drevno

Time to Sell Stocks?

Clearly, no need to dump everything. But one clearly should have confidence in the health of the company and it's prospects in the market it serves, and the ever increasing competition for the dollar spent by the consumer as well as the purchasing managers.

Next Q will be really telling where we are in this economic landscape. The current "tide" (more like a choppy sea!) is not lifting all the stocks, so careful stock picking is needed if one wants to stay in the market for any length of time.

Washington's Dilemma: This Isn't a Recession, It's a Collapse

Recession, Deflation, Collapse...? They are all happening. The current situation, the events leading to it, and a host of economic statistics show that the whole world economic system is changing. It is re-balancing and hopefully, resetting. It may take many more months. The result will be a changed world. How and when, hard to tell. It depends on all of us.

It seems that the practices that we have named "globalization" have contributed hugely to the speed, magnitude and extent of the changes in the previous status quo. But it is not the only factor. The questionable practices of excessive lending, inordinate amounts of debt both public and private debt, micro-second trading on stock exchanges making mockery of traditional investing , multi-bilion dollar swindles that nobody seemed to notice until too late, experiments by various schools of economists in various countries both big and small placidly accepted by their populations with no way of having meaningful inputs into the process, the ineffective politicians seeking re-election rather than service to their constituents, and the list can go on and on. There is a lot that need to be corrected. And the correction will take its time.

And yes, there will be - as they are already - bright spots along the way. And I d not think that there will be some kind of universal paradise at the end of the process that we are witnessing, given the growing imbalance between the populations and resources, and the growing damage to the environment. Moreover, a lot of things need to be done by all the participants in the economy - and that means everybody - before the turbulence of the current situation subsides. The discussion of the depression, recession, deflation or a collapse - and we have them all - shows the enormity of the task of repairing the local and world economy. Using common sense in implementing sound economic principles in running AND using these economies for a quality life for all people rather than a privileged or lucky minority is needed more than anything else.

Debunking Wall Street's New Fairy Tale

It would be too simplistic to assert that the banking system is either essentially sound or essentially dysfunctional. As the story is told, and more and more facts are emerging, it is becoming clear that some banks, some divisions of some banks, some individuals in some banks and some policies both internal and external to some banks have contributed to the near collapse of the banking and financial system. So, on balance, it is not a success story. Coincidentally, or maybe not really so, it is the DEregulated banking system that failed. At least, a powerful lesson for the future.

The subsequent bailout is still works in progress. Whether it was necessary or not is hard to tell. It certainly helped alleviate the anxieties of many individuals, but I do have a nagging feeling that a lot of funds may have undeservedly helped a select portion of the banking system rather than benefited or righted the system as a whole . Let's hope that the decisions and actions of individuals driving it will be a resounding success. Otherwise, where does the buck stop, anyway, if not with the taxpayer? Or his children, and theirs...

In Defense of Buy and Hold

What is missing is a meaningful definition of the duration of the "hold" portion of the buy-and-hold (BAH) strategy. For some it may be weeks or months, for others maybe years; and for some others it may be reaching some predetermined value of the share or a specific event that triggers the sell. Without such a definition a meaningful debate lacks both the necessary focus and the metrics.

Secondly, the BAH strategy is in some respects similar to the "fire-and-forget" method of the army: your fire your missile ("buy") and the device - with some or no intelligence - is hopefully going to hit the target ("holding"). The probability of success is rather variable, based on the quality of the device (the share), the moment of firing it (the timing of the buy) and the elusiveness of the target (market conditions as well as the results of the target company at the time of the eventual sell). Hence, the somewhat fire-and-forget BAH investing strategy may be suitable for investors with either limited ability to manoeuver their investments on a daily or a short-term basis, or have information or faith leading them to believe in the value of a long-term holding of a specific share or an index, e.g. based on some long-term trend or a prospect for a specific commodity or product.

On the opposite side are investors whose strategies are based on exploiting short-term technical movements, or have specific information generally not available on a timely basis to the BAH type investors.

It would appear that in the times of heightened volatility, market timing may offer greater short-term gains. Or losses. Hence, the market timing activity would not generally appeal or be available to the majority of investors, who would prefer less frequent involvement with their investment and are prepared to accept potentially lesser returns.

The problem remains with a degree of risk: neither market timing, nor BAH strategy offer certainty of returns. The difference is only in timing: the BAH may take longer to ascertain the success of investment - for the day traders all is clear gratifyingly quickly!

Next Up: Paying Back TARP Funds

Can anyone explain to me what happened to the actual/real money that went to the individuals and corporations that did not, could not and/or would not pay back the bad loans, 'toxic assets' and all the other write-offs the banks have declared in the past 6-12 months?

I understand that when a person declares bankruptcy, his house/car/boat and such could be repossessed. If he took an equity loan, and used the money for any number of goods and services that he enjoyed, but now is unable/unwilling to pay back, the bank gets nothing, and declares this loan "toxic". Right?

The same happens, but on a vastly larger scale when a corporation, large or small, receives a loan and cannot/will not pay back the amount owed. The land and other tangible goods could be repossessed, but they are likely unsaleable in a (temporarily?) glutted market, and therefore also likely become 'toxic assets' or a write off at the bank. But the goods and services - including salaries, fees, profits, bonuses - used BEFORE the loan became a write-off, are gone. Used up. Enjoyed?

Sure, some of the trillions claimed by banks, insurers and other financial institutions as write-offs under TARP, are due to genuine, unpremeditated economic hardship. But I cannot help thinking, how much of these write-offs and unpaid loans are Bernie Madoff style con? He surely is not the only 'genius' free-loading in this vast mess. At the expense of the taxpayer. Or am I just unduly alarmed by this thought?

Are We at the Beginning of a Bull Market?

Using your numbers gives me $24 billion a year of lost income per each increment of 600,000 new unemployed. That would be 2 billion per month of diminished aggregate demand, not $240 million. A large number indeed.

However, the rest of the employed people still need goods and services, generating a vastly larger aggregate demand (which also includes demand for goods and services from the industry, government, etc.) Hence, the companies producing them may have to shrink their output, but not to zero. Therefore, they will have earnings, and some will even pay dividends, and keep value of their shares at some level. That level is now being debated by the market, the great arbiter of thought and money behind it. The current situation may be reminiscent of the past situations, but the size and the composition of the world economy, the populations and their demand, the investors and speculators, the communications and many other factors influencing the market are in many respects quite different today.

Hence, the analogies with the past, while illuminating, cannot be taken at their face value.


On May 14 10:14 AM ebworthen wrote:

> There is "doom and gloom" and then there is reality.
>
> People who warned about WWII approaching and the Nazi threat were
> "doom and gloomers"; Winston Churchill went from being called one
> and heckled in Parliament to the hero of the nation in the space
> of a couple of years.
>
> Step away from the numbers; regression to the mean does not apply
> with outlier events of great magnitude.
>
> Unemployment is "usually" a lagging indicator. However, people without
> jobs don't pay mortgages, auto loans, credit card, and other bills.
> We are adding over half-a-million JOBLESS people per month. Take
> 600,000 and multiply by median income of $40,000. That's $240 million
> dollars less per month going into the economy. It is also a drag
> of $100 million at least for unemployment benefits paid out by government.
>
>
> The social impacts on the market cannot be ignored. Increased spending
> and money printing will inevitably lead to higher taxation which
> will stunt any growth. Obama's agenda will eventually tax EVERY wage
> earner, it will start immediately with cap and trade. Interest rates
> will have to be raised to prevent inflation if not hyperinflation.
>
>
> Get out of the market now; this is Spring 1930 revisited.

Do You Believe Borrowing Leads to Prosperity? (Part 2)

It's not only cars that represent the illusionary wealth or status (even though some people can and should genuinely afford it). It is also the house, a much bigger expense and cost. Hence it is not only driving an expensive SUV by a single person to the shopping mall, it is also living in a 3,000 sq.ft house that is essentially empty of people, and 20 or even 50 miles from a place of work, that seems such a waste of money and effort. And very likely financed by debt.

The list goes on and on - e.g. the garages so full of stuff that nobody has time to use...or a wardrobe so stocked and stacked that it is like a warehouse. All millstones around a consumer's neck.

Going into debt to pay for such excesses makes no sense indeed. And an economic recovery based on this presumption would be likely unsustainable and would likely lead back to where we are today - but without the Government's ability to bail out the failed ones again.

Stress Tests: Where Do CDS Fit In?

Thanks for the explanation.
It looks like some new, better balancing (clearing) mechanism is needed, for clarity and fairness, and to avoid impact on the rest of banking and financing.
This looks a lot like dual bookkeeping by the banks..I thought it was made illegal some time ago!


On May 05 11:29 AM Tom Armistead wrote:

> Credit Default Swaps are in effect insurance against bad debt on
> bonds or other obligations. The notional amount would be the policy
> limit. Because losses are infrequent, a CDS with a notional amount
> of 1,000,000 might only be worth 12,000 at fair market value. <br/>
>
> The 15 trillion would be the total amount of insurance. At one point
> globally notional CDS totalled 65 trillion, more than they total
> of all outstanding corporate debt. Rather than closing the original
> transaction, a party closes their position by buying or selling a
> new opposite position. So net notional amounts seriously overstate
> the total size of the problem - they are "headline" numbers. <br/>
>
> But the 64 billion in my opinion is an overstatement of assets -
> these banks collectively are asserting that they all have unrealized
> gains totalling 64 billion on CDS trading. Checking the OCC figures,
> for the last 8 quarters the banks collectively reported losing 8
> billion per quarter on the average, not consistent with large unrealized
> profits...

Stress Tests: Where Do CDS Fit In?

A question from the interested but uninformed:
what does the $15 trillion 'notional' CDS mean/represent? Is this the world total of mortgages and other loans and commercial debt? Or is it the value of the 'bubble' created by the banks trading derivatives of these?
Thanks.

Seeds of an Economic Recovery?

The current numbers may indicate what size the US economy is (as well as other economies around the world) when in the "idle" mode. There is neither a pronounced growth anywhere (i.e. boom) nor further rapid contraction (bust).

There's no growth because there's ample idle capacity to cover the essential needs. The replacement of the machinery and other productive capital items is not necessary for another few months. Ditto regarding the huge inventory of houses and commercial real estate, the full strategic reserves of oil and other materials, etc. The same goes for the households - people can and obviously are postponing certain major purchases.

But there's no bust either. Essential machines, engines, parts, cars, telecom equipment, health supplies, housing repairs, infrastructure repairs, government expenditures on services and such must be performed. Replacement and essential innovation must go on in both the industry and the households, at least at a pace indicated by the current numbers.

Although imprecise, this may be actually an example of a temporary economic equilibrium, a pause (inevitably including a small growth here or a further small contraction there). And likely, the calm before the start of the next increased activity cycle in the relatively near future..

Black Credit Card Wars

Here's my 2-cent's worth:

1. The credit card is a great invention, but it should remain a convenience, not an easy way of getting into debt from which many just cannot seem to climb out. It is a great way of paying for goods and services without lugging cash or the cheque book. But it makes sense ONLY if the balance is paid of every month in full, or at least making substantial payments on the amount owed rather than carrying debt at usury rates.

2. I do like the idea of creating one's own black card with an appropriate picture of a dark night (romantic!) or a lump of coal (for the owners of the anthracite mines) or the picture of a certain portion of our financial system (the black hole).

After all, if one can get a good looking 'Rolex' watch for $10, why not pay with a good looking CC? After all, it is generally the cashiers in the restaurant or a hotel, whom the CC holders (of any card) are trying to impress...Or does such black CC comes out intermittently during the cocktail hour on one's own yacht or during a golf or a polo game?

Are Insiders Selling or Buying?

The noted discrepancy in numbers shows how precarious - and unreliable and dangerous for investors - is the state of statistical numbers reporting, and of the financial reporting in particular.

It would be very helpful for the investor community if a consistent, verified and timely set of numbers were available for a selected (all?) important variables.

But what is the chance of it? The majority of 'official' numbers are frequently revised, sometimes several times over; the componies tend to deliver self-serving numbers; and there's hardly any consistency among the methodology and hence the results from the various reserach groups and analysts.

Take your pick. Caveat emptor!
Or fly by the seat of your pants...

Greed, Fear and Loathing: What’s Next for Home Prices?

Very interesting analysis using somewhat unconventionally constructed variables. One thing is clear: we are - and have been for the last 6-9 months, in a very unconventional territory.

The wave of foreclosures announced by most large banks recently can only push house prices down. Affordability may well rise. But the the propensity to purchase a house or a condo, given the expected rise in unemployment ( and the uncertainty about the income), is likely to remain a bit subdued.

On the other hand, there is the inevitable churn in buying and selling of houses by those willing or being forced to change jobs, or due to other circumstances. Such purchase cannot be postponed indefinitely. Hence, I would expect a modest upturn in number f sales, albeit at significantly lower prices.

Actually, Americans Are Not Saving Yet

Although we are in the midst of some very nasty mess and some knee-jerk actions by the Fed and other central banks of colossal proportions, the era of unbridled money creation by the governments to counter the shadow banking practices is probably coming to an end. Let's hope so.

Once this bailout and stimulation bubble is over, there's good probability that the sounder economic principles will again prevail. And that means that saving will be a virtue, because it allows/balances investment, and the governments will have to return to gradually balancing the budgets. That's good. But what's not so good: it might take 2-3 or even more years to have a real positive effect.

Things that may derail these efforts could be over-stimulation of the economy, trying for unsustainably high growth rates in the long term, not letting the housing market find its naturally clearing price level, or relying on some external factors to do the trick. We should aim for less rapid but more sustainable path to prosperity for all concerned.

America Is Becoming a Banana Republic

Maybe it's time to create a parallel banking system based on brand new banks established along the standard banking principles.

They can be capitalized by the money now earmarked for bailing out failing financial institutions plus the deposits by individuals and companies fed up with the existing banks that willfully put their depositors, shareholders and the whole system at risk.

These BRAND new banks, properly managed, regulated and overseen would constitute a nucleus of rebuilding the financial system based on honesty, transparency and good economic and financial sense.