and they will likely increase further if/when market interest rates increase. Why is this important? Recently, U.S. economic activity has been dependent on the housing and related markets. Moreover, financial institutions that originate mortgage loans risk significant losses if/when debtors default. Any market participant should be aware of what is going on here and of the potential risk.
Brave New World 1/21/06 10:45 am
Minyanville President Kevin Wassong introduces Minyanville's next gen website, which officially went live on Friday. If you're still trying to figure out exactly what Minyanville's about, head to the homepage and watch the animated orientation hosted by Hoofy and Boo (pressing buttons across the bottom of the animated screen will get you even more info).
China Syndrome 1/19/06 5:00 pm
You may be aware that central banks, particularly People's Bank of China and Bank of Japan, have been inhaling huge quantities of U.S. bonds over the past couple of years and are currently the largest holders of U.S. tradable debt. The rationale usually offered for this behavior is that China and Japan need to export to the U.S. in order for their economies to remain vibrant. By purchasing U.S. bonds, China and Japan help keep U.S. interest rates low (remember, demand pushes prices higher, and when bond prices go up, the interest rates on bonds go down). Given the current economic and financial environment, such low interest rates are a must for the U.S. economy to function. An alternative rationale is offered here. In this case, central banks could be buying bonds in order to increase their potential control over the U.S. in the future. This is not a scenario to rule out, notes Professor Succo. If China and Japan would decide to dump their U.S. bond holdings, interest rates would rip higher and the economic effects in the U.S. could be catastrophic. Even if this scenario seems remote, a prudent market participant wants to see all sides of the market, and factor plausible scenarios into the probability spectrum of potential future outcomes.
High Tide 1/19/06 4:20 pm
Professor Succo opines that central banks continue to pour liquidity into the financial system to keep asset prices elevated. He notes that even when asset prices fall a little (such as in Japan--see Tricky Nikkei 1/18 post below) and central banks come to rescue in order to buoy sentiment. Any market participant would be wise to keep this observation from Succ in mind: "The amount of liquidity that has been injected into the system over just the last few weeks is unprecedented." When someone like John comments about such an extreme, I tend to keep tail risk in mind.
Support Group 1/19/06 4:15 pm
Recently, Toddo and others have been paying attention to the price action in Citigroup (C), noting that $48 constitutes significant 'support' (see here and here for example). Support is a price level below the current price that tends to keep prices from falling further. For whatever reason (and there may be many), the market has defined $48 as a price where demand (read: buyers) has 'supported' the stock in the past. For many market watchers, it becomes a reference point. If price stays above $48, the bulls tend to be happy. If price moves decisively below $48, then it is often viewed that the support level has been violated and Boo tends to take charge. As can be seen in the chart below and noted by noted by Professor Depew, it appears that the $48 support level is starting to give way. Why care about this at all? Well, Citi is the largest bank stock on the planet. As such, it is a useful indicator (or 'tell') of general stock market health (as Toddo notes in a Pittsburgh Steeler sort of way).
Chart courtesy of StockCharts.com
Good Company, Bad Stock? 1/19/06 4:55 pm
A great company is always a good stock to buy, right? Not necessarily, notes Professor Succo. If everyone 'knows' a company is great, then it's likely that knowledge has been baked into the stock price. In such situations, the stock is likely fairly valued or (in most cases) overvalued. Buying the stock of a well known 'great' company, then, is rarely a bargain. One of the risks in such a situation is that future information that suggests the company is less than 'great' will cause investors to flee the stock, since it was 'priced to perfection'. As a wise sage once opined, the difference between a great company and a good investment is the price you pay...
Filtering the Noise 1/18/06 1:15 pm
Lots of folks like to turn on financial TV stations each day. Professor Succo notes that he'd rather operate in silence and think for himself. To say the least, he's cautious about the value that much of the mainstream financial media provides. You would be well advised to think critically about info streaming from financial media as well.
Gentlemen, Start Your Presses 1/18/06 1:05 pm
Professor Succo continues to observe the huge increases in money supply and the extent to which any resulting liquidity will/should help the economy. 'Big Ben, btw, is incoming Fed Chairman Ben Bernanke (Alan Greenspan retires end of month).
The Tricky Nikkei 1/18/06 12:45 pm
Last nite prices on Japan's Tokyo Stock Exchange, often approximated by the Nikkei 225 stock market index, closed nearly 3% lower in trading last nite. In fact it closed early, as 'curbs' kicked in meant to stem order imbalances and (arguably) the rash of selling. It's the first time in nearly 60 years that Japanese stock markets have employed these curbs. In the past three sessions, the Nikkei has fallen upwards of 10%. Why has this happened? Assigning a 'reason' to such extreme moves is usually futile. However, it often rests on psychological elements. Note that some observers feel people have been excessively speculating (gambling mentality). Sounds like greed transitioning into fear to me. In fact, as you learn more about how markets work, the greed/fear theme and its cyclical impact on markets will likely become a familiar, repetitive phenomenon. Keep an eye on the performance of the Nikkei (and its potential impact on other markets) over the next few days.
The Reason of Earnings Season 1/18/06 12:35 pm
We noted that we're in the middle of the 'earnings season' phenomenon (see 'Tis the Season' 1/10 post below). Two more high profile 'misses' last nite were Intel (INTC) and Yahoo! (YHOO). Extreme movements like this should remind us of the relevance of market psychology on price movements and of the importance of managing risk to account for extreme events.
Gamma Goblin 1/18/06 12:30 pm
Professor Succo alerts us to the high (extreme?) degree of options selling on Wall Street currently. If you're a newcomer to financial markets, being short an option (or short 'gamma') can be a difficult thing to get your arms around. Suffice to say that, at this juncture, the degree to which the Street is short options lends potential for extreme price movements (in other words, high levels of 'volatility').
Presidentialism 1/17/06 9:35 am
A couple posts down we noted the new MV website rollout in progress. Kevin Wassong offers a 'presidential view' here.
The Downside of Intervention 1/17/06 9:10 am
Professor Succo draws a parallel between city government actions to riots in Cincinnati and the Fed's liquidity-based intervention policies.
Next Gen 'Ville 1/17/06 9:05 am
Toddo points readers toward the 'beta' version of Minyanville's next generation website. It's way cool, and will include the new UMV campus. From a content perspective, please note his thoughts near the bottom related to the 'next best trade', the importance of defining time horizon, and the notion of trading vs investing.
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 is 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 from 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...
Sage 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
Reciprocity 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 real estate 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.
