Friday, July 18, 2008
I am flying out of state on vacation tomorrow until August 3rd. I will have limited Internet access especially the first week of the trip and so will probably not be posting much the next couple of weeks. When you see interesting things, email it to me. I am going to need help to stay on top of things.
Thursday, July 17, 2008
I have said for awhile that I thought the next bottom will be made because breaks down and moves substantially lower. The reason is because the market has to be able to grasp something that things have changed fundamentally and will be okay now. August, January, and March it was the Fed. Fed made dramatic moves on oversold markets and the investors bought it thinking the day was saved. The Fannie and Freddie move by the Treasury showed the market was not going to buy it again. Way oversold and the market sold the rally. The market essentially said so what the government is going to help out, it will not change anything fundamentally. This was a dramatic separation from the previous government moves and why we were once again on the verge of a crash like move. If all of a sudden oil goes to 100 fairly quickly you will get the bulls feeling feisty again that now that oil has dropped by a 1/3 this will save the day, the consumer will start spending again, and earnings will be okay. The fundamental picture has changed. Sorry but to little to late in my opinion but I recognize it could cause for a multi week rally in the markets.
As a side note I read something that the last two day move in financials was an 11 standard deviation event that would happen once in every trillion years or something stupid. Two things, one - even if the rally continues the short term trade is to sell financials and two - these seemingly impossible multi standard deviation events happen every few years.
Analyst Mike Mayo: Can you elaborate more, you mentioned home equity might be a little bit better than you expected. But prime mortgage going from 48 basis points up to 91 base business points linked quarter, can you just elaborate more on what you're seeing there and why?
JPM: Mike, it's exactly the same risk factors and all the other things. It's high LTV, it's stated income, it's California , Florida , Arizona . I you agree with you they're track staggering numbers. It's just really hard for us to tell. Our current expectations of those losses can triple from here. We're prepared for that and we will reserve for that appropriately going forward.
Mayo: Prime mortgage losses could go from 91 basis points to 270 basis points?
JPM: Yes. We had 100 million a quarter and we could go to 300 million a quarter. Not next quarter. But if you look at current trends, maybe we're being overly conservative, that could be 300 million a quarter sometime in '09.
Yeah. If that is the case not only will you not have a 2nd half of 2008 rebound (I think only the most stubborn believe that now) but a rebound in the 1st half of 2009 would also be fairy tale thinking. 270 basis point losses from prime mortgages. Ouch!!
This new rule won't stop something from going down, it just probably makes the market more rational and creates technical reasons for a bounce (combined with the fact that many of those names were way oversold). You will not have traders piling on selling something that haven't already borrowed. The reverse would be buying something making the price go up before you take delivery. That just sounds absurd. Blaming short traders and limiting short trading is ridiculous. Making logical rules that should exist in an orderly market should be supported even if it works against your book. Information about these new rules could come out with added restrictions that do not make sense and change my opinion but on the surface it looks okay.
The rule changes proposed by the SEC for selling stocks short are meant to curtail “naked” short selling, selling stock short without locating a borrow. They tighten up procedure between lender and borrower through broker dealers. For example, in the past a short seller would sell stock and then call the broker for a “locate," a stock available at the dealer to borrow. And even if he called first and the dealer had no “available locate” at the current time, the dealer probably told the seller to go ahead knowing that the locate would come at some point.
It's still not clear how to interpret the new procedure, but it looks like now “the locate” must be currently in the box. This is going to raise the cost of borrowing. In other words, the rebate rate credit to the short sellers account (the interest they earn on the cash they generate by selling the stock) will be less.
Wednesday, July 16, 2008
Tomorrow is a key day. Volume seemed moderate today so there did not seem to be that much conviction on the buy side. If you have perceived okay numbers from Merrill and JP Morgan you could have a rally with some legs. We continue to be oversold so it would not surprise me at all.
Well I got more work to do and reading to do. If I see something interesting I will throw it up here but I have to get ready for my next trip which is on Sunday.
Monday, July 14, 2008
We are and have been so oversold and trying to predict anything for the short term at these extreme readings is nearly impossible. Because of the oversold nature if this is a short term 2 or 3 week bottom I could easily see us rally up to the 1325 area in the S&P. If you know why your fundamentally short something that isn't that big of deal. A more sustained rally could bring us up to 1370 and that would be very painful for the shorts.
Well I am in San Diego sitting in a hotel room watching the European markets. Need to go to sleep so I can wake up at 6:00 San Diego time before the markets open. Oh my!!! Horrible time for a business trip.
Friday, July 11, 2008
The "news" that seemed to shoot the market up was that supposedly Bernanke indicated Freddie and Fannie could access the discount window. Two things, first we might as well open it up to anybody and everybody. The discount window seems to have become the popular hooker shared among Wall St bankers. Secondly and much more importantly, who cares!!! THIS IS NOT A LIQUIDITY PROBLEM!!! It has not been a liquidity problem since at least January. Freddie and Fannie have plenty of liquidity. Lehman probably has ample liquidity. There are major solvency issues that opening up the discount window does not help with. The fact that people would still buy on this shows that there is still a lack of understanding of the true problems in the system.
So this little piece of news sent the market skyrocketing and the VIX plummeting. The market then sold off after a massive 270 point rally and the VIX barely retraced its losses indicating people were okay again. The world was fine.
It is just frustrating. There is not a great way to play this. You know you are way way oversold. You also know the market (at least in my opinion) is still overvalued and that the market is not respecting the potential problems in the economy and the financial system. You stick with fundamentals but right now everything is getting bought at once or sold at once and fundamentals are not meaning all that much.
The battle becomes then to grind in motion avoiding losing money.
Sunday I am flying out to look at a company in San Diego. Won't be back until late Tuesday night. Not sure how much time I will have to post anything. Monday will be an interesting day though.
One thing I love about blogging is it creates discussion. I did a post on Bill Gross interview yesterday and an investment friend of mine explained why he came to a different conclusion. As I have said before all this is an art not a science., just like investing. I figured it would be interesting reading for some of you.
By way of background, in addition to the BIA training I was also an Intelligence Officer. Part of my training included 6 months of formal intelligence training, to include interview/interrogation techniques taught by acting CIA interrogators. Bottom line is we did not view is behavior to be deceptive and felt you may have "over-interpreted" a few of the signs. This is actually a very common occurrence that, unfortunately, can be left out of brief investor training programs. As you mentioned, this stuff is more art than science, and we are just as likely to be wrong as you are.
One thing to keep in mind is that the indicators taught are designed to be evaluated in the context of a structured interview. Specifically, it's important to establish a 'base' of behavior patterns by asking a series of unrelated, fact-based questions. This allows the interviewer to identify trends/changes in these behavior patterns as indicators of deceptive behavior (the trends would obviously be clusters). Not necessarily a hard and fast rule obviously. The Gross interview was obviously not structured that way, and in fact, the initial questions asked were more opinion-oriented in nature, thus it is very difficult to set the base and identify indicators. I would also argue there was a bit of ambiguity in a few of the questions that left the answers subject to interpretation. You would typically want to structure the questions such that there is a more clear answer. Specifically, he asked if pimco was reducing 'risk' or 'exposure' to Lehman. That could obviously mean from a counterparty or investment standpoint, which are both sources of pimco's exposure to Lehman (and Gross may not be as informed on either aspect given his high level role). That's obviously just one example of a couple. Any ambiguity in the question will likely be amplified in the answer. We also did not notice the non-verbal clues, but again hard to judge given lack of a base from which to judge. If anything, he maintained consistent anchor points and body language. These are just the thoughts of two people, so again, feel free to discount and/or take with a grain of salt.
A couple of thoughts. Completely agree that the best use of BIA is under structured questions. You have general questions and then a trap question. However, during training we reviewed several interviews that were not structured. Bill Clinton being an example. So though that is ideal it is not a requirement. You would also prefer to see the entire body. All we have is chest up. At the 3:00 minute mark when he is cornered I felt like there was an anchor shift. A shift of weight looking at him from left to right. I also felt there a short boost of serial movements with facial muscles, the weight shift, and head moving. I try to watch every Bill Gross interview he does and he is always very stoic and very still. Even in this interview the first 2 minutes there was hardly any movement where as at the 3 minute mark there seemed to be a burst or cluster to me. By any standards slight and maybe nothing but for Bill Gross it seemed like alot.
It is definitely an art and at this point I don't even know if is usable. I would be willing to bet though that PIMCO is doing something. Could be very wrong.
His Follow Up Thought
Definitely hear you on the movements at 3 minute mark. My buddy and I felt that it could have been frustration given ambiguity of questions and potential lack of awareness of the firm's specific trading and/or counterparty activities. Obviously lots of different ways to go with it. Definitely agree that structure is not necessary. In a real interrogation setting, different techniques would have been used if there wasn't opportunity to structure the interview and the interviewee exhibited signs of deceptive behavior….and no, I don't mean waterboarding. :)
So there are differing thoughts. Talk about intellecutally exhilartaing!! Like I said yesterday there is no way I would short it based soley off the PIMCO intereview. I do think think it adds to the overall probabilities in a downside scenario.
Thursday, July 10, 2008
I am not going to explain it all now but at my previous job we have several days of training for tactical behavior assessment by former CIA interrogators. They run a consulting firm for financial investors called Business Intelligence Advisers.
Look a the first question, in my judgment he is honest and very forthcoming. The second question he completely failed to answer the question but was still very honest. Red flag. The third question cornered him. Right at 3:02 minutes he answered. One he still failed to answer the question but more importantly there is what BIA calls a huge cluster that developed. Movement of what are called anchor points and other non verbal clues that at the least he is not being forthcoming. The fourth question asked it again. In my mind this was less of a failure but still showed signs of deception.
You can call me crazy and nothing is a science but I would be willing to bet big that there is truth to this rumor based on what I saw in this interview with the previous training I have had. That is different from making money off it by the way. I showed an MBIA interview in the WSJ months ago that the CEO in MBIA was using deceptive behavior based on this exact methodolgy and sure enough that is exactly what happened.
Does that mean I am going to run out tomorrow morning and short Lehman? No. So Pimco is reducing risk with Lehman, does that really mean all that much? No What I am going to do is start watching the trading of this stock very close now and determine if I there is an opportunity there. I haven't watched the tape in Lehman in weeks and so I will start watching it and see if I like the tape from a short perspective. If Pimco is indeed pulling in exposure others will follow and that is where Lehman is in trouble.
As an aside even if Bill Gross was pulling all of his exposure there is no way he could come on national tv and say that. That in itself would destroy Lehman.
Buffett: Well, I can tell you that from a certain amount of real-time information that I get from our businesses and elsewhere, things have, the decline has accelerated in the last, I would say, six weeks. So things are getting worse at a more rapid rate than they were two or three months ago.
Wednesday, July 9, 2008
Anyway a great article on online Barron's talking about this echoing alot of my thoughts.
Because of this supply/demand imbalance, implied volatility typically trades at a higher level than the mathematics would predict for a perfectly efficient market. However, if the S&P 500 can only be expected to move -- up or down -- 15% over the next 12 months, isn't it odd that so many perceive a VIX of 25% to be unusually low? After all, a 25% VIX translates to a 67% premium over historical norms!
and maybe because we are not getting a spike is because short interest is up over 55% on the NYSE compared to last year causing investors to be more comfortable and less fearful about their portfolios.
Those who were overleveraged or overexposed to stocks have spent the last several months reducing their long positions. Indeed, this is confirmed by the latest readings from both Investors Intelligence and the ISI Hedge Fund survey, which show bearishness, and hence defensiveness, approaching historical extremes. If investors are in fact less invested than they were, they don't require as much insurance as they did during previous market declines, and this could explain why the VIX hasn't reached the relatively high levels of January and March.
Does this mean the VIX will pull back from here, and the stock market will rally? Not necessarily, but the premise that stocks are headed lower on a short-term basis because implied volatility is only trading at a 67% premium to realized volatility seems bogus.
Somewhat interesting article about Bill Miller. It argues that Bill Miller succeeded in a time era for a reason. That he isn't doing anything differently but that we are in a different era. Something I have thought about and briefly mentioned before that certain investors do better or worse in different eras (5 to 25 yr time frames) because of the way they are wired. So the 91 to 2000 was difficult for more inherent pessimist than optimist where as 2000 to 2008+ has been better for investors who are more pessimists than optimists. This is no moral right or wrong with the way individual investors are made up but it can make a difference in performance during that time frame. That is why the greatest investors have track records of 30 to 50 years. You know they can perform during many time periods.
Tuesday, July 8, 2008
Thanks goes to Jody. He shot me this information in response to the post I did on China earlier.
Arabian gulf - US = ~40 days
AG - China = ~20 days
this is one of the legs of the tanker short. U.S. demand destruction + gulf can't pump anymore.
The heavy demand is coming from shorter time routes
Plus you've got a fair amount of supply comign online late this year + Iran has been idling 14/15 tankers as its repaired some infrastructure.
For planning purposes you could add a couple of days to unload the fuel and bring it to the location needed. If it needed to be refined that would be another week. We are now 30 days until the start of the Olympics.
Polluting factories across a huge area covering four provinces will be idled, reducing steel output by as much as five million tons, about 12% of the country's monthly output. They extend to the neighboring port city Tianjin, where 40 factories and 26 building sites will be shut down.
In Beijing, the government has suspended operations at two major facilities owned by Beijing Eastern Petrochemical Co. because it is near the Olympic venues. Rock quarries and cement factories in Beijing will also suspend work.
I do not think it is an accident that oil and other metals are rolling over. In fact metals started rolling over several months ago which would make sense under this hypothesis because the construction of the actual buildings needed this material months ago. The oil could still be stockpiled until the Olympics start. I think this is a much bigger market moving event than people give it credit for.
Another serious impact of the Olympics could be the increase of the Yuan after the Olympics. Some have speculated that after the Olympics the government will then allow the currency to appreciate much more quickly to help fight inflation. That would also have a far market reaching impact.
Monday, July 7, 2008
Turning to the markets I think we getting close to a rally. I do not think we are quite there yet but we are close. In the last two weeks I have sold 20% of the put holdings I have had on the S&P 500 at 1250. I bought these over a month ago and my belief we are getting close to an interim bottom is causing me to slowly scale out.
Jeffrey Saut had some interesting commentary about a potential for a rally.
Meanwhile, it is session 33 in the “selling stampede,” our proprietary oversold indicator is more oversold than it was at the March 2003 “low” (we were bullish there as well), the spread between Lowry’s Buying Power Index (demand) and Lowry’s Selling Pressure Index (supply) is the widest in the 75-year history of Lowry’s (indicating that stocks are severely oversold), corporate insiders’ selling is at rock-bottom lows, and we are seeing numerous indices not confirming the D-J Industrial’s “downside dive.” It’s not that we are turning aggressively bullish, but we think that unless the markets are in “crash mode” it is time to consider a corrective stock market rally as B.J Thomas warms up in the wings with the song “Raindrops.”
Of course the problem is we may be in actual crash mode.
Thursday, July 3, 2008
Today didn't mean much in the markets though there was surprisingly heavy volume for such a short day. In general you are seeing people moving money out of oil and materials now. Next week it will be very interesting to see if that continues. We may getting close where it is time to start looking at shorting overvalued energy and agriculture names. Let the momentum guys verify they have had enough and then start shorting on the way down.
Have a great 4th and God bless America.
Wednesday, July 2, 2008
A great presentation on the psychology and different biases of the mind. This is one of the areas I find most interesting from an investing perspective. I highly recommend you spend some time going through it. Thanks goes to Nathan.
When 100 residents of a neighborhood are asked to contribute to a city council candidate, most decline. But if they are approached about putting up a yard sign, many will agree. Then, having made a public commitment, the same people are far more likely to make a contribution, even with no new information. Once people take a stand publicly, they become more attached to it. Talking about it cements the idea internally and any new information is underweighted.
“There is nothing more difficult to take in hand, more perilous to conduct, or more uncertain in its success, than to take the lead in the introduction of a new order of things. For the reformer has enemies in all those who profit by the old order, and only lukewarm defenders in all those who would profit by the new order, this lukewarmness arising partly from fear of their adversaries…and partly from the incredulity of mankind, who do not truly believe in anything new until they have had actual experience of it.” Niccolo Machiave lli
Tuesday, July 1, 2008
In the final analysis I wonder why you or anyone else would want to be President in 2009. But there’s the ego thing and a hope for a better tomorrow and all that.
The Chicago survey of Purchasing Managers (PMI) jumped from 49.6 to 50.2, meaning the manufacturing sector went from recession territory to positive. And keep in mind the survey was expected to fall to 49. That sure sounds like good news, and many in the media (USA Today) (NY Times) will tell you it's good news.
But unfortunately it isn't.
The guts of the index tell a very different story. Orders were down from a month ago and are still in negative territory. This is now the 7th month in a row that orders have contracted.
The market was all over the place today. The savior of the market appeared to be an unlikely source, General Motors with June sales horrendous but better than expected. This started the big reversal in the markets across the board. We also bounced hard off of 1270 in the S&P. I really think if it was not for Iran and European stocks getting killed the market would have been up over 200 points today. From bottom to top the market did post a 150 plus rally. The really interesting thing was what I referenced in the past couple of days. People buying beaten up stuff like banks and selling great performers like energy. It is so stupid that because the calendar says July 1st instead of June 30th they are willing to buy. Shows one of the many problems of Wall St. Anyway the rally today seemed to be a farce but there could be consolidation or move up around here for awhile. There was very heavy volume today compared to what I have been seeing for weeks. Interestingly Thursday will be the most important day with the ECB making a decision on interest rates and the June jobs number comes out. Considering how many vacations are planned it will be interesting to see the volume and violence of the markets based on those very sizable news items.
Israel and Iran are getting alot of air time this morning. I know many investors who put it close to inevitable. We shall see. One viewpoint I have heard floating around is for the next few weeks there will be alot of saber rattling and posturing laying the groundwork for an attack. Then it will go quiet for a few months until after the election. If Obama is elected, between the election and inauguration is when you would see an attack. Israel would not attack before the election because they would not want to influence the elections over here but would have to do before Obama officially took office. So you have the groundwork being laid now for an attack down the road.
Israel is increasingly likely to attack Iranian nuclear facilities this year, a U.S. Defense Department official told ABC News.