Saturday, October 25, 2008

U.S. Stocks & A Concerned Populace

I was answering a general question on another board, when vista decided to install an update on my PC and reboot. My blowhard, wordy response was lost. Since it's a general question I see frequently, I'll attempt to recreate my arrogance here on this medium, since blogger has autosave :)

the question (edited slightly):

"Anyone care to share their thoughts on this debacle? I have lost over 40% of my portfolio and need to decide whether I should pull out at the next rally or hang in while things go back up.

In 1929, the stock market fell by more than 80% over 3 years. Is today's market a repeat or will various measures in place stop that from happening again.

Will the emerging economies rescue us from the downward momentum? And can a company lose 80% of its stock and still function? I mean stock value is not an integral part of a company, is it?

I think (please enlighten me if wrong) it is a collective idea of the company's worth which goes up and down according to the collective's sentiment. Therefore, stocks could go down 80% and the companies would still exist but the stocks would be worthless. Is this a fact? What would you do and why? "

three things:

1.) there's a difference between investing and speculating
2.) it's the credit markets not the stock market
3.) a "random walk" -- I'm calling "b.s."


first, there is a difference between investing and speculating.

most people don't like the word "speculator", but if you are buying with the hope of selling later at a higher price (or vica versa) you're speculating.

if you are buying a stock to harvest the dividends (or hoped for divvies) for life you're an investor. ditto with houses -- flipping is speculating and landlording for rent or farming is investing, imo.

the reason that BOTH (and alot of other 'assets' are overvalued is because they only make sense as speculations, not investments. therefore there is no fundamental floor under the price of these items when/as the sh&t hits the proverbial fan.

i have developed a bias against stock speculations primarily because of what i've seen in the corporate world, and money-management world. corporate management was allowed OBSCENE pay and benefits packages due to a large percentage of stock owners being institutions. the money management/pension fund world (with a few notable exceptions) has been very lax (along with government) at rooting fraud, deceiptful practices, and looting of organizations by managments, in concert with boards of directors -- those supposedly tasked with overseeing their behaviours on behalf of the "owners" -- the shareholders.

this charade was allowed to continue -- along with the residential real estate bubble -- and the private equity investment farce -- by really really lax global credit standards and the liquidity that followed. (as we've discussed here and everyone "knows" by now).

A stock can continue to function with it's stock at or near zero. after the IPO, most companies can function without access to the equity markets. many (today) cannot function without access to the credit markets however. a stock price near zero, in most cases, will be a reflection of the company's ability to function -- which at times will be dictated by access to credit. credit market is the dog, equity market is the tail, as Karl Denninger likes to say.


it's my opinion that the world reached the cusp of "peak debt" -- or max debt.

in other words, we reached the point where the debt overhanding the market was meeting or exceeding the assets' ability to service said debt.

this is/was going on at all levels:


personal: on the personal level, the housing bubble and subsequent deflation is the most obvious example of this. every manner of instrument was developed in an effort to forestall the inevitable, however, in the end, the buyers' ability to service ever increasing mortgages on flat incomes was doomed to fail.

corporate: if you are a speculator, the limits of debt availability to corporations means less m&a activity and probably less levered balance sheets. many many companies have built access to short term, cheap credit into their business models (banks, for instance borrow short and lend long and pocket the difference). lots of other companies, fund the time between getting an order, building it, shipping it, paying salaries (etc) and getting paid on an invoice with short term credit as well. these companies could have problems in the near future (those that aren't already in trouble that is).

government: this is the most disturbing probably. we all know that debt levels in government are insane. but what happened in the last several months is truly disturbing.
as lack of faith (due in large part to lack of transparency in companies' balance sheets) started to seep into the market, the government got into the business of guaranteeing everything.

interbank lending, corporate short term credit, bank deposits, money market funds, insurance companies, etc etc etc.

unfortunately, what this did was create a "vacuum" where people who rely on credit and don't have government guarantees are being starved for money....or having to pay WAY up for it.


well, if you have money to loan, who will you loan it to? well, the place with the highest return for the least risk. so, if you believe that you have a gov guarantee on one class of debt and not the other, you'll migrate to the guaranteed money.

governments, around the world, trying to keep funds from fleeing their country started guaranteeing everything. every other government was forced to follow suit. the problem is, that the sheer volume of debts being backstopped by some of the more marginal countries is beginning to outstrip the governments realistic ability to backstop the debts.

So what's the problem with this?

well, we are running a very high risk of having cascading sovereign debt defaults. if this happens it will only make personal and corporate debt harder to obtain without paying higher premiums.

so, we're effectively living through a deflationary credit unwind -- while the government does everything in its power to reflate -- short of demanding and enforcing truth in balance sheets (including their own) .


a random walk in prices postulates that stock prices move in a "predictably unpredictable" fashion....brownian motion, where each "tick" in the market is detached from the last tick. in this fantasy world we can plot the probability of price distribution in a classic bell curve.


as we've seen, prices are VERY dependent on what has happened in the immediate past. they do NOT follow a standard distribution and trends in motion tend to stay in motion -- in large part because the price move tends to have influences on the very system that is determining the price (reflexivity as soros puts it).

for example, if the price goes down by a lot, people holding that position LONG on margin will be faced with margin calls, exascerbating the downward pressure. same thing can happen in reverse.


I think (and have thought for some time) there is still a very high risk of an equity market crash.

This may be brought about by sovereign defaults, a 'extraneous event' or a butterfly wing -- there's no telling.

I'm selling any pop I see in this market still.

This strategy, like any followed with religious zealotry and/or too much leverage will occasionally get me killed (like today), so please don't consider this trading advice. This is just my way of *finally* answering her question.

I think it's over when median home values are no more than 3x median acheivable incomes (and no looming local tax crunch), and balance sheets are transparent and believable. and to get to that point means a lot more "delevering/pain" in the pipeline.

Aren't those cheery thoughts :)


Tuesday, October 14, 2008

Silly Rabbit....

...Trix are for kids....and people who want their poop to turn green :)

Being one that occasionally reviews his fecal matter, I noticed a disturbing correlation between eating Trix cereal and disturbingly green poop.

It doesn't quite turn "" green, more an army olive drab...but definately GREEN. spooky.

Being entrenched in the processes or rigorous science, however, I was not too quick to attach causation to a phenomenon in which we could only apply correlation.

But what to do? I couldn't very well clone myself to create a "control group" -- even if I could get past the minor technological speed bump or two in order to create my clone, I would probably need TWO clones, and then I'd need to wait 39 years for them to reach my age.

Ignoring of course that their medical histories would be nearly impossible to keep consistent with mine growing up -- and dietarily, where could I even *find* "Tab" anymore? Not to mention, the cancer-scare red m&ms...

...Even if it were possible to create and cultivate two identical clones for my experiment, it was clear that a clone of me, raised on my diet, wouldn't stand for being in the control group. Trying to restrain a "me" from those awful, oversugared, puffed corn nuggets, dyed in colors not found anywhere else in nature -- well the "control clone" would obviously revolt.

The clone deprived of Trix would obviously need to be restrained after throwing a cereal bowl filled soggy ass flakes filled with "Total", or some equally atrocious "healthy"(er) alternative, through the one-way observation glass of the experiment room.

No, there was just no way to feasibly pull off this experiment.



Everyone knows that everything on the Internet is true. So, I immediately waddled over to my computer and typed in "Trix Green Poop", and the good folks at (I'm not making this up) were kind enough to answer my question (although in this particular study, he is consuming kool-aid):

"The dye used in purplesaurus Rex is FDA Blue #5, and dye-lake red. Turns out that when metabolized in sufficient quantity, the blue dye combines with bile, and forms a brilliant green. " this story he goes on to describe his use of the scientific method -- then in one of the comments someone reports the same thing when their daughter eats the TRIX yogurt :)...another one from fruity pebbles, etc.

you can check out the "science" behind this and the "anecdotal" evidence mounting from commenters. :)


Monday, October 13, 2008

Markets SURGE -- Caution is Still Warranted

The numbers are staggering...

biggest move in the up in the dow since 1932, s&p moved up over 10%, etc etc etc.

On Sunday I said, "i do believe we see *some* firming of prices over the next little while."

hahahahha...yeah, i guess that was "some". No, I didn't turn into a British gentleman over the weekend, with a mastery of "understatement". The speed of the advance was just further and faster than even I imagined.

In fact, the s&p met and exceeded my interim technical target of 1000 in one day.

the original idea, put forward by elliot wave theorists was that we're moving into a quick "up, down, up" corrective move on the markets. So, what I'm saying is that we'll see a move up in prices, a small rest then another move up...

The original idea was that this entire 3 wave corrective move would take *at least* a week to complete, but the speed of ascent has been pretty breath-taking so far...if this were to continue at this pace (it won't) we'd be threatening our declining trendlines before options expiration at the end of this week.

So what should you do?

If you can't use futures, can't hedge with options, or set stop losses and you are already out of the market, you should probably stay out. yes, you will miss some gains, but the potential for things to get ugly again fast is very very real.

If you are in stocks and have been holding for quite some time, you could possibly use this 3 wave up movement as a selling opportunity.

Why do I say this? Are you supposed to buy once the market starts moving in your direction?

Yes, but only when it's moving along your primary trend. If your investing horizon is the next few years, and you feel overleveraged to stock price movements, the next few days or short weeks could be your last chance to get out whole.

I will doing my utter best to not hold ANY positions overnight that I can't afford a 50% haircut on....this can be challenging in some securities and accounts, but just beware there is still a risk of a MAJOR bond market dislocation, and governments guaranteeing bank transactions that in some cases (in the EU mostly) dwarf the size of their national economies is a recipe for disaster.

it is like tying an anvil around your waist as you attempt to tread water and wait for the tide to come back....

if we start seeing some more major credit defaults of sovereign debt these "guarantees" are going to come under suspicion -- and then what? TEOTWAKI.

On the bright side, it may be our last best chance to get rid of the FED. :)


Sunday, October 12, 2008

The Russian Online Casino Scam and Bank Guarantees

This post is going to be a little bit about the proposed government guarantees for deposits, interbank lending, commercial paper and mortgages.

Beyond the risk of encouraging carelessness on the part of the bankers, there is a gaping hole forming for the a truckload of fraud coming your way....which is appropriate i every postapocalypitc mad-max-type movie, you need an evil sadistic criminal overlord of some kind controlling the assets that would let people live better lives. i guess this would explain how the criminals get so loaded on the way towards armageddon. :)

But first, a story.

I was talking to a friend of mine I used to be in the online casino business with about credit card processing -- a thorn in the side of the offshore, online casino operators since 2000.

He said that a lot of credit card processors were "once bitten twice shy" because of shady operators in the recent past. I asked him what he meant, and he said, "Russians" -- I'm sure other nationalities had figured this out as well, but he made it sound like there was some degree of organized crime involved in this first, i thought it was the players he was talking about, but as i came to find out it was actually the casinos themselves.

Here is how the simple scam works:

You set up a gambling house, and "customers" come in and buy virtual chips and gamble in your casino. Some win, some pay out to the winners and the losers are out of luck.

After about 6 months of growing the business, the casino suddenly folds up shop and disappears into the night -- miraculously, the processor is still holding a bunch of the casino's winnings -- to make good on a reasonable amount of chargebacks and fraud, etc. that usually comes in with any online enterprise -- especially casinos.

The holdback rates (typically 8-10%) and rolling reserve, which often takes as much as 6 months to completely liquidate back to the casino from the processor is usually plenty -- Unless the casino was purposely processing fraudulent cards -- duh.

After the casino disappears into the night, the chargebacks (from the losing players) start rolling in, in extraordinary numbers, and the processor is left holding the bag with a rolling reserve not adequate to payout the chargebacks.

The defaulting customer and institution were obviously "in on the scam" together and stuck it to the processor.

Now, imagine that you are of the criminal mindset and you've just been told the US, UK and EU govts are basically guaranteeing payments on pretty much anything and everything.

Do you suppose that you might be creating a "moral hazard"? Do you suppose that you're leaving the proverbial keys in the ignition of a brand new mazarati, top down, on a street where the local inhabitants have very little to lose and little compunction about swiping your auto?

How will the markets take this news? Quite probably, they will view these events as positive in the short term for equities prices. If you've been stuck in a losing retirement portfolio use the run-up to get ready to sell. I don't believe we've seen the bottom of this bear market yet, unfortunately --- however, i do believe we see *some* firming of prices over the next little while.

enjoy your sh&t sandwiches taxpayers!

Margin Calls -- Another Bad Week to Stop Sniffing Glue

Thursday, October 09, 2008

Do I Have Your Attention Yet?

In case you're one of those that just doesn't open your 401k statement when stocks are selling off, newsflash:

Government Intervention into Markets Doesn't F'ing Work

and, to be quite honest that is about the only thing that can be predicted when you the govt starts meddling in systems that are far too complex and interrelated to truly understand.

They banned (BANNED!) short selling cause that's what was causing this.
They promised to save our financial system if we'd only give them 850B dollars.
They've pumped perhaps over 1T into the system by 'backdoor' methods
They've had a coordinate multi-country 1/2 point rate cut

Guess what? We have literally *crashed* on all indices since then, and some very very disturbing things are starting to crop up in the debt markets.

Short term? I'm out of the markets 'cause we hit my intermediate downside target of 975 on the S&P and found a bid there (finally).

Technicians are calling for a relief rally. Bond market watchers are still VERY nervous we could get a continuing dislocation in us gov treasuries. I can't handicap it, so until i can, i'm pushin back my chair and cashing out for the moment.

btw, the "short ban" on financials is being lifted tomorrow....these stocks TANKED without shorts to offer bids in a falling market -- just as i said they would and counter to popular keeping with that theme i wouldn't be shocked to see the day they reinstitute short selling to have a counter intuitive green day....maybe even a return to normalcy where people can actually hedge their bets without paying through the nose for puts. what a concept!

it's time to stop believing that these fools in government:

1.) know what they are doing
2.) don't have huge conflicts of interest
3.) are protecting YOUR best interests


Wednesday, October 08, 2008

.50 point coordinated rate cut announced

Gosh, and they did it before market opened too....

This whole game would be alot more fun if it wasn't so predictable, huh?

The "problem" is these fools already made shorting almost everything illegal -- so they won't even be able to engineer a short squeeze out of this...s&p futures hopped up to 1040 in the first minute of the release -- a huge jump.

Now I'm looking to put my shorts back on :)

the "suprise" announcement is here:

For release at 7:00 a.m. EDT Joint Statement by Central Banks Throughout the current financial crisis, central banks have engaged in continuous close consultation and have cooperated in unprecedented joint actions such as the provision of liquidity to reduce strains in financial markets. Inflationary pressures have started to moderate in a number of countries, partly reflecting a marked decline in energy and other commodity prices. Inflation expectations are diminishing and remain anchored to price stability. The recent intensification of the financial crisis has augmented the downside risks to growth and thus has diminished further the upside risks to price stability. Some easing of global monetary conditions is therefore warranted. Accordingly, the Bank of Canada, the Bank of England, the European Central Bank, the Federal Reserve, Sveriges Riksbank, and the Swiss National Bank are today announcing reductions in policy interest rates. The Bank of Japan expresses its strong support of these policy actions.Federal Reserve ActionsThe Federal Open Market Committee has decided to lower its target for the federal funds rate 50 basis points to 1-1/2 percent. The Committee took this action in light of evidence pointing to a weakening of economic activity and a reduction in inflationary pressures. Incoming economic data suggest that the pace of economic activity has slowed markedly in recent months. Moreover, the intensification of financial market turmoil is likely to exert additional restraint on spending, partly by further reducing the ability of households and businesses to obtain credit. Inflation has been high, but the Committee believes that the decline in energy and other commodity prices and the weaker prospects for economic activity have reduced the upside risks to inflation. The Committee will monitor economic and financial developments carefully and will act as needed to promote sustainable economic growth and price stability. Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; Timothy F. Geithner, Vice Chairman; Elizabeth A. Duke; Richard W. Fisher; Donald L. Kohn; Randall S. Kroszner; Sandra Pianalto; Charles I. Plosser; Gary H. Stern; and Kevin M. Warsh. In a related action, the Board of Governors unanimously approved a 50-basis-point decrease in the discount rate to 1-3/4 percent. In taking this action, the Board approved the request submitted by the Board of Directors of the Federal Reserve Bank of Boston.


Seeking Safety in the Storm

My feeling is that you could see a short term technical bounce in the markets tomorrow.

I'll pulled 2/3's of my shorts yesterday.

Still looking for intermediate term support at 975 s&p and if we see it and any the downward pressure relieves at all may be tempted to pull the last 1/3.(that's only about 2.5% down from right here)

In short, it's dangerous times. The rate cut I thought they might try didn't happen. Instead they've flooded the market with liquidity via other means....and so far it didn't work. There is tons of government intervention and changing of the rules of the game (in the middle of said game), so ......Big swings in either direction can happen right here, and if you're bothered by that, decrease your exposure/leverage.

Don't consider this trading advice. I'm not qualified to give it. yadi-yada.

Stay Safe,

Monday, October 06, 2008

Rate Cut Warning

be advised, the tin-foilers among us think that things are shaping up for a potential "suprise" inter-meeting rate cut....i'm not entirely sure it will help however.

stay tuned.

Saturday, October 04, 2008

What's On Your Mind?

This is part one of what will probably be a multi-part series regarding what's on my tiny cadre of readers minds.

Every now and again I check out google analytics' stats to see how people stumble on this site -- usually after getting reader emails or commentary that don't know the first thing about Uruguay. I'm curious how someone would find this site since I don't actively promote it.

Here is a list of some things that have been on your mind in the last few days:

Offshore Account in Uruguay

funny how a crisis tends to sharpen the mind huh? well, this one kind of makes sense...i do write about offshore occasionally, and sometimes I even write about Uruguay :) another popular one along that same vein is: bank account in uruguay -- of course this brings up an article where i skewer BROU -- maybe this will disuade a few folks!

Let's see what else our avid readership is searching for on this site:

Ocular Penetration, and in particular the Ocular pentration restriction act
who said this site wasn't informative, huh? I'm not the first person to blog about this, and i don't even show up on the first page of google for this...who is going to the second page, frustrated they didn't get enough ocular penetration information in the first 15 links? who knows?

In addition, one that is rising in the ranks fast:


Oops I guess the sheeple are waking up. I guess it's never too late, right? (wrong). Better late than never though. This is accompanied by lots of variations like: Depression inflation or deflation, and "Depression Deflation", and the ever popular depression vs. deflation

In addition to all the doom and gloomer stuff on my site I also spice it up with some levity with me as the butt of most jokes. In one I concede and claim the title as the worlds worst forex trader and relate some stories of woe

Midnight Forex

As it turns out, people are arriving at my site after searching on midnight forex. Bizarre I thought, so i went and looked in google and apparently there is a site of that name -- and i rank as number one above him. Even more bizarre. His site must be relatively new.


And of course, there are always a few people interested in my country of residence, Uruguay. This is usually expressed as Uruguay Blogs, cost of living uruguay, cost of living montevideo, or uruguay real estate.

Trading terms

Of all the trading crap I've written about probably the most popular reoccuring search that brings visitors to the site (outside of price of gold, inflation, deflation etc.) is the inverted cup and handle, aka reverse cup and handle or cup with handle..what i found funny is that there is actually a guy with a website called :) how much more can you say about it that i said in my posts (?) oh well.

And then there's these...

And then, there are things that I happen to title a post as just because I thought it was cute, or referenced some genx pop-culture. like Eddie Murphy's Grandma from his "it's cold....what time is it?" routine....and barber barber shave a pig...probably by some poor preschool teacher researching nursery rhymes, only to be assaulted with my random musings on the precious metals markets in 2006.

Florianopolis Women

In addition there seems to be an incredible demand for "information" on Florianopolis Women -- because I say almost nothing about them in a random post on our trip to Floria last year and I still get tons of searches landing on my site looking for pictures of brazilian women no doubt. sorry to disappoint.

And Last but not Least

and of course, there is the occasional search for fubarrio or fu barrio -- which suprisingly enough manages to find me. ;) Who'd of figured that a blind bald failed trader dog would become more popular in death than in life?


Wednesday, October 01, 2008