Leif Peterson

Portfolio Diversification Is Key: Consider These ETFs

GLD is based on gold, which is a commodity. The price of any commodity is based on what it can be sold for. For diversification, it would be better to construct a portfolio with less volatile index and currency ETFs, whose pairwise correlations range from -1 to 1. GLD and SPY price returns are quite volatile and driven by the combination of fear, emotion, market sentiment, corporate earnings, and economic reports.

Right now investors should be loading up on US equities, while preserving assets with 10-15% GLD (or gold mutual funds), 10-15% short-term treasuries(not cash reserves), 10-15% municipal bonds (e.g. PIMCO real return bond fund). Everything is pointing to devaluation of the dollar and inflation. The one currency that has done well over the subprime mortgage crisis (market crashes last Sept'08) is the Japanese Yen (FXY). You could also invest in some dollar bear ETFs [seekingalpha.com/artic...].

Is a Case of Quant Trading Sabotage About to Destroy Goldman Sachs?

With some trepidation, I felt compelled to double-post and suggest that there is little risk to national security over loss of the aforementioned trading software. Such code is not nearly as worthy as the data that it uses. Having the code will enable the reader to see what algorithms are used and enable the reader to think about setting something up, but the IT support framework GS implemented in the way of datafeeds over the last several decades likely cannot be quickly replicated by a third party group. There will be large parts of the code where the readers won't be able to know for a long time what the input data format was in terms of units, scale, range, frequency, etc. It's also erroneous to assume that only real-time data are used, as end-of-day, weekly, 5-minute bars, etc., are often more informative than by-the-tick. If the code only looks at real-time data to instantiate other objects for buy-sell orders, then it may be nothing more than a glorified real-time auto-trading database management system which is the culmination of 30 years of being wigged out on Wall Street.

There is a small chance that a "spy" has anything to do with theft of the code. Most good coders probably wouldn't be interested in the code, since they would know there's an electronic leash on it. It's also very unlikely that it involves revolutionary breakthroughs in numerical methods better than what's already publicly in e.g. LAPACK or EISPACK, available at www.netlib.org/liblist.... There are Russian versions of LAPACK and EISPACK at alglib.net for C#, C++, DELPHI, VB.NET, so most of the good stuff is freely available. It is also doubtful that GS developed software for true random number generation (RNG), instead of pseudo-RNG, which renders encrypted data easier to decipher. (NSA supposedly has something close, but no one on the outside will ever know). Besides, who needs true RNG when you can get something close from TrueCrypt? Code developed by e.g. the Prediction Company (predict.com) would probably be more interesting than software developed by GS.

Someone in IT at GS made the most galactically-stupid mistake by not firewalling the software from download or copying. Even then, security is a myth, it's not a reality. Anyone in their right mind who made 400k per annum would have a severance package equal to at least 2 years worth of salary plus bonuses, altogether 1.2-1.5m. They could also easily become CEO, COO, or CIO of a top 500 company in several months after termination. Something sounds fishy in all the information presented.

Is a Case of Quant Trading Sabotage About to Destroy Goldman Sachs?

Programmed trading exploits market anomolies and therefore does not support a free market economy. If it's not free market, then get rid of it.

The problem all along can be realized by the "sand-pile" model of self-organization. Under this model, when dropping sand into a pile, as long as the small "local" avalanches are allowed, the pile will grow endlessly. However, if small avalanches are prevented (i.e., through stimulus bailouts or programmed trading), then there will occur very large global avalanches. A free market allows the natural losers to drop off line, so that the entire market can grow.

BTW, the code was probably previously stolen and this news is merely a public front.

Back in the U.S.S.A.

Good article. Actually, I think Ukrainian borscht is a little better.

National Health Insurance, 'Cap and Trade': Two Steps in the Wrong Direction

Peter, this is a very good article. Although right now I am more interested in the Fed/G-20 plans to inflate away the growing debt. A weak dollar can reduce the real value of debt, and help a growing trade deficit. A strong dollar, on the other hand imports deflation.

Countries are losing faith in Treasuries because they know we have to forcefully devalue the dollar. Once the dollar is strongly devalued, securities of well-managed depression-proof US corporations will become interesting from a global buyer's perspective. Issuing billions of dollars worth of securities at this bottom nadir in the dollar's value would allow the creation of millions of jobs..

Since possibility theory is now the focus after 9/11, there could very well be a plan to rapidly knock down the dollar via a gold price spike, US corporations then sell more securities or get "loans-for-equities" in order to bring back employment. This would be tantamount to the "dissolution of the USA," or like a Gordon Gecko move on the dollar: "I did it because it was doable".

The good part of this scenario would be a huge rise in employment. The bad part about this scenario is that it would be the most horrific thing that ever happened to the dollar, since there would be little spending power. The ugly part would be that the average retirement portfolio would be worth close to nothing in short order. Since this is possible, your suggestion to get off at the next train station is becoming more clear.

One question is: During the biggest garage sale of corporate America, who would do the "loans-for-equity" swap?

Dollar's Days of Dominance Are Over

Information in this article is food for thought for wise investors. It is doubtful that any Presidential administration is capable of addressing even a small portion of these issues. Most politicians running for election know full well they won't even be able to put a small dent in any of these issues, and instead just want to go down in history as having been elected a public official. Sure, elected officials want to help minimize problems to the extent possible, but the definition of meritorious service is slowly changing. Read the recent article by Bill Gross on staying rich in the "new normal" (www.pimco.com/LeftNav/... ), as its information correlates very strongly with information presented in this article.

Why I'm Bullish on Gold, But Still Waiting

Great article! Indeed gold has many advantages over fiat currencies -- and it will be important to see what the Gov't will do to spoil the party. For safety, get some yellow metal offshore -- a little Perth Mint bullion may be helpful when the scenery gets real bad (5-10 years).

10 Dividend Stocks That Are Beating the Bear Market

Great article, keep the good news coming about high dividend yields. (there are other equities that are doing as well or better, and have grown over the last several quarters. Also, please respond if you can on the effect of hyperinflation on earnings and subsequent risk of cutting dividends, and whether it's likely that the Fed will counter hyperinflation by raising interests rates(?). On another note, someone in another forum compared the PFM (dividend ETF) to S&P500 over the last several years and suggested only a 2% comparative increase. First of all, isn't the yield of PFM only 2.81% -- which is low. Hence, they used the PFM/S&P500 ratio as an indicator of how well dividends did.

The Next Bull Market Is 4-8 Months Away

You could sell growth stocks now if you fear another large correction. However, I wouldn't sell dividend stocks for which the companies earnings and dividends are ever-increasing. Such stocks are not the type that you jump out of and get back into because of volatility and herd mentality.

Why You Should Stick With the Dollar and the U.S.

Thanks for the comments. The intent of the article was to contrast the current crises in the US economy with recent history for country with a high literacy rate whose economy acutely dissolved (i.e., "dissolution of the USSR"). By acutely, I mean short-term rather that chronic (long-term) loss of a currency base.

In 2007, data reported by the UN (hdr.undp.org/en/report.../) suggest the literacy rate for the Russian Federation was 99.4% (ranked 11), while for the largest countries in the world the literacy rates were China 90% (ranked 85), India 61% (ranked 147), US 99% (ranked 17), Indonesia 90.4 (ranked 87), Brazil 88.6% (ranked 95). Pakistan 49.9% (ranked 160), and so on.

Because this article is about the US, the only other large country in the world with a similar literacy rate whose economy recently acutely dissolved is the USSR. Japan ranks 10 in the world population and has a 99% literacy rate, but I don't see that the "lost decade" compares to the dissolution of the USSR. Readers may not understand the implications of this. What's interesting is that the economy quickly dissolved in a country (USSR) whose literacy rate was one of the greatest in the world.

Looking at the Human Development Index (DHI, hdr.undp.org/en/statis.../ ), which combines life expectancy, literacy, and standard of living, Japan's ranks 8 in the world, while the US ranks 15, RF ranks 73, China ranks 94, and India ranks 132. Again, in terms of HDI, it's more appropriate to contrast the US with RF(USSR) before China and India if you need to use an example of an economy that quickly dissolved.

As a totally relevant aside, I have been the principal on many joint US-Russian nuclear research projects with Moscow-trained scientists, and have been doing nuclear research in several CIS countries over the last 20 years. Thus, I never really never *compare* the US. vs. RF. If you contrast economies of the US and RF, however, they are fundamentally different. I only used the historical case of the dissolution of the USSR as an example of rapid devaluation of a currency base in a highly literate country.

As the Dollar Continues to Collapse, Where Will You Put Your Money?

The inflation-induced oncoming rise in commodities (e.g., BP, XOM, CVX), consumer staples (MO, PM, KO, JNJ, PG) and pharmaceuticals (ABT, PFE) will translate to greater earnings and hence dividend increases. Compound interest earned through dividend reinvestment should be able to fight inflation quite well. If the proposed worst-case scenario ever comes to fruition, then you could still do well owning and reinvesting in PM.

There is also something to be said about equilibrium.

Notes on a Scandal: High Dividend Investor's Survival Guide to This Unsustainable Rally

You probably wouldn't do badly going long on depression-proof type stocks that have low crash risk, growing earning through last fall, and a bright future. Set the stop loss probably 15-25, and ride out the storm. This assumes you go in during March lows. To short everything now counters the argument of re-investing dividends for *staying* long on e.g. $100,000 worth of stocks over a 10-year period. This is contrarian, but may be one of the surest ways to fight inflation and generate wealth. Also, hedge maybe 30% with TIPS (10-15%) and gold (10-15%).

The Detroit Syndrome of Economic Failure

US Navy Ships Made in Detroit (see www.aviationweek.com/a... )

The Housing Bubble: Greenspan's Wayward Son

I am still waiting for helicopters dropping dollar bills to fly by. Eventually they'll get here -- trust me.

Metals Charts: Inflationary Forces at Work?

In 3-5 years, you will want to be in PM quite heavily because of inflationary pressure from monetary policy(printing money). At that point, Peter Schiff will be doing quite well. As a fundamental gold bug myself, I have been burned before in PM because of the speculative nature -- i.e., it is *assumed* the value will increase, vs. earnings translated into dividends by well-managed under-leveraged corporations. I think, however, that Shiff's argument for the impending West to East transition of both fiat currency and wealth (economic "governance") implies that owning PM may be the only way to hedge from the collapse of the dollar and the US economy.