The biggest threat to investors is no longer poor oversight and regulation of financial markets. Indeed, there exists a more immediate and dangerous threat today – the passing of Ron Paul’s H.R. 1207 bill and the inflationary consequences that it brings.

While it may not be the intent of the lawmakers, Ron Paul’s Federal Reserve Transparency Act (H.R. 1207) will enable the congress to influence the outcomes of monetary policy through an audit of the Federal Reserve’s day-to-day operations, thus severely compromising the independence of the U.S. central bank from political influences.

What is the link between the price discovery process and fixing software bugs? In a debugging process, one can never eliminate all the bugs. This is because fixing a known bug can potentially create more unknown bugs, implying that there exists a point of diminishing returns where fixing more bugs will not yield any more benefits.

The stock market shares the same essential characteristics as open source software: anyone can participate. In the stock market, anyone can buy and sell securities. Likewise, any programmer can participate in an open source project. When a stock market participant discovers the “solution” to a price (i.e. fixes a bug) based on certain information that he’d gathered, he will simultaneously affect the price (i.e. creates a bug). This newly arrived at price becomes a new piece of information that acts as a signal to other traders who cause the price to change again (i.e. creates more bugs). And because not all bugs can be fixed, prices at any time cannot be correct and never will be.

The debate on the fiscal stimulus plan is all the rage these days. Prominent economists are killing each other over this topic. The arguments from the pro-stimulus camp can be found from Krugman (1), Krugman (2), Stiglitz, Mankiw, Summers, Feldstein. The anti-stimulus camp include the usual Chicago-school suspects such as Fama (1), Fama (2), Barro, Cochrane, Murphy, and Chinn (Chinn is not Chicago). You can click on the names to view their arguments.

Where do the disagreements come from? The whole thing centers around three key issues:

Enjoying the lower gas prices lately? Well, now's the the time to fill up your tank some more because oil prices may be on their way up again.

The chart on the right (Click to enlarge) shows the ratio between energy stocks and crude oil prices, and in the background is oil price. Notice that high points in the ratio are associated with a bottom in oil prices. If you subscribe to the commodities supercycle theory, this may be your chance to stockpile on oil again. Looks like this is exactly what Jim Rogers is doing.

So is this the Santa Claus/year-end/super-bear rally we've been waiting for? The S&P 500 has just gained 18% in the past five trading days. "Does it have legs?" ask fund managers everywhere who are suffering from performance-anxiety attacks.

Well, we're currently in what I call a mid-cap rally, where mid-cap stocks outperform small-cap and large-cap stocks. Last time the mid-caps led the market we had a 70-day rally from March to May 2008.

Hugh Cleland made an interesting observation about recession and the stock market. He noted that the NBER start date of the recession in 1990 coincided with the top in the S&P 500. Using this relationship, he conjectured that the market top in October 2007 may be the start date of the recession.

However, data from the past 7 US recessions reveal that this relationship was not repeated in any of the other 6 recessions and therefore, is a mere coincidence. So when did the recession actually start?

Take note that the Taiwan presidential election takes place this Saturday (Mar. 22). Taiwan's prediction market is placing an 89% chance that Ma Ying-jeou will win the election. This may serve as a huge catalyst for a rally in Taiwanese stocks in the next few weeks or months.

I've entered a 30% position in the Taiwan ETF (EWT) June 12.50 call option. Expect EWT to hit at least $16 if the election goes as expected. That means a gain of about 20% for the call option. Any further gains will be icing on the cake. Below are the calculations for determining position size. Kelly criterion says putting 34% of the portfolio into this trade will maximize return (and volatility).

Boosting Returns with Call Options

Share Price: $6.95 (Mar. 9, 2007)
Intrinsic Value: $14.76
Suggested Buy Range (66% of IV): Below $9.74
Market Cap: $141 million

Suspending Dividends to Pay Off Debt