long roh

Five Reasons the Market Could Crash This Fall

I don't necessarily disagree that this rally is unsustainable in the near to intermediate term, but I have to take issue with the author's analysis re: derivatives. While the author acknowledges that the value of the derivatives is "notional," he then goes on to make pure guesses about how much risk those derivatives represent. Just plain silly. The best derivatives desks try to operate like casinos or market-makers, taking a bet from one counterparty and finding another counterparty interested in the other side of a trade. They pocket huge fees from this activity (hence the dealers' resistance to the clearinghouse for derivatives, which would crush their fee structure). The notional value of the derivatives on their books could be incredibly high but the bookmaker, er, derivatives desk may have virtually no risk whatsoever -- except for counterparty risk. As we should all have learned by now, counterparty risk is dangerous when counterparties (like Lehman) are keeling over. But given the government's apparent resolve to prevent cascading counterparty risks (i.e. AIG), the derivative books would seem to be safe for now. So while the market may go down again, derivatives will likely not be the culprit.

Looking at Case-Shiller Levels

The comment below is wrong if applied to the Case-Shiller index (it might apply to other measures like NAR figures, etc.). The Case-Shiller index looks at repeat sales and is not a simple averaging of sale prices.

For more info, try: www2.standardandpoors....

My two cents: foreclosures at the high-end (that the comment below mentions) could be a sign of capitulation, since those owners presumably had more skin in the game and/or better access to financing, and so they are the last ones to say uncle. Of course, it could be that they are selling because they lost a high-paying job. I wouldn't bet either way on housing; too much uncertainty right now.

On Jul 28 12:07 PM 3 degrees of seperation wrote:

> It was the low end of the market that went down the furthest and
> fastest, due to the high level of forclosures and distressed sales
> that followed. Now the foreclosure epidemic is spreading to the mid
> and upper price levels. As the distressed sales pick up in these
> levels, it will pull up the median sales price. This is not really
> a sign of the market bottoming but a sign that the cancer is spreading
> to higher price levels. I have been watching this market in south
> west Florida and the number of foreclosures in the mid to higher
> priced markets are just now starting to kick into gear. This shift
> upmarket in distressed sales is not a sign of happy days returning
> but a sign of further weakening into a broader segment of the market
> that is simply creating an appearance of a bottom. While sales at
> the lower price levels may be bottoming, sales in the mid to higher
> priced levels are still anemic because prices have not come down
> nearly as much as at the lower levels and have much further down
> to go, in my opinion.

Procter & Gamble: A Valuation Opportunity

FX is the only thing that can derail this beast. Great company, great article.

High Frequency Trading: Legally, It's Called Churn

Sparchang is right about the definition of churning:

“Churning occurs when a securities broker buys and sells securities for a customer’s account, without regard to the customer’s investment interests, for the purpose of generating commissions.” Sandra K. Simpson, Exchange Act Rel. No. 45923, 2002 SEC LEXIS 1278, at *52 (May 14, 2002), quoting Olson v. E.F. Hutton & Co., 957 F.2d 622, 628 (8th Cir. 1992).

What the author is really referring to is the practice of painting the tape with fictitious trades, which can have a variety of motives. For example, a broker-dealer might get paid (miniscule amounts) for its quote information and so it adds fake trades to up the volume. A client's tax reasons could also drive such trades (aka wash sales). But what I think the author is alleging is market manipulation. The theory is that by keeping the market in a tight range, the market-makers reduce the market risk of their inventory and can happily make a killing off the bid/ask spread. However, I am unaware of how market-makers can keep the market from moving one way or another and not be easily caught, and I don't think this article proves anything.

For example, the cited $.05 range in C is actually a range of close to 2%, which is pretty decent for a highly-liquid name. CIT's range yesterday (after the "morning move") was about $1.00 down to $.91 and back up to about a $1.00. In no way is that a "tight" range.

I always read Tyler's articles with an open mind and I am sometimes impressed by his art of "connecting the dots", but this is a false positive.

Is the U.S. Dollar the Fed's Next Weapon?

Inflation/devaluation is definitely the game plan. The talk of the Fed reducing their balance sheet at an appropriate time is just a con to keep foreign sovereigns from dropping out of U.S. government bonds entirely.

Note that this strategy is a tax on everyone (including the aforementioned foreign sovereigns), but it "disproportionately" affects the wealthy for two reasons: 1) they have more dollars; and 2) they can't evade the tax like they normally would (i.e. enforcement is automatic, no tax shelters available). The only way for rich folks to avoid the devaluation is to move into commodities or other currencies and subject their wealth to the vagaries of those markets. It's a bold gambit by the Obama administration: tax all dollar holders, change inflation expectations so that spending becomes more attractive than saving, and hope that the economy improves enough to keep the national debt from getting hopelessly out of control.

If the plan goes south, another administration in the future (perhaps one with a greater desire for military conflict), will have to seriously think about defaulting on foreign-held U.S. debt. BRIC would not be too happy about that, but it would have a certain benefit for the American public.

Are GLD and SLV Legitimate Investment Vehicles?

I am starting to tire of reading SA comments from people who seem to want more than anything else to be able to say "I told you so" someday while we're waiting for our turn in the Thunderdome...

But seriously, how can anyone suggest, as some commenters have, that GLD and SLV are some sort of conspiracy to suppress prices?

Go look at a chart of the entire price history of GLD. It has sucked up $33 billion in physical gold in the last five years. That's over a thousand tonnes of gold (1,094.54 according to their website). Rather than "diverting" demand from the physical market, they are generating additional demand by making it easy for the average Joe to invest in gold.

A number of commenters here have some serious "trust" issues with Wall St. (They're greedy bastards -- I get it.) But ask yourself this: if you were a relatively uninformed investor looking to speculate in gold because you read on SA that it's a good investment, who would you put your trust in: a large financial institution that presumably doesn't like to get sued or a gold dealer looking to sell you a physical object that you have no practical means of assaying and who wants to charge you a hefty premium? Gold dealers scare off average investors, and GLD picks up what would otherwise be lost demand. GLD is just better marketing for the asset class, plain and simple.

Are Sirius XM Insider Sales a Buy Signal?

This comment is spot on and the author is wrong. I haven't looked at the specifics here, but I'd also point out that the insiders could be subject to Section 16 short-swing liability (in and out within 6 mos.) if the author were correct that the plan deviation was discretionary. More likely is that somebody screwed up the filing.

On Jul 16 08:54 AM relayer75 wrote:

> 10b-5 plans might have specific instructions to sell or not sell
> above or below a certain price. The whole point of a 10b-5 plan is
> that it gives irrevocable instructions for sales at certain points
> in time if certain conditions are met, taking the sale decision out
> of the hands of the holder. This creates a safe harbor against charges
> of insider trading. I wouldn't read too much into the lack of a filing
> for July. There are a lot of variables, but the insiders "deciding"
> not to sell in July is not one of them; 10b-5 plans don't work that
> way.

Game Over, CIT

Does anyone really believe that CIT was well-positioned to continue making these kind of loans? The comment below is just bearish propaganda. I'm sure there are plenty of other institutions to step into the breach -- and who will likely cherry-pick any good employees still left at CIT.


On Jul 16 09:30 AM David White wrote:

> How soon we forget! When Lehman was allowed to go under, it wasn't
> supposed to hurt that much. It did! The credit markets seized up.
> Among others things Dry Bulk Shipping came to a standstill because
> there was no one to finance the voyages. Eventually others stepped
> in. CIT has a unique position too. It is big enough to make a huge
> difference in the small and medium business sector. Who is going
> to provide those loans immediately? I am not hearing any big plans
> for that. The apparent CIT bankruptcy will have huge ripple effects.
> Scoff at this "minor bank" at your peril.
>
> The job numbers today were better than expected, but not that much
> better. Plus one has to believe that a lot of GM and Chrysler related
> job losses are looming in the darkness. When these are finally seen,
> the numbers may go back up. Plus a CIT bankruptcy may have a bigger
> effect in this area than many want to believe.
>
> JPM's results were better than expected, but JPM's tier 1 ratio still
> went down dramatically. With S&P's downgrading of many CMBS's
> from AAA to BBB-, you can expect this situation to worsen as we go
> into the fall. Plus the single family home foreclosures are up 15%
> for the 1H 2009. This isn't good either. Are we about to see another
> round of capital raising by the banks? If so, we may see their prices
> fall dramatically this time. investors will only ignore dilution
> for so long.

Are GLD and SLV Legitimate Investment Vehicles?

"'Neither the Securities and Exchange Commission [SEC] nor any state securities commission has approved or disapproved of the securities offered in this prospectus, or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense' (emphasis mine)"

Really? That worries you? A government stamp of approval would help you sleep better at night? That's hilarious.

Also, the author writes:
"In analyzing the SLV prospectus, the following statement can be found: 'The trust does not trade in silver futures contracts on COMEX or on any other futures exchange. . . .'
Elsewhere in the SLV prospectus, the following claim is also made: 'Accordingly, the bulk of the trust’s silver holdings (emphasis mine) is represented by physical silver.' If the bulk of the trust’s silver holdings is represented by physical silver, what constitutes the 'remainder'? . . . . So what is the rest of the trust’s silver holdings? Paper silver future contracts, air, or something else?"

No big mystery here. Probably OTC swaps, and most likely with an affiliate of a custodian. OTC swaps are off-exchange, so the disclosure would be accurate. This introduces counter-party risk, but my guess is that such risk is minimal because they are most likely buying swaps in small amounts to bridge the gap between incoming order flow and availability of hard inventory.

The bottom line: if you want gold or silver as a store of value through the Apocalypse, then by all means pay the ridiculous premiums that dealers charge for the physical metals. If you are interested in PMs as an investment asset class and do not plan to buy bread someday with Krugerrands, GLD or SLV will be just fine.

Winter's Coming for the Boomers: Part 2

An entertaining piece, though I don't put much stock in this type of backward-looking pattern-recognition. For all anyone knows, 9/11 and the Crash of 2008/09 were the end of a brief "Crisis" and we are about to enter the "High" because of some unforeseen technological discovery. Or perhaps we will now have a long period of stagflation where unemployment stays high enough to make a lot of people unhappy but there is no trigger for mass social unrest and the theory falls apart.

In any event, I have to take issue with the statement that "Inconvenient facts like no ability to distribute any energy created by wind and solar to the places that use the energy are completely ignored by green extremists." Putting aside whether green extremists ignore those facts (I don't care what they think), the author is positing that wind and solar are useless because of the distribution problem. I could be wrong, but I was under the impression that the distribution problem was related to the fact that our antiquated power grid can't accommodate these new sources, not that the issue is simply a "fact" that is unsolvable. In poor countries that don't have a sunk investment in a huge power grid, those power sources would seem to be more viable. Moreover, in the U.S. the distribution problem would seem to be one that is uniquely suited to a government solution. In other words, no private actor is big enough, skilled enough, patient enough or risk-tolerant enough to create a profitable solution such that the only possible solution is a forward-looking political initiative that marshals public resources for the public good (and not for profit). If a commitment to such a new grid were made, private investors could more reliably invest in making wind, solar and other alternative technologies practical and it's possible we could ultimately see dramatic, unanticipated advances as a result of such investment. I realize I may have the facts wrong here, as I'm no expert in power grids, but I wanted to point out what seemed to be an over-simplied point made by the author. The real question is whether the energy crisis has advanced (or will advance) to the point where such a public investment is a wise choice. I don't think we'll have a good read on that until the current dislocation in the economy works itself out and we understand what the "new normal" will be.

No One Saw This Economic Crisis Coming?

All of these comments and nobody mentions the crazy moon guy comment? And his comment has a net positive rating (as of this comment)? Has SA jumped the shark? It seems to me that there's been a real uptick lately of articles/comments that fall into the category of "circle jerk by bat-shit-crazy conspiracy theorists". It's only a matter of time before this place devolves into Yahoo! Finance.

And, yes, moon guy, I have been brainwashed.

FHFA Five Year Plan: Where's the Exit Strategy for American Taxpayers?

For those who mistook my comment as defense of what happened in the past, allow me to clarify: I believe mass home ownership is in the public interest. Obviously unsustainable borrowing practices are not the right course. On the flip side, the suggestion that the government has no role in regulating or encouraging home ownership going forward puts far too much faith in "private markets." There is no easy answer to the present quandry, but I'm quite certain that simply extricating the taxpayer from the equation will be destablizing.

Groundbreaking WSJ Story on Gold

What ever happened to the wisdom about stock-tips from the shoe-shine boy? Could gold be getting close to that? (Thank goodness the article is quoting doctors and bankers and not some average goober.) Given that gold bugs are always complaining about banks shorting gold (I don't know if that's true or not), one can assume that we would be in the throes of a huge gold bubble if the banks were not betting against it. (I have been long GLD based on the theory about picking the winner of the beauty contest based on who you think the judges will pick.)

In any case, I am exhausted by the senseless debate about the usefulness of gold in the event of a total U.S. currency failure. There are other mediums of exchange (not to mention barter), that would likely take precedence over silver coins and gold chips. Zimbabwe is a terrible example. Try Iceland, where foreign currencies basically supplanted the native currency when it collapsed. This is a more realistic scenario. I'd be willing to bet that the credit card networks and banks would figure out a way to transact U.S. transaction in Euros or yuan before they would ever start transacting in gold.

FHFA Five Year Plan: Where's the Exit Strategy for American Taxpayers?

The fundamental question is whether we, as a nation, want to encourage home ownership. In today's world, this question is largely left out of any debate in favor of haggling over the details of government intervention. So I applaud the author for provoking that question.

That being said, I think there are sound policy reasons to encourage an "ownership" society. Chief among them is that owners of assets (even leveraged assets) are more likely to be better caretakers of assets than renters. Second, relegating huge swaths of the population to near-permanent renter status would lead to higher rates of poverty and less socioeconomic stability. Finally, the ownership phenomenon allows for the expansion of credit supply and more economic growth than would be possible without it. (Hence, the real estate bubble and dislocation caused a massive contraction of credit and economic strife.)

It is tempting to throw out the whole damn scheme (as Adam855 would) in light of what has happened as a result of an ironic combination of misguided government intervention and a lack of effective regulation, but ultimately I think we need government policies that encourage home ownership. Don't throw out the baby with the bath water.

I agree with the author's suggestion that the solution to the current quandry should be actively considered. At the same time, there is so much economic uncertainty right now that any "exit" strategy is probably premature.

A Golden Hedge Against the Dreaded Dollar

This article is nothing more than a useless observation that gold and UUP are moderately negatively correlated. If the author is proposing that one should construct a portfolio exclusively of UUP and gold, well, that idea stinks.

First, that leaves out commodities, equities and foreign currencies (UUP actually amounts to a short on foreign currencies), and there is no explanation of why one would want to avoid those asset classes (other than perhaps the implied argument based on past performance over a random 20 month period that coincides with perhaps the biggest market dislocation since the Great Depression). Second, if one reasonably assumes that some inflation will occur in the future (perhaps not near term, but over a longer period of say, two or three years), then this strategy is definitively sunk. Gold is a form of money. While the tried and true wisdom is that gold is a hedge against dollar inflation, it is also true that gold still loses purchasing power during periods of significant inflation (because it is money). In other words, you might not lose as much purchasing power if you shift some dollar holdings to gold, you still can't buy as much gas or food with your gold as you would have been able to buy before the inflation. And, of course, UUP offers no protection against inflation; it just bets against fx risk.

In sum, "I award you no points, and may God have mercy on your soul."