Seeking Alpha

Joseph L. Shaefer's  Instablog

Joseph L. Shaefer
Send Message
Joseph L. Shaefer is the CEO and Chief Investment Officer of Stanford Wealth Management, LLC, a Registered Investment Advisor. Joe retired as a senior executive at Charles Schwab and Co. to found Stanford Wealth Management, LLC, in 1990. He also spent 36 years in a very different leadership... More
My company:
Stanford Wealth Management LLC
My blog:
The Investor's Edge
My book:
Bringing Home the Gold
  • Is the News Manipulated? Are the Numbers Managed? Are Hedge Funds Out of the Woods? 9 comments
    May 29, 2009 12:02 PM | about stocks: SHY, BND, AGG, GLD, EUM, SH, SEF, REW, PSQ

    Clearly someone has had a chat with Fed Chairman Ben Bernanke. I don’t day trade, but I still have a number of colleagues on the floor of various exchanges who do. And the best day-trade of the 3rd quarter of 2008 and the 1st quarter of 2009 was: when Bernanke was scheduled to speak the next day, short the market the night before. It worked like a charm.

    Was he being shrill then or telling the truth? Whichever it was, members of Congress and, clearly, the new Administration, became concerned that Bernanke’s comments were a factor in exacerbating market declines. Since March, he and all other government spokesmen have changed their tune completely. Which time was he telling the truth? Or did the facts on the ground actually change enough to warrant this opinion swing?

    Well, there are facts and there are facts. Is I wrote here, the April unemployment numbers created a stellar rally because the job losses were “ ‘less than expected.’ Less than expected by who? Pollyanna? These are lousy, dreadful, abysmal, horrendous, rotten, atrocious, and awful numbers. And I only wish they were true. In fact, the BLS gets to add or subtract a ‘delimiter’ based on some computation known only to them (though well-placed sources say they call it something like ‘flipping a coin’) that determines how much of that loss is ‘merely seasonal.’ ”

    I then showed how this heuristic plus the national government’s ability to hire temporary workers whenever they like can easily skew the numbers to a move favorable conclusion. And, of course, a month or six weeks later, those numbers are usually buried on page 6 because most investors have short memories and have already moved on to some other news that they believe can or will move the markets.

    I am no conspiracy theorist. I don’t believe there is some vast, controlled scheme to fool the investing public. But I do believe the pendulum has swung far to the other side in reporting because both well- and ill-meaning analysts, researchers, government statisticians, talking heads and leaders in industry and government wish it so. How else can they, with a straight face, trumpet a corporate loss as a win because they lost another $2 billion but it was “less than expected.” Today, earnings estimates from corporate management to analysts have been slashed well below what they see as worst case so they can “beat the estimate.” It isn’t a conspiracy, it’s job-and-bonus-preserva... It isn’t a conspiracy, but it is manipulation.

    Given that the estimates no longer bear a close working relationship with reality, is it really good news that losses are mounting, even if they are “better than estimates?” .As I wrote here, “If I am in a car that has lost both brakes and steering, and is careening down a 30% grade toward a cliff, even if the grade becomes a downgrade of only 20%, it’s still going to go over the cliff. It’s time for me to exit the vehicle.”

    Never forget: for every buyer, there must be a seller. Always ask: who’s selling and who’s buying? Well, we can tell by the volume and the time-and-tape tracking of the size of the trades (discounting for institutional algorithmic and dark pool trading as best we can) that the public is doing a lot of trading. Are we buying and selling from each other? It’s possible but it is more likely that we are taking a lot of the hedge funds’ mistakes off their hands.

    In the January 2009 issue of Investor’s Edge ® I quoted Jim Rickards, a friend who is legal counsel to a number of hedge funds. He explained something to me that he says many hedge fund managers didn’t even understand prior to the current troubles. Here is my introduction to that January discussion and his response: 

    [JS: This month I present…Jim Rickards … on the hedge fund “redemption” overhang. I still expect a honeymoon rally in the first quarter of 2009, but Jim’s thoughts below give me concern about the timing and duration of the next decline.]  
      
    JR: “The hedge fund non-redemption scenarios are real inside baseball and not understood at all outside the industry (and scarcely understood inside the industry). The basic idea is to achieve equity between those who want out and those who stay. In ‘normal’ markets this is easy; withdrawing investors get cash and those who stay own a larger pro rata share of the portfolio.

    “But in distressed markets the dynamic is completely different. The early redeemers get cash and the last guy out gets ashes. Everyone knows this so they all want to get out at once… The ‘solution’ is to call a ‘suspension’ and stop ALL redemptions so that the portfolio can be unwound in an orderly way and all investors get a pro rata share of the cash less whatever costs or losses were incurred in the unwind. Now everyone gets a little cash and spoonful of ashes. So far so good.  

    “What people don't understand is that once you suspend, you are no longer a going concern. (Some managers think they are but we have a name for that -- denial). This is because investors who put in redemption notices which are not honored are no longer investors. By operation of law and accounting rules they are ‘converted’ to creditors for the unpaid redemption. The manager of an insolvent fund has a strict fiduciary duty to creditors which is higher than the duty owed to limited partners.  

    “As a result, the manager is now on one side of the market only. He can sell (and use the proceeds to pay redemptions in drips and drabs) but he cannot buy (because that is at odds with his obligations to his new ‘creditors.’)  

    “So what do you call it when you have ALL sellers and NO buyers? Suspension is not a license to trade your way out of a hole; it's just a way to give you more time to liquidate. Now, as a trader in this situation, you would do the same thing I would do. Wait out the declines and sell into rallies as long as you can. By the way, the manager still collects his 2% management fee on the ‘suspended’ fund. So the manager has some incentives
    to take his time but he can't take forever or he'll be sued by his creditors (formerly investors).  

    “What you are left with is an enormous overhang; all on one side of the market.”  

    I can’t say with certainty that Jim’s concerns will drive the market lower. I can’t say with certainty that the market will go lower, for other reasons. But there are a lot of bankers, brokers, hedge fund managers, CEOs, CFOs, government leaders, and talking heads out there who are trying to pipe sunshine into our lives. As far as I know, rain has not been banished from the planet.

    DISCLOSURE:  June may be different, but the “incredible rally” of May has been mostly manipulation of news, management of numbers, and smoke and mirrors. In fact the market is virtually unchanged from a month ago!  (And has yet to close higher than it was on May 6.)  We got in to the current rally on 3 March (article here) and out on 17 April (article here) when the Dow went from 6726 to 8131. I’m OK missing a rally that took 5 additional weeks to climb 350 points as long as our clients are sleeping well, safely tucked in to: 90% cash and short-term bond funds and 10% gold ETF GLD, and inverse ETFs like EUM, SH, SEF, REW, and PSQ.





     

Back To Joseph L. Shaefer's Instablog HomePage »

Instablogs are blogs which are instantly set up and networked within the Seeking Alpha community. Instablog posts are not selected, edited or screened by Seeking Alpha editors, in contrast to contributors' articles.

Comments (9)
Track new comments
  • It is, perhaps, not a conspiracy, but rather a policy.

     

    The news releases over the last two month come out in pairs: bad always followed by good, just minutes later. Good doesn't need to be significant - it can be dwarfed by the magnitude of the "bad" - but it has to exist. Just an example: more job lost than were expected. In an hour: Consumer confidence increased, which signals we are out of the woods!
    Housing data is really bad. In an hour: But X is now expecting less-than-expected loss.

     

    When there is absolutely nothing positive to report, bad news are typically followed by Tim, Ben, Obama or someone else doing a press-release, indicating that "the economy shows signs of improvement".

     

    For the last month the market has shot up at the end of the day on bad news, good news, no news. Perhaps, there is no conspiracy, but certainly there is a lot of market manipulation.
    29 May 2009, 05:55 PM Reply Like
  • Sir

     

    I think you have a pull out your WHITE FLAG and say - I was WRONG -
    I missed the rally - ( I myself sold some too ) -
    - What was wrong in keeping your positions and have tight stop losses ??
    30 May 2009, 10:55 AM Reply Like
  • Author’s reply » Thank you for your comment, Silverman. I make no claim to financial prefection or personal sainthood! But please read my disclosure again -- and the published SA articles cited. It's all a matter of public record. I'll always admit when wrong and re-deploy assets where they may be better used, but we haven't lost // a thing // by missing this "rally" except for insomnia...

     

    And you bring up a good alternative strategy -- using tightly trailing stops. The reason I personally stair-step in and out rather than relying on stops is that, in any market that doesn't rise or fall in a straight line -- 90% of them -- I think it's just too easy to get whipsawed. Your mileage may vary!

     

    On May 30 10:55 AM Silverman wrote:

     

    > Sir
    >
    > I think you have a pull out your WHITE FLAG and say - I was WRONG
    > -
    > I missed the rally - ( I myself sold some too ) -
    > - What was wrong in keeping your positions and have tight stop losses
    > ??
    30 May 2009, 01:43 PM Reply Like
  • Sir
    I want to make it clear - I am an IE subscriber - that means I value your opinions and leadership..and I followed some of your stock sell orders myself...but when a mistake is done..that is part of the game.
    You say " we haven't lost // a thing // by missing this "rally" except for insomnia... " - yes - you did not lose - you just DID NOT GAIN .
    The equities you are now for 20-25% higher

     

    BHP sold for 46 - now 56
    CP sold for 33 - now 40
    GG sold for 30 - now 40
    DGP sold for 18 - now 22
    Even PVR - sold for 13.25 now 15.25

     

    No one can predict the future - Too bad gold and Commodities were so
    hot during April and May.
    Sorry - It was a hell of a bad call.- I rest my case - and I still read your IE every month..........

     

    Best regards

     

    On May 30 01:43 PM Joseph L. Shaefer wrote:

     

    > Thank you for your comment, Silverman. I make no claim to financial
    > prefection or personal sainthood! But please read my disclosure
    > again -- and the published SA articles cited. It's all a matter
    > of public record. I'll always admit when wrong and re-deploy assets
    > where they may be better used, but we haven't lost // a thing //
    > by missing this "rally" except for insomnia...
    >
    > And you bring up a good alternative strategy -- using tightly trailing
    > stops. The reason I personally stair-step in and out rather than
    > relying on stops is that, in any market that doesn't rise or fall
    > in a straight line -- 90% of them -- I think it's just too easy to
    > get whipsawed. Your mileage may vary!
    30 May 2009, 07:31 PM Reply Like
  • Author’s reply » Dear Silverman,

     

    Thank you for clarifying that you were speaking of the IE G&V Portfolio rather than the more generic discussion on SA. Yes, there's no question, with the now-certainty of hindsight, that in the IE portfolio we sold "too soon." And given the information available at the time, I'd do it again, as I always prefer to sell into what I think is near the end of a rally, than too late, into a decline.

     

    I make no claims to infallibility! Rather, I try to sell in the topping area and buy in the bottoming area. IF we can do that 6 times out of 10, we'll do better than most every institution. If we can do it 7 out of 10, we're in Buffett's league. 8 out of 10? Liar and mountebank territory!

     

    Thank you for subscribing and let's see if our inverse ETFs in banking and real estate don't make up for leaving something on the table this go-round...

     

    On May 30 07:31 PM Silverman wrote:

     

    > Sir
    > I want to make it clear - I am an IE subscriber - that means I value
    > your opinions and leadership..and I followed some of your stock sell
    > orders myself...but when a mistake is done..that is part of the game.
    >
    > You say " we haven't lost // a thing // by missing this "rally" except
    > for insomnia... " - yes - you did not lose - you just DID NOT GAIN
    > .
    > The equities you are now for 20-25% higher
    >
    > BHP sold for 46 - now 56
    > CP sold for 33 - now 40
    > GG sold for 30 - now 40
    > DGP sold for 18 - now 22
    > Even PVR - sold for 13.25 now 15.25
    >
    > No one can predict the future - Too bad gold and Commodities were
    > so
    > hot during April and May.
    > Sorry - It was a hell of a bad call.- I rest my case - and I still
    > read your IE every month..........
    >
    > Best regards
    >
    > On May 30 01:43 PM Joseph L. Shaefer wrote:
    30 May 2009, 11:02 PM Reply Like
  • Sir
    What I wanted to ask you - what is your colleague's bob howard take on this
    rally ? I know that you think highly of him, and that he is the one who told his subscribers to " get out and sell everything" last September.
    Thank you
    31 May 2009, 10:43 AM Reply Like
  • Author’s reply » Bob and I are in respectful disagreement. (We are very often in sync in terms of direction, but not amplitude...) I wrote back in January that I expected the next rally to carry us to 875-925 on the S&P. Bob expects the current rally to extend to S&P 950 - 1000. I acted in concert with that and am now, as you know, mostly in cash. Bob is still making a number of new recommendations. If you would like a free trial subscription to Bob's publication, e-mail me at the IE address and I'll forward the info directly...

     

    On May 31 10:43 AM Silverman wrote:

     

    > Sir
    > What I wanted to ask you - what is your colleague's bob howard take
    > on this
    > rally ? I know that you think highly of him, and that he is the one
    > who told his subscribers to " get out and sell everything" last September.
    >
    > Thank you
    31 May 2009, 11:26 AM Reply Like
  • Sir
    Thanks for the offer to get a free trial to Bob's newsletter....but..no .tahnks
    ..I will stick with IE...
    With my best Regards
    31 May 2009, 01:34 PM Reply Like
  • Good article. To believe the news is not manipulated is sheer naivety. The country is in brave new territory, and investing in this market is downright dangerous. Hedge funds are just one part of the equation. One must pay attention to the bigger, long term picture and understand all the new investment products now available to protect oneself and capitalize on the opportunities as they develop.
    1 Jun 2009, 09:43 AM Reply Like
Full index of posts »
Latest Followers

StockTalks

More »

Latest Comments


Posts by Themes
Instablogs are Seeking Alpha's free blogging platform customized for finance, with instant set up and exposure to millions of readers interested in the financial markets. Publish your own instablog in minutes.