Jasper M's  Instablog

    At the burning tip of the credit inflation, the biggest banks were not only perforce placing the biggest bets, but many were also playing with a higher proportion of the riskiest cards. So it's not exactly stunning that their huge aggregate losses tend to catch the attention of the press, and its consumers.
   At the time, I patted myself on the back about the health of the three (carefully researched) banks I did business with. The were rated A+, A, & A-, by thestreet.com's banks screener. My A- went down to a B+, but I didn't keep much money there, so I slept soundly, as Lehman, Bear, et al roiled the financial and political world, and seized the headlines.

    Then came the steady, drip, drip, 'Chinese water torture' of local banks failing. It started with a few heavy mortgage players, in overbid markets - nothing particularly relevant to me, in the rural backwater where I reside. But gradually, the cratering spread, and spread, and spread. I got a bit nervous. My A+ was now down to an A. But everything else held. 

    Well, the 3rd quarter's numbers have now been digested, and the ratings adjusted, and Trouble has arrived. The decline in business activity, and therefor wages, and therefor real estate prices, and therefor default rates, has finally started to take a serious toll, even on the very best banks at my disposal, even in my neck of the woods.
   I live in Tennessee. As long as I have been keeping track of such things (2002), we have had more than our share of strong banks. In fact, we still have more than our share of A rated banks, compared to the average state. But the number has dropped, a lot. My A+ bank, that went to A, has dropped to A-. Still respectable, but a bad trend. And my A rated bank has slipped abruptly to a B-, after many years of proudly maintaining their A rating. In normal times, that would be acceptable, but these are not normal times. To put things in perspective, Lehman was rated B- in the cycle immediately before it went under. 
   If the economic crisis is measurable weakening the ratings of some of the safest banks even in my neck of the woods, then thre really IS no place to hide, and it is time for me to take heed, and start worrying in earnest. Dr. Weiss, and others, have warned about the possibility of failure rates high enough to produce situations that would be unmanageable by Federal banking  authorities. I am taking those warnings absolutely to heart now, and shifting more funds out of the US banking system. 

    
   

    Robert Prechter's advise for successful trading is largely focused on discipline. One major component of this is admitting your mistakes. 
   I believe there can be no better way to accomplish this than to share your performance - that way, if you are failing, and can't or won't admit it to yourself, the guy next to you can enlighten you. 
    I have proudly laid out my greatest trading successes (such as they are) in my profile. It only seems fair to share some of my worst. That is what I am going to be doing here  - show anyone who cares to look, my poorer trades
    Not from my whole career, mind you! That would be just too painful. And time consuming. BUT, as it happens, recent market action, and my response to it, provides a convenient sample. Starting back in May, I began buying puts, mostly way out of the money. I finished off the last purchase this morning (I think). This will be my sample.
   As I write this line (10/21/09), this is a 'placeholder' entry. If and as any of these options expire worthless, or I just give up on them, I will use the "Edit" function to add an entry of their time and price of purchase. I expect to make the first entry in the first few days of November.
    Bear in mind that some of these have expirations going out to 2011, so this might be a loooong project.

Or not.        ; )

Oct. 30: Weatherford International (WFT) (or in my case, WTF ?)
   Goldman saw this company as a leveraged play on oil field utilization, and I agreed . . . but I had different expectations of where oil was headed. While I predicted the rise of oil to around $75/barrel this summer, I had no idea demand would return to those levels so late in the year, with depression looming. 
   I bought a small handful of the Feb. '10s, @$7.50, at a nickel each. Oil is currently just a bit under $78/barrel, and WFT is trading at $17 and change. I still have some time on these, and it looks like oil and stocks are going to be headed in the direction of bailing me out, but I must admit that my original expectations justifying the position were erroneous.
   Moral: Goldman Sachs is not always wrong; moral turpitude does not equate to universal error. I made the same mistake our intolerant ancestors did, during Europe's religious wars - anyone believing differently was a 'heretic', and presumed to be open to every other kind of sin. Which is silly, as the gentlemen on both sides, while they would cheerfully kill one another, would never stoop to stealing.

Nov. 1: MBIA (MBI)
   Once upon a time, there was a company that insured other people's debt. That is, put up its own pristine credit rating to support those less fortunate, who paid it handsomely to do so. 
   But then, its pristine credit rating went away. The business model was no longer executable, right? So the company must be doomed. Right?
   Um, well, no, it turns out. Somehow this company manages to stay in business insuring bonds and CDOs, despite the fact that its own credit rating (=capacity to actually make good on claims) is shot. No, don't ask me, I don't know.
   Much was made of a notion to split the company, shielding its relatively attractive muni arm from whatever might be about to happen to the rest of the firm. Given recent events in almost every state in the union, but most especially California, I wonder how this really would help. 
   Most of the puts in the financial sector that I made so much on in 2008 were LEAPS I had bought a year or more earlier. As 2008 progressed, I had been stalking MBI as a 'zero-short', but didn't pull the trigger in time, and then the SEC said no short selling, so what's bear to do? I tried to set up a 'synthetic short' using puts, but I came in too early (May), and cheaped out, went too low, and not quite far enough out. 
   I didn't lose much on this, but the errors are obvious enough to be painful. I waited too long, then couldn't discipline myself to walk away, instead coming back in too early, embracing a strategy that required me to be proved correct quickly.
   I would say "won't make that mistake twice", but . . . 

    American International Group (AIG)
   "The Dead walk ! The Dead walk !! The Dead . . . pass taxpayer money, to Goldman . . . !?" 
   Who would have guessed the taxpayers would supinely accede to this abomination? Not me, that's for sure. The fact that (relatively) free markets attach any value to this hollow shell is beyond me. They are either assuming the Recovery Fairy will make all their potential liabilities go away, or they believe the government well really is bottomless, and will never find a better way to keep Goldman Sachs in business. 
     My trajectory for this position was almost identical to my MBI experience: waited too long, wouldn't walk away, couldn't short, back in too early with a too-aggressively structured synthetic position. Recent market action might actually take this one into the black, but I have to admit, my assumptions were just wrong.
    
    

    I thought I would be done with this topic, but two events pertaining to brokerage firms I mentioned in an earlier post pretty much demand publication.

   First, you may recall the Edward Jones broker who didn't know the difference between an option and a short position. Well, this mental giant has lately been refusing to accept sell orders from a customer, an elderly woman, who is rightly terrified of the risk to her life savings. 
    Now, I have no indication of any malice on the part of this . . . man. I suspect he is just sure that he knows best. And we can hope that this is an isolated incident. But it is at very least, it is a solid indication that Edward Jones is not effectively policing its franchise. 
    As for the miscreant himself, rest assured that steps are being taken to limit his capacity to do harm.

     The second item relates to Scottrade. Anyone tempted to make use of their cheap and  convenient options trading should be aware that they are not able to trade options on the ^VIX. Could have knocked me over with a feather.
   

    

    Not so long ago, I came upon a commenter here on SA who declared that 'T-bond trading is only for pros'.
    I have complex feelings about this statement. It has not been my experience - I've made money 4 times in as many years. But, from that same experience, I suspect it is passable advice. My experiences with T-bonds have been troublesome and nerve-wracking, and were only profitable because I had a lot of determination, and some of the best advice around.
   Starting in late 2006, I have had 4 positions in longer-maturity US Treasuries (or a tightly related ETF). Each time, I targeted shorter maturities. Each time, I didn't hold them as long. Each time, I made less total profit. All during a time when the very solvency of said Treasury has been in progressively greater question.
    I am going to spell out some of the details of my adventures in Treasuries here, so you can draw you own conclusions, as to difficulties, and arguably my own good sense.

     It all started back in late 2006. I wanted to try out a prediction by Robert Prechter, who had opined that the spread between AAA debt and junk would continue to widen. I agreed. So I bought an inverse junk bond fund, and bought a 30 year T-bond (^TYH). Small positions, 5 grand each. 
    This last proved more troublesome than I expected - my broker, really, Really didn't want me to buy that T-bond. But I am a stubborn person, and I got my bond. 
   I would like to stress that, at that point, I had every intention of holding that bond for a very long time.
     Both ends of that trade proved profitable. But as budget issues, and the likely consequences of the near certainty of a Democrat President, continued to loom, I got nervous over the big run-up in my bond. So I sold it. 9% capital gain, plus about a year's worth of 5% interest. 
    But then I realized my junk short was now unhedged, and the intermediate-term outlook for T-bonds seemed okay. So the next wiggle down in Treasuries, I bought TLT, an ETF holding Treasuries with 20+ years left to maturity. I figured this would provide a more fluid vehicle, should I want to get out sooner than later. 
 
   Several months later, I determined that my inverse junk fund position, while profitable, was not effectively mirroring the performance of the underlying issues. So I closed it. I closed the Treasury ETF hedge at about the same time. About 4%.

   As the run-up to the Lehman failure began, I began to lust after a short position in junk bonds again. This time, I planned to short a junk bond ETF. Preparatory to that, I established a hedge by taking a position in another iShares Treasury ETF, this one holding maturities of 10-20 years (as I was getting somewhat gunshy about the possibility of a big jump in rates) (sorry, no ticker symbol, I can never find it in a hurry when I need to).
    Joke was on me, as my broker could not 'locate' junk ETFs to short comparable to the size of my Treasury ETF position.  And then the Treasury chart started to look worrisome. But then, a few months later, Bernanke pulled out the QE bazooka, and blasted my position back into the black. Knowing that the effect of such interventions is seldom durable, I took the opportunity, and bailed out with a marginal profit.

   (Digression: I can't help but wonder if this is one of the ways investors get sucked into trading - they exit a bad position swiftly, with a small profit, then note the profit/unit time is reasonable)

    At that point, i thought I was done with all but the very shortest term Treasuries. Given all I had experienced so far, why take the risk, and why endure the bother?
   But ultimately, I am a technician, and I can forgive a lot of fundamental horror if the charts look promising. And in August, the Treasury chart started to hint at a possible intermediate term bottom. This seemed to correlate with anticipation of "flight to quality" buying of T-notes when the bear market in stocks resumed. I was flush with cash from a Very profitable 2008, so I determined to plow a good chunk of that into a position in the US 10 year Note. 
   Since I had every intention of holding the bond for a long time, I decided to skip the convenience of an ETF.
    Easier said than done. The world is awash in US Treasury paper . . . but there was none for me! Ended up buying an old 30-year bond, with 10 years left on it. Close enough.
    (digression: just to put things in perspective, note the original interest rate on That bond, issued in Aug of '89, was 8.125%) 
     Well, long story short, the "intermediate term" I envisioned apparently was a lot briefer than I supposed. As I said before, I can ignore fundamentals as long as the wave counts look good, but when they stop looking good, I get uncomfortable, fast. Longer Treasuries look like they're done, the "quality" that will be flown to will be something else, and I cannot expect much more there. I closed the position a few days ago, for what appears to be a fractional percent profit, after commissions and such. 

   I learned a lot from these trades, about bond trading, and a bit about myself as well. I leaned that bond charts are a lot harder to read than the Dow. And I learned that, while you can make a profit going long the bonds of a financial irresponsible entity . . . it might not be worth the hassle. 

  

    "De Morituri, nil nisi bonum"

That's an old latin quote - means something like "of the dead, don't speak ill"
And it is certainly unfashionable to speak ill of a fallen foe.
But then, I never was especially sensitive to fashion.
I certainly didn't get wealthy adhering to it.
So I think that, as usual, I am just going to call 'em like I see 'em.

   I can think of no more poetic marker for the change that is about to occur, to pretty much every aspect of American culture, than the death of Senator Edward Kennedy. The proponents of his world-view have captured more power than they have had since the last depression, and have found their own 'high water mark', and are about to suffer the extreme misfortune of seeing the results of their theories being tried. When those who come after us look back at the silly turbulence of our age, I suspect they will view his death much as modern historians look upon the death of his brother John.
    And make no doubt about, we are very, very close to History, with a capital "H". And not in a good way.

    While I disagreed with the late Senator on pretty much everything except the utility of oxygen, in a way, I wish he had held on a little longer, for a reason that reminds me of my mother.
   My mother was a doctrinaire leftist, a crypto-marxist, actually, who believed there was nothing government couldn't do, if it only decided to. Create wealth from thin air? No problem - it's The Government! As corollaries of this, she believed that law had a moral authority all its own (once admitted to me that she would turn in Jews if they were being rounded up), and that the government could manage the economy well enough to ensure perpetual prosperity.
   Fortunately for me, she operated on this last belief in a period where it appeared to be true - from the late 70's, right up to 2006, it was, on balance, just fine to Buy and Hold. And I say "fortunate for me" because she died in 2006, right about at the top of, well, everything, giving me Just enough time to liquidate everything before the sky started to fall in. 
   I won't lie to you, I love having this money. I love not having to go to work. I love not having to get up early on any but the most critical market days. I love the way I can make more money out of it, enough to pay my bills and then some. I love being able to honestly answer public servants older than I am that "I . . . am retired!" And I love planning who I will share it out to, when I die. And I would not have it if she were still alive (and would have way less if she had lived only slightly longer). But in a way, I wish she was still around.
    Not because I had any great affection for her. My mother embraced pretty much every bad idea the 20th century had to offer, and her unrelenting hostility to everything good and beautiful and inspiring had long ago overwhelmed the natural tendency to love one's mother. By the time she died, we had been estranged for some time.
    No, the reason I wish she was still around, now and for a few more years to come, is I would have loved to see the look on her face. Her beliefs in socio-economic matters have been made into manifest policy, and I would have loved to see her reaction to their implementation in another two years.

   And so it is with Senator Kennedy. I wish he had lasted a few more years. Yes, it might have allowed to Democrats to push through a truly hellish medical 'reform' . . . but I think that would have killed itself pretty quickly. And it would have been more than worth it to see the late Senator counted amongst the other dumbfounded Big Government proponents.

    Am I being petty? Perhaps. But I like to believe there is another component to my wishes. When asked about the moral standing of his opponents, Michael Dukakis (another guy I don't agree with much) quipped, "I believe in the redemption of souls". And in a way, so do I: I believe if people live long enough to see their errors implemented, they have a Fine chance to see the error of those ways, and Change their Minds!

   That's all probably just a pipe dream - my mother was sufficiently disconnected from reality that she would probably just ignore the parts she didn't like, and I have no particular reason to suspect that Edward Kennedy was much different (certainly his voting record gives no reason to think it). He was a Bad Guy, and I and the world are well rid of him.

   So, as condolence prizes for not seeing my ideological enemies proved wrong in their own lifetimes, I shall just have to settle for a lifetime's worth of wealth, and toasts of "One Less!" with my friends. 
   It'll do. It'll do.

    You can't pick a compass direction to look out these days without seeing some prognostication of China's great future. I am moved to paraphrase some lines from Julius Ceasar: 'Upon what meat is our China fed, to have grown so great? . . . Why, they bestride the narrow world like a Titan, while we petty men peep about their feet, and find ourselves dishonorable graves!'
     
    I also remember that this all sounds terribly familiar; maybe because I heard pretty much the same things about Japan in the early 80's. In case you weren't around then, I promise you the rhetoric, while certainly bearing a slightly different flavor (as befit the times), carried the same message: Certain Gifted foreigners had found a Better Way to prosperity, and would soon surpass us.
   This mythology was not just limited to geopolitics (e.g., requesting that the Japanese restart their military) and finance - it crept into all sorts of nooks and crannies. For example, I remember at the time that you could not find any near-future science fiction that did not assume that a bankrupt US would not end up bailed out by a Japanese economic hegemony. 
     Those prediction didn't work out so well. 

    Now, here we are, a quarter of a century down the road, and I feel like I am hearing the same story, just with a slightly different address.
   The mongers of these views cite data to support there beliefs. Of course, they did back in the 80's, too. I wonder at the apparently open-ended credulity of those who are willing to rely on numbers produced by Marxist governments.
    But the numbers are really irrelevant, as they are not the true source of the opinion. The true source is Foreigner Envy - the (periodic) observation that someone, somewhere, is doing better then us. WhenEver our national economic star wanes a bit, there always seem to be some who will count out the country's future, and hurriedly cast about for the next superpower. This goes way back: In the 20's, there were jackasses that went over to the Soviet Union, and returned claiming "I have been over into the future, and it works!"

    I invite all concerned to indulge in applying just a few moments of critical thought to the notion of China's long term prosperity.

    1) Some of China's growth numbers look good. Real good. Which is hardly surprising, given that they are collected, analyzed, and distributed by the Chinese government. Do you suppose for a moment that there are many in that process that would hesitate to boost the national resume'? 
    One of the basic precepts of Marxism is that social truths are malleable. Which is a fancy way of saying lying is okay. If I am wary of the declarations of a stranger, about whose character I know nothing, how much more wary should I be of a declared liar?

   2) Most people seem to have forgotten this, but Tyranny is Bad for Business.
The Chinese have outstanding promises to partially democratize their political system, but they have yet to progress with this past the level of the smallest communities. Malleable social truth. 
   Does this seriously surprise anyone?! We have seen the tenacity with which American bureaucrats cling to power. Why would we assume those who, being raised in tyranny, chose to join its ranks, would be any better?
   And tyranny is not, cannot be, irrelevant to economics. Prosperity requires efficient allocation of resources. And that requires a certain amount of, what's that word? Oh, yes . . . Freedom! If any government official can redirect a purchase from a better supplier to a worse one, prosperity is impaired. 
     Yes, we have a bit of that here. But we have a natural check - the ballot box. Do you seriously suppose any Chinese official loses sleep over possible confrontations with angry voters at town meetings? Of course not - they aren't elected. It's not the government that loses sleep in dictatorships; it's the people. WHen the Chinese people contemplate confrontations with their leaders, it is they who must fear.
    As I have said of the Chinese government elsewhere, remember that these are the heirs of Mao Tse-Tung, a mass murderer who made Hitler look like Mary Poppins. And lest you think he was an anomaly, they were driving tanks over their own children at Tienamin not so long ago.

   3) Socialism is Really BAD for Business.
   A world view that advocates rewarding failure, and punishing success, will impair any economy it gets into. And when it is embraced by a monopoly political party, that influence will be inescapable. 
   Much is made of our own nation's flirtation with socialism, and I find it loathsome as well, but as a matter of degree, they are not comparable. 

    4) So how is it that China has managed growth, any growth, as a socialist dictatorship? Simple - we paid for it.
   Various US public policy, most notably labor law, discouraged production within the US, in essence exporting jobs to lower cost nations. China got a lot of this. 
   But this is not sustainable. Recent US consumption has been a false prosperity, achieved on the back of a credit inflation of historical proportions. And these never last. The great economist Ludwig Von Mises was clear on the fate of credit inflations - once they have peaked, they Cannot be maintained. So all the song and dance from the Fed et al is just that. American credit supply will decrease markedly, which means American money supply will decrease markedly. Which means American purchases must decrease markedly.
    So who will pay to fill in the misallocation gaps in the Chinese economy in such an environment? I can tell you - No One! 

   5) Where has China reinvested the profits from its recent bounty? Treasury Bonds, commodities, and gold. The first are yielding crap, and may ultimately be partially defaulted on. The second will be pointless with no one demanding their manufactured goods, and impossible to resell at anywhere near cost in a world-wide depression. And he last they will reliably sell, right at the bottom. 
   The Chinese have made the classic military mistake of fighting the last war - they look in their rear-view mirror, and see inflation, and prepare for it again, not realizing that everyone else is doing the same, tilting the board the other way.
   Again, we do that here. We do it a Lot, in fact. But the free(r) market allows some to make preparations the other way, and thereby rescue capital. 
   
   China is Not a model for success, it is Not the wave of the future. They are Communist country, better behaved than many, but still communist. Nothing they say can be trusted. And they are headed for the loss of all they have acquired from American shortsightedness. 
   I believe China may be headed for a similar state of affairs as that it experienced in the 40's: Starvation level poverty, with social order maintained only by extreme oppression. 

    I would love to be wrong about this. I am not rubbing my knuckles and cackling with glee at the prospect of the suffering of the Chinese people (or their neighbors - these things tend to flow downhill). I am not the sort who enjoys the misery of others. But I believe that if you ignore the product of your intelligence on an issue, whatever the reason, then you may as well have no intelligence. 

   The United states did not come to world dominance because we were chosen by god, or because we chose him, or any such nonsense. It was productivity, pure and simple. Through most of history, the outcome of the vast majority of international conflicts can be determined by which side makes the most steel. And the highest productivity requires freedom.
    The US has now impaired its productivity, and looks set to impair it more, and it might be that the beginning of the end of American dominance is at hand. But I find the notion that the US will be out-produced any time soon by a (more) blatant police state to be ridiculous.