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Former analyst for Connecticut General and current serial entrepreneur with over 40 years experience building companies. Background includes a masters degree in economics from the University of Connecticut and experience taking several companies public. Educational and professional experience... More
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  • Greece: Strengthening the Dollar and Giving the IMF More Power
    The Sunday agreement for a 750 billion euro bailout for European Union countries caused the Dow Jones Industrial Average to increase 404.71 points on Monday, or 3.9%, to 10785.14. The bailout also allowed global equities to surge. The euro rose above $1.30 to the dollar before retreating to close below $1.28. Great news, but let’s look behind the headlines.
    The European Union and its euro zone members said on Sunday that any future bailout would occur only in the context of joint EU/IMF support,” and require a program of “strong conditionality” according to an agreement by EU finance ministers. In plain language, the International Monetary Fund is providing 250 billion euros for the bailout, but the IMF will have the power to approve any loan, and as a condition of any loan, impose tough economic policies on the borrowing country, and will police the loan. Consequently, the IMF’s power to oversee the global financial markets has been vastly increased. The IMF, with U.S. support, has made the leap from making leveraged loans to poorer countries to making fiscal policy for the European Union countries. Now the IMF is going to be the main architect of fiscal discipline for the European Union.
    On Sunday, the euro zone countries surrendered a great deal of fiscal sovereignty to the IMF. The European Union is not one nation like the U.S., but rather an affiliation by treaty of sovereign nations, and because of their diverse national economic and political interests, euro zone members have been unwilling to integrate their fiscal and monetary policies under a central bank and a treasury. The European Union’s failure to integrate fiscal and monetary policy across all of the euro zone countries is the root cause of the financial crisis it now faces and, long-term, it’s bad news for the value of the euro.  The role of the IMF in the bailout is evidence of the cracks developing in the European Union and the euro. The crisis in the euro has been kicked down the road, but it is not over. 
    Greece’s bailout will increase capital flows from euro zone investors into the U.S. securities markets, because economic growth will be higher in the U.S., and because of this we can bet on a stronger dollar and weaker euro in the near future.
    Element Alpha (element-alpha.com) is a securities research firm that allows the individual investor to manage money and outperform benchmark indexes by investing in stocks within those targeted indexes. This is made possible by a proprietary algorithm that was developed over the last decade and validated by third-party mathematicians. 


    Disclosure: No positions
    May 12 12:58 PM | Link | Comment!
  • More High-Speed Market Drops Likely in the Future
    The May 6, 2010, market crash has been characterized by some as a Black Swan Event (Nicholas Taleb coined this term in 2007 to define a market event that is rare, has extreme impact, and retrospectively - though not prospectively - predictable). While some are viewing the events of last week as a Black Swan, we believe that the markets are prone to more rapid drops like this in the future.
    On May 6, 2010, the Dow Jones Industrial Average (“DJIA”) dropped 1,080.95 points (9.9%) from its May 5, 2010, close of 10,868.12 to a low of 9,787.17 – then rebounded 733.05 points (7.5%) to close down 347.80 (3.2%) at 10,520.32. The Wall Street Journal called the sudden plunge from about 2:48 p.m. to 3:00 p.m. a “high-speed drop.”
     
    In this short time: Apple, Inc. (NASDAQ:AAPL) dropped 23% from $258 to $199 and then rebounded to $246; Accenture plc (NYSE:ACN) dropped 100% from $42 to $0.01 (trading was cancelled and the day’s low was changed to $17) and then rebounded to $41; and Proctor & Gamble (NYSE:PG) dropped 37% from $63 to $39 and closed at $61. Many investors with stop loss orders got taken to the cleaners as the market ran through typical 10%-20% stops and then rebounded to prices far above this type of safety net. In essence, the market’s erratic behavior “tricked” investors into selling stock that they should have held onto.
     
    Pundits attribute the sell-off to a variety of things, including a Black Swan Event, turmoil in Greece, decline of the euro, overpriced equity markets, illiquidity, market psychology, the now famous “fat-finger” trader that entered a sell order for 16 billion shares of PG rather than 16 million shares, high-frequency traders, and no uptick rule. It almost doesn’t matter what the pundits say, the plain fact is that the selling panic ended the day with stocks down, the dollar up, the euro down, and gold up.
     
    While economic causes contributed fuel to the fire, our view is that the markets are becoming increasingly fragile with the rise of large pools of capital engaged in momentum-based, high-frequency trading programs. Algorithmic traders, without any duty to supply liquidity to the market when it is needed, are now estimated to have a 70% share of the daily trading volume on the NYSE. To this powerful force, add the fact that the SEC eliminated the uptick rule in 2007, and the algorithmic traders had a clear field to sell short, drive prices down, buy at the bottom, drive prices up, and make a fortune while taking investors to the cleaners. (The SEC eliminated the uptick rule in 2007 and approved an alternative uptick rule in 2010 (Rule 201), but it is not yet effective and not likely to have much impact.) 
      
    Black Monday refers to Monday, October 19, 1987, when global stock markets crashed. The DJIA dropped 508 points to 1,738.74 (22.61%). The Black Monday decline was the largest one-day percentage decline in stock market history. The possible causes for the decline include a Black Swan Event, overvaluation, illiquidity, market psychology, currency fluctuations, and selling by program traders. The possible causes are the same ones we hear today. Black Monday has been studied by the SEC, government, academics, and others; yet its cause remains a mystery. 
     
    A Black Swan Event is not forecastable, but this crash was imminently forecastable. The impact on the market of large pools of capital engaged in momentum-based, high-frequency trading programs, without any obligation to provide liquidity, makes the odds of a “high-speed drop” very high. The markets have turned into Casinos and investors should expect more steep and rapid market declines until the house changes the rules of the game.

    Element Alpha (www.element-alpha.com) is a securities research firm that allows the individual investor to manage money and outperform benchmark indexes by investing in stocks within those targeted indexes. This is made possible by a proprietary algorithm that was developed over the last decade and validated by third-party mathematicians.



    Disclosure: No positions
    May 11 11:07 AM | Link | Comment!
  • Why Warren Buffett Plays Defense
    This week’s market sell-off caused some investors to lose sleep, but not Warren Buffet. Why not? The answer can be found in the 2009 Berkshire Hathaway Annual Report with his letter to the shareholders (http://www.berkshirehathaway.com/2009ar/linksannual09.html).
     
    For the 45 years from 1964 to 2009, Berkshire increased its book value at 20.3% compounded annually as compared to 9.3% for the S&P 500, or an astounding value-added for the shareholders of 11.0% compounded annually. How did Warren Buffett do it? Buffett explains in his own words, “[Berkshire Hathaway has] lagged the S&P in some years that were positive for the market, we have consistently done better than the S&P in the eleven years during which it delivered negative results. In other words, our defense has been better than our offense, and that’s likely to continue.” The table on page two provides an excellent illustration of this statement and makes one thing clear to us - if you invest in a portfolio of high quality stocks, that portfolio will consistently outperform the S&P 500 in down markets, but is likely to sometimes lag the market in strong up markets, however in the long-term high quality stocks win.

    Element Alpha (www.element-alpha.com) is a securities research firm that allows the individual investor to manage money and outperform benchmark indexes by investing in stocks within those targeted indexes. This is made possible by a proprietary algorithm that was developed over the last decade and validated by third-party mathematicians.


    Disclosure: No positions
    May 06 10:51 AM | Link | Comment!
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