Seen and Heard

Talked alot about the markets late last week. A few of the things I heard over the weekend that I thought were interesting. Some of this I knew but worth posting.

1) Apparently what started the market turmoil in August was a large hedge fund getting massive redemption's in July. They traded primarily through Merrill (I think that is the one Britt said) and Merrill prop desk got caught creating massive losses. Top brass as Merrill said they were not going to lose money this way and said enough is enough and decided to shut down the entire desk. Starting in the beginning of August they started massively unwinding their positions. Most of the other big prop desks on Wall Street held very similar positions and were caught with Merrill's unwinding and this caused huge reverberations throughout the markets leading to the crazy action in mid August.

2) Emerging markets are not in bubble territory including China. I was sort of shocked by this one. Unfortunately it was not a long discussion but the numbers put forth to me was that China had a PE in the high 20s / low 30s which is high but by no means bubblish....yet. I had previously heard higher numbers.

3) The market is shifting towards favoring growth after years of favoring value. One reason you are seeing the value guys struggle this year.

4) As I thought there are huge opportunities in the debt market for those who have cash. I have not really been that bummed not buying aggressively with the market going down. I did not figure a 10% correction (for all of like 1 hour) was that much to get excited about. I also lamented at not having access to millions of dollars to be able to buy debt because I thought that was where the huge contrarian play was and where things where really out of whack.

5) Since the Fed was founded in 1913 the dollar has lost 92% of its purchasing power. This will probably happen in 10 to 20 years causing the Dow to rise to 36,000 all things equal. Previous big commodity booms / panics saw the Dow to gold ratio to be 1:1 in 1980 and 1932. (Gold at $100 per ounce and the Dow at 1000) Gold could rise to $1400 currently to achieve that same 1 to 1 ratio.

6) Examined long term charts of small caps, the S&P 500, and the NASDAQ examining where the bubbles was and wasn't. The small cap graph shows barely a blip down wall the S&P 500 was declining and the NASDAQ was imploding. The small caps are not pretty expensive. As everyone should know at this point the value is in large caps.

7) Talked about Jeremy Grantham and how furious he must be at the Fed's actions. Britt has not talked to Jeremy since that rate cut.

8) Talked alot about investor psychology and how poor humans are equipped at investing. Harry Markowitz, the founder of portfolio theory, and really the founding father of modern finance illustrates this. When constructing a portfolio for his retirement after making all kinds of breakthroughs decided to just split 50% in bonds and 50% in stocks because he could not bear the thought of being more in stocks and seeing the market go down or less in stocks and see the market go up. Psychologically he essentially admitted he could not follow what he came up with.

I may add one or two if it comes to me over the next few days but a few snippets I thoughts I would share.