25 April 2007

Event of the Century

The 21st century is still young as there are another ninety-three years to go. So it might sound over-ambitious to claim that 'The Event of the Century' is already behind us. But I'll gladly take the risk; for I seriously believe that the peaking of the global production of crude oil --- commonly know as 'Peak Oil' --- has occurred in 2006 [1] and will be 'The Event' bound to dominate the history of the 21st century: one of those 'Historical Inflection Points' [2] which abruptly change "fundamentals" in the course of World History. I cannot foresee any other 'Event' coming to eclipse 'Peak Oil', not even the World Wars which might be unleashed in the Peak's aftermath and further fueled by widespread resources' scarcity. Unless, of course, humanity decides upon collective suicide with the massive use of weapons of mass destruction; but such an annihilating 'Event' would spell the word 'End' for most, if not all, of Mankind…

After some 147 years of almost uninterrupted supply growth to a record output of some 81-82 million barrels/day [mb/d] in the summer of 2006, crude oil production has since entered its irreversible decline. This exceptional reversal alters the energy supply equation upon which life on our planet is based. It will come to place pressure upon the use of all other sources of energy --- be it natural gas, coal, nuclear power, and all types of sundry renewables especially biofuels. It will eventually come to affect everything else under the sun…

Take, for example, population. In the 'Post Peak' era, population growth will gradually decrease before becoming stagnant (following crude oil) and passing a Peak of its own --- my early projections show a 'Population Peak' occurring some time around 2025 (a twenty-year lag respective to oil) at a global level of around 7.5 to 8.0 billion people. There is little doubt that crude oil is our world's 'Master Domino': when it thrives all other dominoes flourish, and when it tumbles it does topple all of the others too. Thus, interestingly, 'Peak Oil' will not usher in a revolution, but rather an evolution 'en sense contraire' ('in reverse gear').

'Peak Oil', however, is now in the past and we are presently left facing the 'Post Peak' era. There is little doubt that in this brand-new period, massive changes are bound to occur. The usage of relatively cheap crude oil has invaded every nook and cranny of our modern world economy --- sometimes without the wasteful invasion being fully realized. Moreover, the ubiquitous oil products have created addictions (especially in the transport sector) which will be extremely difficult to uproot. And, not only is the addiction to motor cars common throughout the developed world, but it has also begun making deep inroads in China, Russia and even India: a very dangerous development indeed because as American physician and poet Oliver Wendell Holmes (1809-1894) judiciously remarked:

"Man's mind, once stretched by a new idea,
never regains its original dimensions" [3]

It is not only addictions that the decline of crude oil is threatening but ultimately what Thomas Carlyle (1795-1881), the genius turned historian, called 'The System of Habits' --- the whole fabric underpinning Society:

"Without such a System of Habits… in a word, fixed ways
of acting and of believing… Society would not exist at all.
With such it exists, better or worse. Herein too, in this its
System of Habits … lies the true Law-Code and
Constitution of a Society" [4]

In 'Post Peak', all of our Systems of Habits are in mortal danger. Due to the relative cheapness of crude oil (in relation to other, more expensive daily needs), people don't exactly realize the pivotal role played by its products in their daily routines --- as these products has invaded every nook and cranny of our modern life. It is only when the brakes will be pulled (as they inevitably will have to be), that the general public will come to gradually realize the critical importance of 'Black Gold' --- which currently provides no less than two-fifths of world energy --- and of 'Energy' in general, in their living habits.

Thus, at present, the global masses seem totally unprepared for the two shocks which will inevitably occur in 'Post Peak'. On the one hand, no major institution or medium is willing to inform them seriously on the not-so-palatable consequences of 'Post Peak'; and, on other hand, specialized institutions (such as the 'International Energy Agency' [IEA], the 'Energy Information Administration' [EIA] and OPEC) as well as some major energy consultancies (e.g., the 'Cambridge Energy Research Associates' and the Edinburgh-based 'Wood Mackenzie' research outfit) will go on denying 'Peak Oil' by issuing rosy future oil output predictions.

So that the twin shocks are now inevitable on a global scale, as there is no time left to prepare public opinion for 'Post Peak' sequels. The shocks will first surprise, then jilt and finally entangle swaths of people worldwide. Those better prepared will be less inclined to react in a disorderly way and panic when the shocking truth will be unveiled...

For example, according to my personal research, the country best prepared to cope with the 'Post Peak' shocks seems to be Australia because three major institutions have led the way to boost public awareness:

A. The 'Australian Broadcasting Corporation' [ABC] --- on both its TV and Radio networks --- has exposed its audiences to the 'Peak Oil' phenomenon (always trying to remain impartial by presenting both the pro and con views). A remarkable decision by ABC's top management which will soon prove to have been very wise indeed.
B. The Australian Senate has issued a 'White Paper' on the subject, and also a plethora of enlightened regional ministers, politicians and experts (sometimes acting together in ad hoc committees) have endeavored to encourage the diffusion of the 'Peak Oil' paradigm into the general public (with the Gold Medal clearly going to the 'Western Australia' Cabinet of Ministers).
C. The local NGO groups which have been active since 2003-2004 as they became aware of the impending 'Peak', and have since taken giant strides in preparing their constituents for the coming shocks.

But, in the large majority of countries, no one has prepared (or wanted to prepare) the general public to the Historical 'Peak Oil' Event and to its momentous consequence in their daily lives. Thus, most probably, the popular masses will be directly exposed to two main types of shock:

1. A Material Shock;
2. A Psychological Shock.

Due to the benign decline gradient in crude oil production during the early 'Post Peak' period --- only 3 mb/d over the first transition period spanning 2007 to 2010 --- the Material Shock will not pose insoluble problems and accommodation will prove possible with minimal gradual pain. Moreover, sizeable amounts of wastage in most developed societies will provide a welcome cushion for the initial cuts to be made.

Not so for the Psychological Shock. This shock, in stark contrast, will be electric and abrupt. Stress, fear, depression, despairs and nightmares will be the order of the day --- as people come to face the not-so-palatable facets of 'Post Peak'. When confronted with this series of unknowns, with the trauma of Change, people will try to protect themselves by automatically reverting to their past, to the known, to what they believe to be "real and true" --- in a word, to their reassuring 'Roots'…

I define the overall concept of 'Roots' as a mixture of traditions, language, art, festivals, monuments, academies, museums, institutions, religion, creeds, legends and myths --- and God knows that myths are always infinitely more attractive than reality. Or still, 'Roots' could be said to be

"Past Excellences that have withstood the Test of Time"

Every living society on Earth --- be it a community, a city, a region, a country or a continent --- has its very own set of pell-mell 'Roots'. Some rather primitive, some extremely developed. Interestingly, there is little correlation between a society's 'Roots' and the present status of the 'Tree' it supports and nourishes --- the former being in the Past, and the latter in the Present. But, interestingly, the Future will come to depend more on the Past than the Present…

Soon, the attraction of 'Roots' will prove irresistible, and woe to those societies who have little or none, and to those who had some but have cut them off (for example, by changing their language or alphabet), and also to those who have failed to properly tend their valuable 'Roots' over time.

Some, like the Belgians, have already begun their historical 'Return to Roots' by trying to live in the Middle Ages (a glorious period for their small country as its trading centers of Bruges and Antwerp were then dominating the world). In Belgium, this return to the past

"has become a national passion… with groups of medieval
enthusiasts such as the 'Order of the Hagelanders' and
the 'Gentsche Ghesellen' [Ghent's Companions] having
sprouted up over the past two years" [5]

Across the country, a growing number of Belgians "are trading in their jeans for suits of armor... they are rubbing stones together to make fire, eating their dinners out of cauldrons, re-enacting heroic battles… and, in their medieval life, appreciate the value of everything they do".

In Europe, Belgium is only the top of the iceberg. Soon many others will follow suit --- countries such as France, Germany, Spain, and Italy. Especially Italy which is definitely 'Number One' in the world (by miles) for her magnificent 'Roots' --- which reach deep in all times and in almost every possible domain, with the Churches of St. Peter (The Vatican) and that of St. Francis (The 'Porziuncola' at the Basilica Santa Maria degli Angeli near Assisi) as two of her Unique and Universal Beacons.

As usual, it will be the masterminds who will be showing the way leading to their nations' collective 'Roots'. It makes sense that Men of Excellence will be those pointing back to past Excellence. How they will manage to do so (through the major institutions at their fingertips) might prove of utmost importance for the future wellbeing of their own society.

And, let us end with the verdict passed by one of the great masterminds of the 20th century, French thinker Andre Malraux (1901-1976), who paid the greatest possible homage to 'Roots' by advancing that:

"Le seul monde qui vaille la peine d'etre sauve est le monde des statues"
["The only world worth saving is the world of statues"]


[1] See paper 'Peak Oil: The End of The Modeling Phase' (March 2007)
on the website www.samsambakhtiari.com

[2] Taking the basic idea from the expression 'Strategic Inflection Point'
coined by Andrew Grove, the former 'Intel' CEO (1987-1998) --- in
his book entitled "Only the Paranoid Survive" (Doubleday, 1996).

"A Strategic Inflection Point is defined as: a time in the
life of a business when its fundamentals are about to change"

[3] 'Wikipedia' at http://en.wikipedia.org --- Oliver Wendell Holmes, Sr.

[4] Thomas Carlyle, "The French Revolution", (New York, The Modern
Library, 2002) p.33.

[5] Dan Bilefsky, "Pining for power, modern Belgians return to the
Middle Ages", in the 'International Herald Tribune', April 3, 2007.

20 April 2007

The Structural Problems of Structured Finance

Edward Chancellor

When banks discovered how to securitize loans they inadvertently created a sexy alternative investment. Looking for an asset which isn't correlated to the stock market? Then, invest in mezzanine tranches of collateralized debt obligations. Or better still, give your money to a credit hedge fund which promises to produce double digit returns. Rampant demand for structured securities has been a boon to bankers, homeowners and private equity firms. It's also led to the mispricing of credit risk. But participants in this brave new world of finance have little cause to worry about that.

Last year, some $340 billion of collateralized debt obligations were issued in the United States, according to Credit Suisse. That represented a 58% increase over the previous year. The true size of this market is probably much larger when private deals, arranged by investment banks, are included. The securitization of loans has enabled banks to remove credit risk from their balance sheets. It also provides institutional investors with a means of diversifying and creating exposures to new risks, which were previously inaccessible. The first-loss, or equity, tranches of CDOs appeal to sophisticated market participants with a greater risk appetite.

Exponents claim that securitization not only strengthens the financial system by distributing credit risk away from the banking system. It also lowers the cost of borrowing by placing that risk in the hands of those who are most willing and capable of bearing it. If such claims were true, we would expect credit to be more efficiently priced than ever.

That doesn't appear to be the case. Until recently, the US mortgage world, where most loans are securitized, was characterized by an extreme recklessness. Private equity firms are currently able to finance risky buyouts with cheap loans that carry little or no covenant protection. As Carlyle Group co-founder Bill Conway observed in a recent memorandum "there is so much liquidity in the world financial system, that lenders (even ''our'' lenders) are making very risky credit decisions."

Of course, Carlyle's lenders aren't stuck with the consequences of those decisions. Instead, most LBO loans now find their way into structured finance securities, known as collateralized loan obligations. Last year around 60% of US buyout loans were packaged into CLOs, according to Standard & Poor's Leveraged Loan and Commentary. The same dynamic has been at work in the mortgage world. Lower quality loans have been packaged initially as so-called "private label" subprime mortgage-backed securities. The riskier tranches of these MBS, which were traditionally difficult to sell, were subsequently put into CDOs. Around $200bn of mortgage loans went into CDOs in 2005. The bulk of these loans were below investment grade.

Mr. Conway is not alone in believing that the spreads on loans provide insufficient compensation for the risk of loss. David Roche of Independent Strategy, a London-based research firm, has coined the term "New Monetarism" to describe this phenomenon. Roche argues that this new source of liquidity has contributed to low risk premiums and inflated asset prices. But it would be wrong to categorize the lenders as crazy.

As we've seen the banks which make loans don't hang on to them. Nowadays, they earn more than enough in fees from originating, packaging and servicing loans. By freeing up their balance sheets, the banks' returns on capital have soared. The hedge funds, which invest in the equity tranches of these structured securities, also have their reasons. As long as defaults remain low, their risky bets are designed to produce outsize pay-offs. Equity tranches can produce internal rates of return at the high end ranging from 20 per cent to nearly 100%, according to Martin Fridson of Leverage World. Since no US leveraged loans turned sour last year, they've proved a good bet so far.

Furthermore, as these gains have come with little or no volatility hedge funds get to report high risk-adjusted returns (as measured by the Sharpe ratio). Of course, some of these loans may go bad in future. But given the way hedge fund managers are compensated, it doesn't pay for to think too far ahead. After all, their performance fees are distributed annually and aren't refunded even if past gains are subsequently given up. So even if a loan is destined to produce losses over its lifetime, a hedge fund manager can still, in theory, profit from taking an early exposure. For those wary of the endgame, there's always the possibility of selling on the loan before the credit crunch appears.

That's not the end of the story. Institutional investors also pile into the senior tranches of structured securities. Given the complexity of these instruments that might seem strange. Last year, ABN-Amro launched a product known as the Constant Proportion Debt Obligation. The CPDO, as it's called for short, sells default protection through an index of credit default swaps. It is designed to carry maximum leverage of up to 15 times principal. If a couple of names in the index blow up or spreads widen beyond a certain point, then investors in the CPDO could lose most of their capital. A yield of 200 basis points above LIBOR might seem insufficient compensation for these risks.

But not to investors who are attracted by its triple-A rating. Banks and insurance companies like to hold investment-grade debt as it attracts a lower capital charge from regulators. The CPDO appears designed to get the highest possible yield for its rating. Frank Partnoy, a professor at the University of San Diego School of Law, claims that the "ratings agencies have developed methodologies for rating CDOs that result in the combination of tranches being worth more than the underlying assets."* According to this view, structured securities don't create value by distributing risk. Rather, the various tranches are boosted artificially with ratings which don't reflect the underlying risks.

Whether that's true or not depends on the accuracy of the models used by the ratings agencies. These models are not beyond criticism. They use historic data to measure the risk that different names within a CDO will simultaneously default (what's known as "correlation risk"). In the case of the CPDO, they also gauge the likelihood of spreads widening, which is a market risk. For all their mathematical sophistication, the models will only be accurate if the future, more or less, resembles the past.

What's more, the investment banks which issue structured securities shop around for the most favorable rating, says Ed Grebeck, a lecturer in Credit Trading Products at NYU. The ratings agencies earn fat margins from this business, which has been growing rapidly. Around half of Moody's and S&P's earnings now come from structured finance. But if these ratings turn out to be wildly inaccurate won't the credit rating agencies suffer as similar punishment to those investment banks which gave dodgy recommendations on internet stocks a few years back? Possibly not. If everything goes awry, the rating agencies will deny, as they have in the past, any fiduciary responsibility to investors, claiming instead that their comments are made under the right to free speech guaranteed by the First Amendment.

The growth of securitized lending and derivatives has contributed to the extremely easy conditions of the credit markets in recent years. The mispricing of credit appears irrational to many observers. But the structural flaws in the world of structured finance provide market participants with reasons to play this game to its sorry end.

* Frank Partnoy, How and Why Credit Ratings Agencies Are Not Like Other Gatekeepers, in Financial Gatekeepers: Can they protect investors? (Yasuyuki Fuchita and Robert Litan, editors, Brookings 2006)

13 April 2007

You want some trading advice: here it is..

If one use the Monday, April 9th Dow high of 12,593, and todays low of 12,428, the various fibonacci retraces are:

.89 12,575

.786 12,557

.618 12,530

.50 12,510

.382 12,491

.236 12,467

If one looks at a 15 minute bar chart, these were all momentary stoppage points, as the Dow climbed higher.

Further, when I look at a chart of the last month's correction, I see a typical irregular flat. An easily recognizable corrective pattern. Accompanied by low volume

I see the Bank index looking scary, sitting on the bottom of the bollinger bands.

The CRB index has begun to roll-over. The dollar is hitting new lows.

The key move for the 10 year and 2 year notes started at -15 bps on February 21st, a few days before the plunge. This came to 0 bps on March 22nd, from which it made it back to -7 bps on March 30th. Going thru 0 bps reverses the trend to steepening. Like inverting with a boom, it is a cyclical event that shouldn't be mistaken as deliberate policy.

The key mortgage bond prices have been falling since March 21st. As the falling banking index can attest to.

Things are contracting. Once thru the contraction, the Fed should be unable to print, hence the dollar will firm.

Now, after all the b.s., let's talk about bears. They have terrible eyesight. Sometimes they think they see things that aren't there. And sometimes they don't see things that are there.

Well bears, we are right here, Dow 12,550

Now, how about that big honkin' bear nose. It has a keen sense of smell. And it's currently smelling the last spec play in natural gas yet to play out. Everything else in energy and metals is rolling over. That's the whole thing supporting this game. Base metals and energy. It's over.

The problem with a bear's nose is he smells a rose like a color painting by Raphael (one of the super-ninja turtles I watch). It's a kaliedoscope of colors. That's why your dog will sometimes eat his own poo. And loves to sniff bums. Can't get enough of those colors.

Next, is a bears character. Does he like cheese with his wine? Or, does he just whine? Have you ever heard a bear whine? No, because real bears don't whine. It is the most pathetic sound, and generally only attributed to cubs, or bear clowns.

Bears have a hard time enjoying themselves. They don't have many friends. They don't like to go fishing together. And they tend to drink alone.

These character traits are for the most part anti-social.

Therefore, bears need to get get there noses out of their, or other peoples bums, and start smelling the roses, not the roses of ungentlemanly conduct so often found in the Oval office.

We are at the precipice of soon to be bear heaven.

So, what I don't understand, besides everything, is why are bears whining?

Did you hedge? If you did, did you sell your calls? Did that feel good? Did you add to your shorts at the close? Or are you waiting for the .89 12,575 retrace?

It's great to be a bear. Even better, have that glass of wine with dinner and before bed. Skip the cheese, it smells.

RE: Thanks boo boo, good post AnxiousBear
NEW 4/12/2007 2:26:12 PM
And why do bears whine? Because we HATE being short on up days, we cannot stand being short on up weeks, are disgusted when we are short on up months and man o man, really really can't stand being short on up quarters. It just makes a grown bear cry being on the wrong side of a move even though it MAY HOPEFULLY resolve itself the way you describe. All the dumb bears have now is hope, hope that the master-bankster-greedhead-mega-controllers of the so-called market deem bears now fit to feast.

RE: Unlike the movie "300", the reality is... rasputin
NEW 4/12/2007 2:44:52 PM
...that a few bears CANNOT overcome one-hundred fifty million long-only sheeple, penned into 401(k)/IRA/mutual funds and being led by Wall Street Wolves and DC Gansters.

The only hope for the bears is that the Wolves and Gangsters stumble and that the sheep panic and stampede out of the markets en mass.

However, given the overwhelming programmin of the sheeps, I don't look for this to happen anytime soon, if ever.

Therefore, I intend to not fight the horde of lambs and theie shepherds and will just stay long--gold and silver that is!!!


RE: Unlike the movie JBVO
NEW 4/12/2007 3:01:20 PM
How do you explain 2000 to 2002 when SPX declined 50%? The wolves and sheep existed at that time as well.

RE: I can explain that time-period. rasputin
NEW 4/12/2007 3:15:34 PM
As the NASDAQ bubble burst, the vast majority of sheeps were caught flat-footed at first. However, from about 2001 to 2002, they started to panic-sell.

You may recall it was in the Fall of 2002 that Bernanke was trotted out and started making "helicopter" speeches.

Also, the Fed went into serious Weimar-Repubolic mode, dropping Fed funds rates and cranking up the Monetization Machine.

From that time until this very day (4.5 years and five-thousand point on the DJIA), the sheeps have been lured back into the slaughter pen. This is confirmed by the record amount of stock margin loans currently in place.

Will this bull market REALLY continue forever?

Who knows?

As time goes on, I become more and more convinced that we WILL see Dow 36,000. However, gold will be a t $5000, silver at $200 and a gallon of milk will be $10.

RE: Thanks boo boo, good post boo boo bear
NEW 4/12/2007 2:59:35 PM
I am unaware of any bank, central bank or Federal Reserve ever preventing a bear market.

As you know, bears and bulls learn by getting their a$$e$ burned. That's why, for the most part, we have such little hair in that area. Unless your like my uncle, Big Bubbha Buttle Butter, who lives just down the road from me. Very hairy.

But then, he doesn't trade for a living. Hmmm.

We all pay our dues one way or the other. And I'm one of the guys that has challenged the banks in the courts. I know. The banks were one of the resources that enabled me to trade in the market.

I enjoy the criminal mind. It is that mind that dominates the world of finance, politics, in a nutshell, money. This of course is not news to anyone. But for the trader, the saying is, "think like a criminal."

That used to be posted on this board regularly. Thanks Yogi. I learned a lot from him and mannfm11. I would always write down their comments.

I was 12 when I built my first sailboat. The frustration of getting a good edge, joinery, lofting, was intense. This served me in life in a way that I'll never forget. We all go thru a frustration curve whenever we learn or partake. After a while we realize we survive, and the game gets easier. Instead of drilling a hole at the end of the wood stock, you clamp it so it doesn't split. Softwood crushes if the chisels/planes edge isn't right. And the edge isn't right if it reflects light. Most importantly flatten the back of the steel before you sharpen etc.....

Boats can drive you up the wall, especially when dealing with other peoples messes. Like the markets. But there are proven methods. Whether its in the greeks, elliott wave, time clusters of indicators etc. The tools are endless, and do wonderful work.

I went thru that period of blaming the banks, the boys etc. I don't anymore. I like playing with them. Their very good. Which means maybe I'm pretty good too. Which means there's a lot of people on this board and lurking that are very good. And it's all free.

Is the market rigged. No doubt. The odds are always with the house. We know that. And many people make a living from gambling. They just trade different kinds of paper.

Frustration is very beneficial. It teaches leverage. Ask any mechanic about leverage, and he'll refer you to his favorite cheater bar. I know many grown men today who don't have a clue what that is. I bet Yogi uses a cheater bar a lot. He's probably got a small collection. He's that kind of trader.

Or the use of Oxy/acetalene to free up a bolt/nut. When the action heats up, volatility is when things bust loose. Yogi pee's on the weld to cool it, so he doesn't burn his hand. I know, he said so, and I wrote it down.

This post is in no way intended as boo boo thinks he knows something about trading. It's intended as what the members on this board over the year gave me. Where else do you get a free education?

I'm 49 years old. Maybe I'm just too damn old to get frustrated with the markets anymore.

People here are funny. I appreciate that.

Good trading to all.

RE: I don't understand....... JeckylHeckle
NEW 4/12/2007 2:46:11 PM
I whine because I can't stand the smell of bullshit and we're getting buried in it

RE: I don't understand....... boo boo bear
NEW 4/12/2007 3:07:41 PM
When's it ever been any different? Ten years ago? Twenty years ago? A hundred years ago?

See the problem with going back in time is that our brains thought differently when we were ten years old as compared to twenty years old.

I thought differently at forty than at thirty. The same bull wasn't the same bull anymore. It was either old or new.

Is the market old or new?

RE: where I believe it is different: currency bonfire... JeckylHeckle
NEW 4/12/2007 3:48:58 PM
Every day I wake up hopeful that the markets will illustrate that my fears that authoritarian hijacking of the markets are unfounded, that hyperinflation via this route is not the outcome sought by the monetary authorities. But since July, the number of days offering any hope in that regard has been too few and the showcasing of actions that substantiate those fears of mine has been overwhelming.

I hope and pray that you are right boo boo bear. But it seems here that THIS TIME, when the US debt/income chart has gone hockey stick, the official sector is printing whatever it takes to keep this thing rising. If one day 6 trillion dollars of sell orders hits stocks, I now sorta expect them to buy 7 trillion in stock futures. They have F'd things up so badly

RE: Do technical indicators have any value...? ericblair
NEW 4/12/2007 2:47:22 PM
If it's true that the "markets" are manipulated, and in my view this is prima facie, then do technical indicators have any value? I'm not questioning your competence, or your understanding of historical market forces and/or analysis, I'm just wondering if technical indicators can be applied to rigged markets.

RE: good point imo nm mohonri35
NEW 4/12/2007 2:57:15 PM

RE: Do technical indicators have any value...? JeckylHeckle
NEW 4/12/2007 2:58:46 PM
for 4 years we can depend on technical failures to ignite WTFRFH - particularly when those breaks are accompanied by bad fundamental developments

let's recap the new "market":

failed gap-up openings: excellent buying opportunities

Hot inflation numbers: tend to ignite huge bond rallies

Spikes in gasoline/oil: transports go nuts to the upside

Retail sales take it in the crotch: retail sector rallies 5%

Lending shuts down for 40% of homebuyers: Homebuilders rally 4%

and so on

And NO, it wasn't always this way

now, if you'll excuse me, I'm gonna go buy some RUT futures ahead of tomorrow's Zimbabwe Showcase Jamboree

RE: Do technical indicators have any value...? nobid
NEW 4/12/2007 4:26:25 PM
Anyone who claims it was always this way has very little experience watching the pig show.

In 30 years of watching equities and 20 years of watching futures what we are seeing now has no resemblance to anything I've seen before.

If tens of thousands of hours has taught me one thing...
It is different this time.
The lunacy machine was cranked past the red line post 911.

Please please no claims this is normal "market" price discovery.
Its nothing more than a rat infested pigpen run by mobsters who know the final score before the close each and every day.

MTG today, was another exhibit that can be added to the thousands of others.

RE: Do technical indicators have any value...? skeptick
NEW 4/12/2007 3:01:05 PM
IMO, for the most part, no. Because where the controlling financial authority is ever more vigilant to prevent a decline, the threat of a decline, then the hint of a decline must be addressed. Before the current regime, a decline...just happened. Now, even a hint of a decline is tended to with gusto. These days, when I look at a chart and every instinct I have is that a stock will roll over....it doesn't. It won't act that way. It acts confoundingly the opposite. And gets bought all day long.

And yet...there is hope.


RE: MRK skeptick
NEW 4/12/2007 3:20:16 PM
Wow...two astounding conflicting pieces of news on MRK.

Judge rules in a way that possibly kills 1K cases in TX.

FDA recos against approval of a new drug.


RE: Do technical indicators have any value...? boo boo bear
NEW 4/12/2007 3:16:39 PM
The question has to define the spectrum. The spectrum has many different lights, that project the one picture.

For example, seasonals as indicators provide a measure of spec interest supplying liquidity which fuels the stock market. How does one measure this? The Pi cycle? The coppock curve? How does one use these?

How is credit expansion/contraction defined, and how do you measure these? How do these relate to the yield curve? Which in turn relates to seasonals?

Who mentors you? That is, who out there do you know that has made a living at trading? Who can you talk to that knows more than you?

What cluster of momentum indicators are you familiar with?

What is the relationship of the Gold/Silver ratio to liquidity and credit expansion/contraction? How do you apply it? What are the seasonal implications of it?

Why is the monitoring of the 2 year note to 10 year note important? How is that used as an indicator? Along with the corporate bbb junk to treasury? What do they indicate?

Markets need credit expansion to continue up. How do you monitor that liquidity?

Pass the cheater bar, and pee on the weld is my favorite measure of volatility.

RE: Too much money out there JeckylHeckle
NEW 4/12/2007 3:58:28 PM
when I talk to the guys I know who are killing it, that is the take-away

curve inversions, housing bubble bursting, recession signs all over the place, 500 point down day out of nowhere....NOTHING stems the tide of money money money

it's as if somebody is simply printing 50 billion a day and depositing it into mutual funds

maybe somebody is

RE: Got a new one on ya... Yogibear101
NEW 4/12/2007 4:11:15 PM
...you may assume I use a cheater bar alot since I'm mechanically inclined. Actually, I seldom have use for one. There's a right way, a wrong way, and my way of doing things. Cheater bars will break a standard socket. Split it right down the side, sometimes you can get hurt when that happens. If you must use a cheater bar, get a hardened impact socket. They are thicker, and six point rather than 12. Enough of that lesson.

You may know from my posts about our Friday night drinking game of golf. One of the boys has a problem standing over the ball and moving his head before, during, and after the putt. Needless to say we took alot of his money. The movement and miss distance increased as the pot grew until it was noticable. He was trying too hard to get back to even.

Rather than see him give up on the game, it was time for a lesson. The typical way to show a golfer his head is moving is to tie a string around his head with a plastic ball on the end. This also fixes alignment between the eyes, ball, and putter. Unfortunatly, we didn't have any string, or plastic practice balls. The next best thing is 2" wide duct tape and a Hooters hot wing....stuck to the forehead.

If the wing swings, don't putt, you're trying to hard to get even.

The same thing works for trading. If you're not concentrating on where you're aiming, you'll lose alot of money. Everything must be in alignment, hold still, and don't jerk your head up to follow the ball or it won't make the cup. Takes practice and patience. If you are down, don't try to make the big plays in an attempt to get even. That's when the wing swings....and you miss.

RE: Got a new new one on ya' boo boo bear
NEW 4/12/2007 4:20:57 PM
Not to overwhelm you with my tecnical expertise, but let's put away the boys toys, and pull out the real men's toys (yep, bring along the measuring tape too).

I'm talking 3/4 inch drive, D-8 Cat dozer blade. You bring the half inch rachet/breaker bar. I'll bring the 7 foot inch and a half cheater bar.

Then, we'll get out the measuring tape and see who's got the parts.

And, as long as where talking technicals, Bourbon to lubricate moving parts.

RE: yeah, yeah, yeah..... Yogibear101
NEW 4/12/2007 4:48:43 PM
....I owned a CAT 943 for four years. I've still got a 350 ft. pound torque wrench, 3/4 drive.

One of these days you should try installing a 90,000 lbs. CNC machine tool. They come with these hollow leveling jacks that fit over 1"+ anchor bolts sunk 24" in concrete. In the center of the machine there's casting holes a midget couldn't fit in to screw these jacks, let alone a cheaterbar. The massive cast iron base is always warped & twisted from shipment. Yes, cast iron moves and sets.

Your first job is to rough level the base to within +/- 0.020" using precision calibrated bubble levels. It requires three open end wrenches; one for the jack screw, one for the locking nut, and one for the anchor bolt nut. The method is to find the highest point or corner of the base after all the jacks are retracted. You give that jack one turn up, tighten the anchor bolt nut, then the lock nut and observe levels.

The rest of the week you spend on your hands and knees jacking all the other points to match that highest point to the best of your ability. As the temperature changes, the cast iron moves at a different rate than the concrete. It is also settling and trying to warp the earth to it's post shipment state. Don't move the levels overnight or you'll have to start over. Once you're happy that things aren't moving, you can assemble the rest of the machine and fire it up.

After everything checks out, you've got to square the machine X, Y, and Z axis. Before you do that, it's a good idea to place an electronic level on the table and make fine level adjustments, which means another week on your hands and knees sometimes undoing what you did on rough level. Once it's actually making parts, come back in a month and do it all over again.

RE: I can easily top that...... boo boo bear
NEW 4/12/2007 5:44:14 PM
I lied.

But here's one for you. I worked towboats (tugs) for a while, on the Fraser River. We would take a forty foot tug, with 425 hp. and hook up to 6000 ton rock barges. The river runs an easy 6 knots on the ebb and flood. During spring melt freshet if you fall over, the drag is to great to pull yourself out.

Anyways, I'm a green deckhand. The skipper has one eye and forty years experience.

The Fraser splits in three, the south arm, the Slough, and the North Arm. The North Arm has a swing bridge for trains. And its a 50 degree turn off the main arm.

Well, I'm sweating. Ab, the skipper isn't. He's reading the sports.

I call him for the swing bridge. The current is on our tail. Which means your basically out of control. Ab just pulls the hammer (throttle) back, and basically drifted this 6000 ton rock barge thru the gap. With a few kicks here and there. He let the river do the work.

The stories I could tell about that guy.

Now, park that sucker. Another story. Didn't leave a scratch.

RE: Fraser tugs... PulpLogger
NEW 4/12/2007 6:11:51 PM
We spent a week camping this summer, at Porteau Cove up by Squamish, with 3 families in BC coast tug work. (A week of sun, believe it or not.)

I guess they mostly run log barges, down the coast. But said though in one slack time, a disabled vessel was on the radio for a long time seeking a tow from Hawaii - so needing the work off they went, in a 56 footer. Their big question was "You guys had to figure you were scraping the bottom of the barrel - weren't you a bit worried about what would show up?".

RE: HA... Yogibear101
NEW 4/12/2007 6:20:18 PM
....tight squeeze eh? I usually see the aftermath of screwups. And then pay for them. That's one reason I sold my site work corporation. You can go from a huge profit to a loss in seconds of operator inattention. We used to get into trouble for tracking mud on the streets from tractor tires. So I told my two tractor drivers to run them in high gear over in the field, you know, sling that mud off. I get in the truck and leave.

Five minutes later I get a phone call to come back. One tractor is on top of the other one, both were four wheel drive with front end loaders. The big one was on top with it's front axel laying on the ground. The little one was broke in half just behind the clutch housing. Both operators had been thrown clear because they didn't fasten seat belts, which was a rule violation. They only suffered some bruises which was good for me. Their story was the little one was slower, and turned in front of the big one.

Anyway, that little job we were doing came nowhere near paying for two 4 X 4 tractors getting fixed. And that's with me doing the damn labor. Lesson learned, don't give second chances when an employee screws up. These same two guys ended up costing me more money later, but that's another story.

RE: Good trading advice, Yogi definitionofbear
NEW 4/12/2007 4:59:54 PM
Many years ago I wondered why I consistently lost big sums of money over time.

It's easy to be right more often if you wait for the correct event, and avoid trying to get even when you exit out of an error. That's like your golf analogy.

After careful thought, it also occurred to me that I was trying for big scores. So I would quickly take many losses and less quickly close nice sized gains, which I thought would blossom into big scores. Often those gains shrunk because I was not afraid when I had a gain. It was fear that wisely drove me out of losses. So I learned to have the same fear when I had nice gains. I now take many small gains as though I had the same fear as a loss. I quit looking for the big score trades.

12 April 2007

''Inside the House of Money'' Book Review

''Inside the House of Money'' by Steven Drobny (Wiley, $29.95) pulls back the curtain, slightly. This is less a book of sustained narration or explanation than a notebook of interviews developed from exclusive confabs sponsored by the author's consulting firm, Drobny Global Advisors. Still, the ruminations of supposedly hush-hush hedge fund operators are richly illuminating, and much less expensive than the fees they charge.

Nowadays, ''hedge fund'' signifies a legal and performance compensation structure, not an investment strategy. Mr. Drobny focuses on the style of ''global macro,'' which he defines as investing in any asset class anywhere in the world. He dwells little on crucial differences in investment time horizons.

But today, he says, all investments, even mutual funds, ''are subject to changes in the world economy, the U.S. dollar, global equities, global interest rates'' and other factors, not to mention wars. ''Global macro,'' Yra Harris, the Chicago-based trader, tells Mr. Drobny, ''used to be called 'geopolitics.' ''

The author shows us human beings, not forces of darkness. Many of the 13 interviewees reveal getting a head start from friends of friends and fellow alumni. Some draw inspiration from ''Reminiscences of a Stock Operator'' by Edwin Lefèvre (1923). Several acknowledge harvesting ideas from The Economist. Most now run their own funds, but few enjoy managing people or even portfolios. They love managing risk.

A number of themes emerge. First, despite prodigious research, their brilliant ideas can go awry.

''If I've gotten better at it,'' the industry legend Jim Rogers tells Mr. Drobny, echoing others, ''it's because I've made enough mistakes.''

Another says that ''my favorite trades are when I'm wrong and I get out without losing too much money.''

Second, trading and analysis entail different mojo. Mr. Drobny's business partner, the analyst Andres Drobny -- no relation -- says the crucial skill is not just reading a crystal ball on the world, but translating an insight into a trade.

Third, incentives have become perverse. In a $10 billion hedge fund, one purist complains, the 2 percent management fee amounts to $200 million, whatever the performance, and as soon as the fund goes up 10 percent, that's another $200 million (20 percent of the $1 billion profit), meaning that the manager can ''close out positions and take the rest of the year off.'' So much for absolute return.

Full-blooded characters enliven the text. Jim Leitner, a former graduate student in international finance and Russian studies who grew up in Germany and Turkey, bounced from one trainee position to another before landing at Bankers Trust in 1985. In 1997, he founded Falcon Management, behind a gas pump in Wyckoff, N.J., where he apparently amassed 10 percent of the international market in Turkish lira.

In 1999, when an earthquake caused Turkey's stock market to collapse, Mr. Leitner bought shares in Turkish glass companies, anticipating replacement demand. He still follows megatrends and aggregated country data, but he also bores deeply into specific companies abroad. Good global macro has become global micro.

Dwight Anderson, a commodities specialist and an alumnus of Princeton's history department (where this reviewer teaches), started as a manufacturing consultant, visiting factories. Then he was hired by Tiger Management, Julian Robertson's firm, to help run a commodities desk. After crunching the numbers on palladium, Mr. Anderson staked out mines in Arctic Siberia and subtropical South Africa, confirming what the data indicated -- a looming supply deficit. Tiger bet that prices would climb. Prices fell.

''Julian would always ask, 'Are we right in this situation?' '' Mr. Anderson recalls. '' 'If so, we should be bigger. It doesn't matter that prices moved against us.' '' They doubled down. Eventually, the price of palladium exploded to more than $1,000 an ounce, from $120.

Successes like that allow you to be wrong a lot and still trounce the Street. But, Mr. Anderson says, ''as Tiger got to be upwards of $25 billion, positions had to be massive to be meaningful.'' Size helps until it hurts.

What is this select group's collective prognosis? Shakeout.

Peter Thiel, whose Clarium Capital charges no annual fee but takes 25 percent of any profits, maintains that ''we are living in a world distorted by the biggest financial bubble ever seen,'' adding that ''there has to be a deleveraging of the world's financial system.''

Scott Bessent, who ran Mr. Soros's London office when it ''broke'' the Bank of England, shorting the pound in 1992, suggests that what has changed is that now ''your biggest risk can be how your competitor is positioned.'' Welcome to game theory.

Yra Harris concurs that ''global risk is way out of line right now'' and that ''there's not enough liquidity to absorb a blowup.'' But he also says that it can be costly anticipating that something ugly is bound to happen, because it may not happen for a while. ''If you're right at the wrong time,'' Mr. Harris says, ''you're wrong.'' So they're all in.

Whatever may befall us, many hedge fund types will be O.K. After all, Keynes invented their profession during the Great Depression.

''One of these days,'' concludes Sushil Wadhwani, a Keynes devotee and former Bank of England analyst, ''the chickens will come home to roost, and when they do, there'll be huge opportunity.''

Calvin J. Bear - On Gold

When you look at people's analysis of the price movements of gold you should take into account some factors to do with how the international supervisory committees on banking and national accounts enforce standards onto banks and participating governments.

Yes it's true there are international treaty obligations but these in their own right need not FORCE governments into line. Take Zimbabwe for one good example. Mugabe has had no interest of any kind to preserve the integrity of his economy and the currency of Zimbabwe. But he takes comfort in the examples of Singapore and China as countries that have claimed the right and the power to step outside of global co-operation in economics standards and banking. These have claimed special status for certain reasons and tell their own public that they are also economically competitive enough to DESERVE to hold to their own ideas about central banking and fiscal policy and not be dictated to by any treaty or banking supervisory groups.

When you understand the mechanics of how Luxemburg Treaty Supervisory Committees enforce rules onto governments, you will see a feature of gold holdings and gold price dynamics that all the expert commentators never talk about.

If a country fails to use its tax base to operate in the repurchase market and ‘make' its bond issuance reliable and liquefiable along the annualized average-of-yield curve to maturity (in other words that each year the bond trades close to what its yield SHOULD be for that year number divided over the years to maturity) then supervisory bodies ‘arrange' pressures that force the hand of the government involved. Either ratings agencies mark down the rating of the country involved, or the work as a cartel to push down the currency involved; this latter thing they do in absolute secret but they do it all the same. Sometimes they employ proxies in the form of huge investment banks. It isn't very transparent where they get the ‘money' from to enforce their wishes; bluntly you might as well know they just print it.

But the effect is that if a country takes its tax collections and spends these for purposes like infrastructure or fundamental corruption – as has happened in Zimbabwe and some Asian countries over the years – instead of the sovereign debt (obligation) market, then a global system operates to penalize these regimes. Eventually such penalization can totally cripple a country and lay siege to its government.

Where countries like Burma, North Korea, Thailand, Indonesia – or even places such as India and Iran – use their gold holdings to try to defeat these currency penalizations

China has a major problem on its hands and that is the question of whether or not private purchasing of gold inside China is a de facto dual Chinese currency factor!

If businesses inside China have vast gold holdings, and the gold price goes up, is that the same as a Chinese economy-originating ‘currency' going UP versus the USD?

The Chinese Politburo want the Yuan itself to stay down so that their exports stay high. But Chinese business people can artificially hold a rising currency via gold.
Or let's more accurately say – NOT-SO-ARTIFICIALLY!

The outcome of all these dynamic forces working for and against the gold price, and the virtual inexhaustibility of money to enforce central banks to do what the global banking cartel wants them to do, is uncertain at this moment.

Gold denies absolute control to central banks and a global fiat currency banking structure. But almost because this is so, some people constantly act against the gold price to assert their own power and obsession about ‘control.'

That is why the price of gold doesn't just go up on a straight line to reflect inflation and the blowing out of debt and the quantity of currency-on-issue in trade deficit countries in the first world.

The upside risk for gold has a lot to do with catastrophic damage to the actual money system itself.

6 April 2007

The Sordid Business of Predicting A Crash

Cassandra Does Tokyo
March 13, 2007

First let me state that I am patently NOT in the business of prognosticating stock crashes. That said, please allow me to forecast one that, against all good, common sense, I believe, may be coming to a bourse near to you rather soon, in perhaps the next 30 to 40 trading days. And I say "good, common sense" because statistically predicting crashes is, for those who pursue it, a truly rotten profession. Far more difficult than trying to predict, say a "0" or "00" on the spin of roulette wheel (at a mere 1-in-37). It is more akin to 1-in-120 call, AT BEST, and perhaps a 1-in-500 or even 1-in-1000 longshot-of-a-call at worst, assuming of course that I do not need to accurately flag the precise day, but or days, but only the general vicinity in time.

Surely you will ask "why" I have embarked upon so ludicrous and statistically unrequited and unrewarding a path. The first reason in all honesty is that since I am not paid for this forecast, I cannot be fired for being wrong. Second, because I am master of my own fate, and because I am rather reasonably hedged and crash-neutral insofar as market exposure is concerned in my professional portfolios, I needn't worry about firing myself, for being wrong. Third, IF as a result of this rather bold and outlandish prediction, I turn out to be correct, then I shall have no problem (with all of my readers' testaments in hand), in pursuing a new (and leisurely!!) career as an Investment Letter Writer, one that I can pursue from a suitably comfortable location, be it surf-side or slope-side (for which the prices of said bricks & mortar will - no doubt - be dramatically reduced in the event).

The more skeptical amongst you will no doubt endeavor to ask, what manner of evidence I might possess to back up this apparently farcical and visceral hunch. And here, I will reveal to you, that which is of true value. It is not a secret of dark magic or of statistical smoke & mirrors, though it is somewhat obscure, and off the beaten path of ordinary observers. For "it" is buried deep in the cross-section of the distribution of stock-market returns, in particular, within the higher moments, which, I would hold out to my readers, have a remarkable tendency to (historically speaking) whisper things that are terribly important, be it "danger" or "opportunity".

To be more specific, I am referring to the cross-sectional skewness of daily returns in the investable portion of the US equity market, and, even more precisely, a three-month moving average of such a measure, systematically removing of course, the most extreme daily observations. Typically, this measure tends to have a negative sign, which if my feeble knowledge of statistics serves me right, implies that the associated tail risk of the distribution sports a negative sign, in relation to the average daily return (which has incidentally over the past 25 years typically been (small) positive. The kurtosis[1] then, a sensitive cubed measure, relates to us just how far from the mean that [usually] negative tail lies. Periodically, in the US, this measure of cross-sectional skewness of returns climbs to positive territory, and, on a few even rarer occasions, the departure into the positive is rather greater and more elongated than at others. These, historically speaking, have coincided with, or presaged significant market events.

On some occasions (as one might expect), such a flip-flop into a state of highly elevated positive skewness has FOLLOWED extreme corrections such as those seen in the Aug through October period in 1987, the May through early October period in 1998, or the June 2002-> March 03 capitulation of the NASDAQ. On such occasions, it has been a benign signpost of recovery, signaling what momentum traders term: a breakout, or trend-continuation, of sorts. This is intuitive since, following a grand capitulation, with the veil of fear and uncertainty is lifted, gaps to the upside, recovering earlier losses, are unsurprising and tend towards continuation. Such moves are typically consistent with, and converge towards, some future sustainable intermediate-term equilibrium rather than away from it.

On other occasions however, such positive skewness periodically follows elongated positive return runs that resembles something like a melt-up. At such times, positive returns perhaps have induced panic buying, or panic short-covering that causes the tail-risk to have - at these instances an uncommonly positive sign. Such was the case in April to August run-up in 1987, the second quarter of 1998, the fourth quarter of 1999 into the beginning of the year, and, yes, mid-February 2007. In fact, mid-February 2007 saw the most elevated measures seen I’ve seen in the US market since my data for this commences 25 years ago. Now Ill admit that these may not be apples-to-apples comparisons since the nature and number of listings in the investable cross-section has changed over time, but nonetheless, the elevation recently witnessed is, in a single word, unprecedented.

None of this will escape practitioners, who can see it and smell it in the trenches, perhaps using other technical descriptive terminology or endogenous market indicators, but it is, nonetheless an additional systematic tell-tale, less commonly observed by most. Now add to this a kurtosis measure of the same cross-sectional returns. Somewhat expectedly, during selective panics, (for example the 2002 tech-wreck), skewness is highly negative, and kurtosis is highly elevated signaling a negative tail well-departed from the mean. During 1987, by contrast, or September 11th, the crashes were rather more democratic, and while skewness was negative, kurtosis was not nearly as elevated as at other times of less-universal panic. For during a crash the average return tends to be rather negative, with the tail not too far off the mean, as correlations tend to converge. Importantly, at both significant tops AND recovery rallies, kurtosis is typically diminished, or at a local minima. This may reflect investor behavioural preferences to take profits on large the positive tail, but it nonetheless has a subduing effect in keeping the tail closer to the mean on those occasions when the skewness does turn positive. Yet again, in mid-February, somewhat unprecedentedly, we have witnessed very elevated positive skewness AND reasonably elevated kurtosis. In my experience, this is twilight-zone stuff. All we need now is Rod Serling to tell us what it means.

My take is as follows: we are at a monumental turning point in Americas twenty-five year experiment in leverage, and systemic speed bump in Bretton Woods II. We are seeing the telltales of a liquidity-induced blow-off that’s been fueled by ever-easier credit and nearly free-money that, up until now, has fed nominal earnings growth, but that is on the cusp of rolling over, on many and diverse fronts due to systemic contradictions, inconsistencies and imbalances. Yet some high-rollers awash with investable funds and brass cojones seem to be betting that even more liquidity (the Fed "put", Bernanke's helicopter, whatever) will be thrown at it by authorities, that will assuage any drop in nominal prices. AND they must also believe that this liquidity, like that which has been thrown at markets since 2002, will continue NOT to spike rates, and NOT to puke the USD, and NOT cause the ire of Pelosi and her labour constituents, and so not fan inflation but further fuel yet another bout of asset price spirals such as those seen in commodities, stocks, Art, REITs, Credit Spreads, beachfront property, wine, Chelsea homes, and the famous Honus Wagner T205 baseball card. The era of risk anaesthitization is ending.

Understand, I am not a bear looking for an excuse to be bearish. Rather, I am looking at an indicator of an unusually rare market occurance, searching for an explanation, whose more plausible answer is pointing towards something eventful, with returns that are likely to be more volatile, and with a greater frequency of negative signs than those witnessed in the preceding four years. As an immediate forecaster of things bad, I must admit to being unnerved by the post-hiccup jack-in-the-box company of Mssrs. Faber, Edwards, and Tice, irrespective of their esteemed and cogent analyses. But IF the whispers of "the higher moments" again prove prescient, it is highly likely that the brief turbulence witnessed last week is but a proverbial shot across the bow presaging an episodic fit that will, in hindsight, be measured in months, and nominal losses into measured into double-digits.

Sordid Business of Predicting A Crash (con't)
April 5, 2007

Kurtosis in the daily cross section of US equity returns is as elevated and extended as it has ever been, YET the skewness remains highly positive, a truly anomalous circumstance. Historically, this has reliably foretold something ominous to come. Today, in answering the question I posed and whose answer I hinted at in my early March post of similar namesake, I will reveal why this happenstance exists. The answer is: "Private Equity".

Collectively, they [private equity], and the speculators who move security prices on the basis of rumours surrounding "who's next", are the ones responsible for the positively-signed, bountiful premiums, gapping certain stocks in the distribution higher in relation to the the rest of the distribution, which only inches forward. And as Stephen Ratner forthrightly said in his Bloomberg interview detailed below, they [his own private equity firm, Quadrangle] will continue to take things private so long as liquidity is abundant AND lenders are willing to buy debt at rates and on terms that, as Ratner says, make little economic sense from the perspective of the lender.

So in itself, the higher moments of the US equity market are whispering "bubble", though the bubble is seemingly located in the credit markets, with the equity market but a reflection thereof. This doesn't leave equity markets free and clear by any stretch of the imagination, for the chain of dependencies and linkages are many and complex, but it does explain the highly unusual circumstances of the higher moments. And by explaining away the fragile state of the higher moments, it perhaps takes the heat off of a collapse based upon unsustainable speculative internals, and pushes it towards the exogenous sustainability of the credit markets' extreme generosity and munificence.

Historically they have been related, and, as such, the higher moments of the US equity market may themselves be the tell-tale of the bell-ringing ebullience of us dollar-based credit markets.


Kurtosis risk denotes that observations are spread in a wider fashion than the normal distribution entails. In other words, fewer observations cluster near the average and more observations populate the extremes either far above or far below the average compared to the bell curve shape of the normal distribution.

Kurtosis risk applies to any quantitative model that relies on the normal distribution for certain of its independent variables when the latter may have kurtosis much greater than the normal distribution. Kurtosis risk is commonly referred to as “fat tail” risk. The “fat tail” metaphor explicitly describes that you have more observations at the extremes than the tails of the normal distribution suggests. Thus, the tails are “fatter.”

Ignoring kurtosis risk will cause any model to understate the risk of variables with high kurtosis. For instance, Long-Term Capital Management, a hedge fund cofounded by Myron Scholes ignored kurtosis risk to its detriment. After four successful years, this hedge fund had to be bailed out by major investment banks in the late 90s because it understated the kurtosis of many financial securities underlying the funds own trading positions.

Benoît Mandelbrot, a French mathematician, extensively researched this issue. He feels that the extensive reliance on the normal distribution for much of the body of modern finance and investment theory is a serious flaw of any related models (including the Black-Scholes option model developed by Myron Scholes and Fischer Black, CAPM developed by William Sharpe). He explained his views and alternative finance theory in a book: The Misbehavior of Markets.
The obvious question is, what if this deviation from ‘normal’ in stock market returns is the result of a concerted and sustained manipulation of the markets? The answer is seen is CDT’s paragraph which I have enlarged, regarding the assumptions required to maintain the market distortion, e.g. that this liquidity will continue to NOT spike rates, NOT to significantly erode the value of the US dollar, and NOT fall afoul of the changing political environment in the US as the middle class realizes it is being screwed, and that the social model is shifting from a democratic republic to an oligarchy.

What will limit the ability of Fed to continue to Ponzi scheme and continue to inflate asset bubbles? The answer is clearly the ‘value’ of the dollar, a subfunction of the full faith, credit and fear of the US and its debt of zero maturity which is the US dollar, otherwise known as dollar hegemony. When and if the dollar breaks, bonds and then stocks will quickly follow and the Ponzi scheme will be done. There will be no ‘deflation’ in terms of monetary deflation with a stronger dollar, excepting at the point of a gun (“Political [and economic] power grows from the barrel of a gun.” Mao ZeDong) or when we knock two or three zeros off the dollar and issue ‘new dollars’ as Russia issued ‘new roubles.’

To put all this simply and in summation, as we have been saying it now for four or more years, the limiting factor on the Fed’s ponzi liquidity scheme is the value of the dollar and the existing social and political structure of the United States.

4 April 2007

Imminent and severe market correction

A leading UK fund manager has sold off about half the equities in the portfolios he oversees in anticipation of an imminent and severe market correction.

Ken Murray, the founder and chief executive of Blue Planet Investment Management, has revealed he has offloaded equities and cut the gearing on the firm's portfolios to zero in the belief a US economic recession is set to wipe more than 20 per cent from the value of global stock markets.

Blue Planet, a specialist investor in the financial sector with $350m of assets under management, operated three of the four best performing financial funds in the UK last year, according to figures from Bloomberg. Its Worldwide Financials fund was the best performing investment trust in the UK and the world over the last three years. About 25 per cent of Blue Planet's portfolios are now in cash.

Mr Murray warned the impending market correction was likely to be considerably more severe that either of the two most recent downturns that began in February just past and in April last year.

Mr Murray, who began the share sales two weeks ago after the latest downturn, said a consumer spending slowdown was already under way in the US. Combined with rising inflation and a slowdown in corporate earnings, this would drag the world's largest economy into recession.

"People don't want to believe bad things will happen but the market will correct very sharply," he said.

"It is time to get out of the market and I don't think it would be unreasonable to expect the market to fall by more than 20 per cent in a very short space of time".

Mr Murray has built a reputation as one of the UK's most successful investment trust managers. He has combined his role of chairman and chief executive with an active role as an asset allocator via his position of head of investments.

A leading figure in the Scottish financial establishment, Mr Murray founded Blue Planet in 1994. Prior to that, in 1990, he established the Bank of Edinburgh and led the move to consolidate the UK's fragmented building societies sector.

Bank of Edinburgh bought the Heart of England Building Society before being swallowed up by Scottish Amicable.

Mr Murray said investors could ill afford to ignore warnings from the likes of Alan Greenspan. The former chairman of the Federal Reserve warned earlier this year that the US faced the risk of recession.

Stockmarket Cycles Current Observations

Stockmarket Cycles Current Observations: "The chart above shows the Japanese Nikkei 225 Index going back to 1984. Notice that the all-time high in the Nikkei index was registered in the last few days of 1989. This year, more than 17 years after the peak was reached, the Nikkei remains over 50% below its all-time high. Had you told someone in late 1989 that this index was about to reach a top which would mark a high in the Japanese market for more than 17 years, they would have attempted to have you committed. But as you can see, that is exactly what happened. Those of you who were around at the time may recall that virtually every financial expert in the world had taken turns in incorrectly predicting a top in the Nikkei, especially in the period from 1985 into 1989. And yet, all the experts who predicted an imminent top finally proved to be correct. Unfortunately, by the time they prove to be correct most of them had been convinced the magic of the Japanese economy justified the bubble-like prices that were crossing computer screens in late 1989.
There was a model, however, that can claim to have virtually pinpointed the top of the Japanese bubble and that model will be the main subject of this month's section on the Cycles.
Martin Armstrong is a controversial character to say the least. He is currently in prison for contempt of court charges. The amazing fact is he has been in prison for over seven years for contempt of court charges. We don't know if records are kept on the subject, but this must certainly be some sort of record for prison time on contempt of court charges. We are not going to go into the details of the charges against Armstrong because that is not the purpose of this newsletter. We have no idea whether he is guilty of the spectacular charges under which he was incarcerated in January 2000."

3 April 2007

America Now (2007 'debt prosperity') and Then (2011 Depression)

charles hugh smith-Weblog and wEssays: America Now (2007 'debt prosperity') and Then (2011 Depression)
Trade in 2-year old SUV for a new model Drive --SUV to wrecking yard and pay them $50 to take it off your hands "

2 April 2007

Quotes of the day

"Economic history is a never-ending series of episodes based on falsehoods and lies, not truths. It represents the path to big money. The object is to recognize the trend whose premise is false, ride that trend, and step off before it is discredited." (George Soros)

"The way of the Tao is reversal." (Lao Tzu)

"Chance favours the prepared mind.” (Louis Pasteur)

"It is neither necessary to hope to undertake, nor to succeed to persevere." (French proverb)

"You must have a willingness to do something when everyone else is petrified. You must learn the lesson of following logic over emotion." (Warren Buffett)

"Success consists of going from failure to failure without loss of enthusiasm." (Winston Churchill)

"May a fair road always be open to you." (CHS, April 2, 2006)

collected by Charles Hugh Smith.

1 April 2007

April Fool

New York (Fox News) April 1, 2007

David Lereah, Chief Economist of the National Association of Realtors, resigned his position today, effective immediately, as Lereah was under increasing pressure to resign due to rebellion amongst the 1.3 million strong NAR membership and mocking in the media and amongst housing blogs.

Mr. Lereah held a press conference earlier today at NAR headquarters in Chicago, also attended by his lawyer Lirpa Loof.

"For too long I did the bidding of my evil masters at the NAR" said Mr. Lereah, in a hushed tone to start the briefing. "They marched me out as the bubble grew bigger and bigger, month after month, to say 'it's different this time - the fundamentals have changed - housing prices never go down'. Well, we all know how that line of bull turned out."

"They even had me write a book, which looking back on it must seem like a real hoot, called "Are You Missing the Real Estate Boom", later retitled "Why the Real Estate Boom Will Not Bust". And yes, that book, and my series of misleading quotes to the press as the bubble burst, has made me the laughingstock of the nation, if not the world, and caused irreparable damage to the nation, to families and to our economy."

"But today, everything changes. I have resigned my position with the NAR, I renounce 100% of my quotes and behavior over the past five years, I admit the housing bubble was the biggest con and Ponzi Scheme in world history, and I ask America for forgiveness."

Mr. Lereah went on to say that he will now be volunteering at a homeless shelter in Phoenix, the epicenter of mortgage fraud, realtor greed, and the housing collapse. His lawyer, Lirpa Loof, also confirmed that Mr. Lereah will be donating all of his book profits, and his entire NAR salary for the past five years, to the homeless.

In a related development, the NAR has hired Mohammed Saeed al-Sahaf as its new spokesman and Chief Economist.