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Pompano Frog  

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  • Greece Contagion Risk [View article]

    You can read my previous comments on Seeking Alpha concerning investing in China. My postings go back to 2009.

    I don't write as much on SA for a number of reasons.

    You can take the 4 largest trade partners and the 4 largest financial lenders and their countries and know where the connections are.

    Thailand and Indonesia had common lenders. Most of the Greek debt is held by official institutions.

    Academics date the Thai crisis from the currency panic in July, 1997.

    I am of the school of economic reality that identifies the starting point as the top in the Thai stock market in Jan, 1996 with the Thai Set Index at 1410. By May 1997, two months prior to the currency crisis, the index was at 566.

    Think about this. A massive stock market collapse. I know Keynesian's tend to think the financial markets are a side show. They are not.

    The Thai's could not loosen credit without causing a currency collapse. Would you sell European equities today with the ECB loosening credit? That would be like selling the S&P in 2009.

    If you were advising the current Greek government how would you tell them to stay in power if they give in to the EU?

    It will be interesting to watch no matter what happens.
    Apr 17, 2015. 02:33 PM | 4 Likes Like |Link to Comment
  • Greece Contagion Risk [View article]
    Greek exit will be a trivial event.

    Markets will have a strong rally in reaction.

    The political party in power in Greece can stay in power only through an exit. In general, the major harm is done to Greek savers.

    Financial institutions are not following the same models that they did in July, 1997 when the Thai currency crisis began.

    What evidence exists that there is financial connection between Greece and some other country equal to Thailand and Indonesia in 1997?

    A Greek exit would be an enormous..enormous plus for the Euro. It would allow those other countries such as Italy, Spain, Portugal and Ireland that are reforming to continue to meet their obligations to become competitive.

    Property values in Greece will plunge in $U.S. terms under the new Drachma. If we can make money buying China we can end up with a home on a hillside on some Greek island.
    Apr 17, 2015. 12:38 PM | 2 Likes Like |Link to Comment
  • The Small Cap Premium: Where Is The Beef? [View article]
    Dear Reader..

    This was a cutting edge article on the current academic take on the financial markets. The problem is most of it is wrong.

    Let's take the most obvious which is his academic model of future stock market prices based on analyst estimates of future earnings.

    Do you really believe that corporate revenues for the S&P 600 are going to grow at the rate projected if the Central Bank inverts the yield curve? Or takes M1 to negative growth?

    Earnings are a function of revenue. Companies budget based on expected revenues. If revenues fall short or increase beyond expectations earnings are subject to substantial volatility.

    A stock model to work must be based on monetary reality and expectations. That of course, is an oversimplification, but it catches the main point.

    At major tops in the market the economy is booming and the analysts have rosy projections for the following 12 months.

    What were the analysts projections in Feb/March 2009? Think about it. What was the Central Bank doing?
    Apr 12, 2015. 01:48 PM | 2 Likes Like |Link to Comment
  • The Federal Reserve Has Painted Themselves Into A Corner [View article]
    Dear Reader..

    Now I am waiting for dinner. A recession is typically created by the central bank in response to inflationary forces above their targets. In many cases they don't intend to cause the recession they just want to reduce business and investment activity to a point where inflationary forces are reduced.

    So why do they need to fight the result which is their goal?

    In some cases as the economy weakens it turns out that there are underlying structural weaknesses in the financial system which begin to feed on itself. In that case, such as December, 2008, the Central Bank provides enormous additional liquidity to encourage the holding of long term financial assets.

    It took only three months for the financial markets to respond. This is not perfect, but this is the best of any alternatives. You will notice that the Central Bank bought commercial paper directly to bypass the banking system that they had reason to believe based on historical precedent would be slow to increase loan demand in response to increased monetary stimulus.

    There is no limit to what assets a central bank can buy. Look at Japan recently. They have been buying index funds on the equity markets.

    Financial markets move first in an economic recovery. They don't predict economic recovery. They cause economic recovery. The equity markets are the transmission mechanism of monetary policy to the real economy.

    Both political parties in the U.S. have adopted economic theories that have not changed since the 1930's. It's a total disaster for the country. Neither of these outdated theologies could create wage growth for the average American. It is sad.
    Mar 21, 2015. 05:39 PM | 4 Likes Like |Link to Comment
  • The Federal Reserve Has Painted Themselves Into A Corner [View article]
    Dear Deep..

    If this article was accurate you would not want to be holding anything but cash.

    Of course, this article is not accurate. This is what they taught at the University. Oh, I forgot that was 30 years ago. I don't see doctors quoting their textbooks from 1980.

    First, does it make sense to the readers of SA that all of the world's central banks have no idea how to run monetary policy? They are not making policy up on a whim. Every move is made on the basis of the best research available.

    If you go to any of the world's central banks you can find the research papers that discuss the reasons behind every movement in policy. When I couldn't find a rational comment on the recent moves by the Swiss Central Bank I went to their website and, sure enough, there was a paper done the month prior concerning how to handle massive capital inflows.

    Lunch is ready, so that is the end.
    Mar 21, 2015. 01:58 PM | 4 Likes Like |Link to Comment
  • Why I Am Buying AK Steel [View article]

    I too still hold my original AKS position.

    I see the import situation as being a national defense issue. You have to maintain your domestic steel making capacity in order to have the expertise and expansion potential during wartime.

    Meanwhile, steel is a short if you believe that the U.S. is going into a recession. That would be a wrong assumption, but if you believe it to short these stocks is the correct move.

    AKS is a deep value stock. All of the stocks with small or negative earnings with high debt to equity ratios have had a shortage of buyers. That represents an enormous buying opportunity for more patient investors.
    Feb 26, 2015. 07:12 AM | Likes Like |Link to Comment
  • Is It Time To Buy Greece? [View article]
    Dear Reader..

    Greek bond prices are not an indication of Greek default risk. Even if Greece leaves the Euro they still owe this money and eventually they will pay.

    It seems to me there is at least a 50% chance that Greece will leave the Euro. The debts of Greece are serviceable, contrary to the claims of the current Greek government.

    Other countries in Europe have complied with reform requirements. If the ECB gives into these opportunistic Greek politicians that are taking advantage of an uneducated electorate, what are the implications for Italy, Spain and Portugal?

    Politicians usually have little concern with the long term consequences of their actions. They have little to loose if Greece leaves and chaos ensues. They will blame others and try to remain in power.

    This is a 50/50 deal and not worth an investment.
    Feb 20, 2015. 09:16 AM | 3 Likes Like |Link to Comment
  • Greece Dependency Has Created Dangerous Illusions [View article]
    If France & Germany give into blackmail then Portugal, Spain and Italy are entitled to equal treatment.

    Greece should leave the Euro and let the new Greek Drachma bring an influx of tourists and if, there are reforms, industry.
    Feb 10, 2015. 04:03 PM | 7 Likes Like |Link to Comment
  • Rising Credit Spread In Junk Bonds - This Red Flag Is Really Ominous [View article]

    The Fridson quotes used in this article come from the "Reuters Global Investment Outlook Summit" in November, 2014.

    At the end of these soundbites he said "This is just a projection of what would happen in a normal cycle."

    This is totally true. We will always have business/liquidity cycles. Since World War II these have been preceded not by earnings shortfalls, but by significant tightening of credit and liquidity by the Central Bank.

    The yield curve went negative in August of 2006. That means the yield on the ten year government bond was less than the yield on 3 mos tbills.

    The author's chart on the yield curve shows nothing. He is throwing charts at the reader.

    The increase in issuance of low rated bonds is because their yields are near 50 year lows. It is a license to steal to borrow money at these rates.

    The spread has had a slight rise because the potential default rate on energy related issues has increased.

    In a bond default does not mean the investor necessarily loses any money. It means an interest payment was missed.

    During the entire U.S. bank rescue of 2008/2009 all of the money was repaid with interest.

    If you think that a dramatic drop in the price of oil is bearish for the U.S. stock market you ought to drag the data down from the St. Louis FRB and put it into a spreadsheet. The historical record is that large drops in energy prices are followed..are followed by double digit returns in equity markets.

    I would think this author has been bearish on the U.S. for the last 5 years. If a reader is in a similar situation he needs to revisit his assumptions and variables.

    One last thing, go to the Federal Reserve Board of Governor's website and look at their assumptions for interest rates, unemployment, GDP going forward.
    Feb 3, 2015. 05:40 PM | 23 Likes Like |Link to Comment
  • Why I Am Buying AK Steel [View article]

    There are different types of steel. Low grade steel sells for $600 a ton. You will notice that AK's average selling price is close to $1000 a ton.

    There is still no recognition that we are in an equity bull market which is being further fueled by low energy prices. Higher stock markets create a macro economic environment where housing prices and auto sales rise.

    I expect the Federal Reserve forecasts for GDP growth, unemployment and inflation to eventually meet their targets.

    This should lead to enough strength in steel pricing to allow AKS to show $1.50 to $2 annual pre-tax earnings. With tax carryforwards this is the bottom line.

    In the end, it is not what I think, but what the hedge funds think. They are determining the next hot sector or market strategy. They have successfully brought down the valuation levels of most deep value portfolios.

    Deep value strategies are at a substantial discount to the market which is at 16x earnings.
    Jan 28, 2015. 11:19 AM | Likes Like |Link to Comment
  • Why I Am Buying AK Steel [View article]

    I have run those numbers and I find no correlation with future movement in the steel stocks.

    This stock has characteristics that attracted hedge funds to sell short. I don't believe anything was used rather than a strictly mechanistic system. I am buying this and I believe it is a leveraged play on a continued bull market and economic recovery.
    Jan 25, 2015. 09:02 AM | Likes Like |Link to Comment
  • Shorting China Based On GDP Growth Rate Projections Is Highly Risky [View article]
    Thanks for the article.

    Readers need to understand that the IMF economists are using an American/European economic model to forecast the China economy. In America and Europe you have a low savings rate combined with an anti/investment tax structure.

    The peak in China GDP growth in 2010 at 10% annually was the result of a stock market boom which ended with p/e ratios above 40x.

    At the recent bottom of the China equity market p/e ratios were 8x with a savings rate in excess of 40%.

    Due to the recent runup in the Shanghai market GDP growth is going to come in above the government targets.

    In the U.S., at the market bottom in March, 2009, it took until the 4th qtr for that to be expressed into GDP growth.
    Jan 23, 2015. 12:22 PM | 2 Likes Like |Link to Comment
  • Why I Am Buying AK Steel [View article]

    You have hit on a key point. Markets are not efficient pricing mechanisms. The hedge funds have marketed shorting to their investors. They are then using long term studies, that do not apply, to analyze for potentially negative investment situations.

    What is amazing is how few deep value investors exist. It is what makes this strategy so profitable. Though you have to subtract the costs of a cardiologist.
    Jan 14, 2015. 07:00 AM | Likes Like |Link to Comment
  • There's No Bubble In Bonds, But They Look Frothy [View article]
    Dear Reader..

    Reading this I am incredulous.

    The yield of a bond is no different than the p/e ratio on a stock.

    Yields on all of fixed income are near 55 year lows.

    What financial market investment was a good idea at 55 year highs in valuation?

    Valuation is the most important factor in an investment allocation decision.

    Investment allocation is the decision which will determine 80-90% of your ultimate return.

    Fixed income is in a masive bubble.

    Investors ignored the Central Bank when they inverted the yield curve in 2006/2007 to tighten credit.

    Investors ignored the Central Bank when they created double digit M1 growth in early 2009.

    And today investors are ignoring the Central Bank when they are making it easy to look at what they are doing.

    The reader needs to take 5 minutes to go to the website of the Board of Governor's of the Federal Reserve Board. Just google.

    Across the top press the category "monetary policy."

    Under Features, the fourth line down you will see a heading "related information:"

    Press the last item "View All>"

    Under 2014 FOMC meetings, at the bottom, you will see December 16-17.
    Press "Accessible Materials."

    You will see before you the economic projects of the 18 members of the Federal Reserve for the years 2015, 2016 and 2017.

    For this to be wrong, you need to think you have more knowledge than the staffs of each of these members, plus their ability to create the reality of their projections.

    Holding fixed income is financial suicide.
    Jan 8, 2015. 08:36 AM | 1 Like Like |Link to Comment
  • U.S. Market Valuation: Are U.S. Equities Overvalued? [View article]

    In 1989, Japan's Central Bank was following the German economic/monetary policy model. This calls for maintaining a strong currency and low inflation at all times.

    Until Bernanke wrote his 1996 paper "The Financial Accelerator Model" it was not realized how important the financial markets are in transmitting monetary policy to the real economy.

    If you have an economy operating below its historical growth rate standard practice today is to not only loosen blunt monetary policy, but to make sure that this money flows through the system to weaken your currency, raise inflation and raise the valuation on financial assets.

    The U.S. is the global reserve currency and is a special case.

    You will notice that the U.S. Federal Reserve, in 2009, bypassed the banking system and bought commercial paper directly because of the lag in which banking systems respond.

    Your description of the economy has also been on the Seeking Alpha pages since 2009/2010 and it has not done a good job of describing the investment environment.

    Until Abe Japan did not target inflation, the currency nor financial assets. We will know in a year or two the outcome.
    Jan 2, 2015. 09:16 AM | 1 Like Like |Link to Comment