Al Capital's Comments

Cat Fight at the Fed

Thu, 15 Jan 2009 09:32:07 -0500

The under-capitalization in the financial sector alone requires a $3 trillion backstop in order to facilitate a mild stabilization in 2010. If you factor in the Federal Reserve's other mandate to minimize unemployment, another $1 trillion is needed before 2010. In other words, the most conservative actions, ie excluding any effective economic stimulus, will cost about $4 trillion over the period 2008-2010. The effect to the economy had the Fed not acted is not easily quantifiable, but probably would include the permanent crippling of the U.S. financial sector and chaos in international exchange rates and trade.

Economists: They're Just Modelers

Wed, 14 Jan 2009 09:19:22 -0500

Economists attempt to explain the system. Those that publish models are putting their ideas to the test, to be validated or invalidated. With either result, we learn something. Improving on economic models, or pointing out that despite the existence of a mature academic discipling there is no functional model of capitalism, has some value. Indeed, being critical of economic models is a vital part of the process of learning about them and improving our understanding of what those models are trying to simulate. But bashing economists, well that is simply pointless.

Citigroup Sees Gold Reaching $2000

Tue, 02 Dec 2008 01:07:03 -0500

When currency was backed by gold, the response of trading imbalances or monetary policy was easier to predict. Now the "gold inflation play" is more opaque. Certainly if enough money chases gold, then the price of gold will rise. But the fundamental coupling between the economy and any commodity, including gold, is nearly opaque given global deflation that is expected to rage through global economies like a wildfire prior to an inflation phase.

Planned, Cautious Buying Amidst This Panicked Selling

Fri, 24 Oct 2008 09:17:01 -0400

That was a thoughtful post. The element that was missing however is the plan under worst case scenarios, or what I would call "survive to fight another day" scenario. Although I have suggested all cash positions since February, I recognize that "traders" are looking for "deals".

Look, it might be unbelievable, but the market reaction to the current crisis is painfully obvious. First it will discount all growth since the housing bubble, basically assigning 5-10 cents on the dollar to mortgage backed securities of that vintage and bringing the Dow and S&P down to 2002 levels. From that point it could get even worse, much worse, so in making choices in this market, realize that the risks are enormous. The VIX alone documents an extraordinary risk level.

That brings me back to your point about "a plan". That plan should also account for the risk and costs of being wrong, meaning that if you are just hoping for a stabilization, or hoping for a bounce, then the plan should be to avoid risk.

Regarding the comment about "buy low and sell high", that works great in retrospect, but today's price might seem low now, but in fact turn out to be very high in a month from now. Don't invest using aphorisms, as you know "a fool and his money are quickly parted".

What Happens When Banks Are Nationalized

Thu, 09 Oct 2008 18:41:52 -0400

Simple reasoning indicates that DJI headed to 7500 (based on removing the gains since the housing bubble) but can go below 4000 when you factor in the positive (self-enhancing) feedback of the continued loss of capital and credit (unless the Feds can stop that from happening). The only floor is found near 2000 under a global meltdown scenario. Recovery under the worst case scenario is greater than 10 years. Be careful with your funds and your clients funds.

CPFF, TAF, TARP, Bailouts and All That Jazz

Tue, 07 Oct 2008 14:56:38 -0400

Note that when credit contracts r becomes negative.

CPFF, TAF, TARP, Bailouts and All That Jazz

Tue, 07 Oct 2008 14:53:18 -0400

Back of the envelope calculation (the basis of capitalism) assume that: economic growth = M + rG where M is available liquid capital for investment, G is inherent economic demand for goods and services, and r is a coefficient determined empirically (but is inversely related to the cost of credit). A the cost of credit increases r gets smaller (it is certainly less than 1 now). The most important factor in this equation is r. So, as simply as one can express this situation, it means we are deflating rapidly, and will continue until credit EFFECTIVELY cheapens considerably.

Asset Securitization Crisis: The Butterfly Effect

Tue, 07 Oct 2008 14:38:15 -0400

Strictly speaking, the "Butterfly Effect" describes predictable non-linear systems, albeit ones that can be catastrophically affected by very small changes in some factor (the effect was discovered by noting results from roundoff errors in computer modeling of weather, and explains why weather cannot be forecast more than a few days in advance).

What is happing in the economy is quite the opposite, it is the result of a catastrophically large change in credit markets and resulting capital deflation (deflation creates further positive feedback causing credit to shrink further). That being said, an optimistic projection for the general market bottom would be 7500 for the Dow, or roughly 2002 levels. However, if things go badly, we could see a bottom at 4000-4500. There is a small chance that the national banks can avert this disaster, however, the risks remain extraordinarily high.

Remember this, if you are using the word "hope" in your description of investments (e.g. "I hope the market improves"), then you are not investing, you are gambling. An investor factors in the risk.

The Cramer Crash?

Mon, 06 Oct 2008 17:36:34 -0400

I guess you geniuses all figured out that Cramer's comments TODAY caused the global market free fall LAST WEEK.... what is wrong with you people, can't you do simple arithmetic. The financial sector is potentially $6 trillion dollars in the hole, a hole that can't be filled with hope, so let these investors protect themselves and if they think it is in their best interest, to exit the market. And if you know something that Cramer doesn't, by all means share that INFORMATION , but don't fault the man for his market-experience based advice just because it makes you feel bad. Too, I am really surprised by this Bespoke Investment Group Cramer voodoo story... you don't really believe in that do you? Or were you among the ones who thought Meredith Whitney caused the financial crisis by exposing Citigroup's weakness? Hey, y'all should use that energy to help investors figure a way out of this crisis without cutting off a limb. But looking at Cramer as a scapegoat, well that is just pathetic: don't you recall that Paulson, Bernanke, Immelt, Congress etc, have been saying we are in difficult times for weeks, if not months.

LDK Solar: Revenues Way Up, Margins Way Down

Tue, 26 Feb 2008 15:58:15 -0500

The shutdown of the Florida nuclear plant today (Feb 26, 2008) is the buy signal for solar:

mnrtrading.blogspot.co...

Google Advances in Latest Search Data

Thu, 21 Feb 2008 18:00:03 -0500

Google results demonstrate a level of execution rarely seen. When you couple the tremendous database buildup with their web applications, the "sapper" strategy is nearly flawless. The Yahoo development is exactly what Google was planning as it ties up MSFT cash and resources.

mnrtrading.blogspot.co...

Microsoft Wants to Play Nice With Open Source

Thu, 21 Feb 2008 17:49:20 -0500

Microsoft saw gOS and they realized that they actually NEED open source or risk becoming superfluous to a significant portion of the market.

mnrtrading.blogspot.co...

The Difference Between Bernanke and Greenspan

Tue, 29 Jan 2008 20:16:31 -0500

Reinko, the Soviet Union went bankrupt trying to keep up with an arms race, a chess match that Ronald Reagan started and used Star Wars as his checkmate move.

Beware Ben Stein's Twisted Math

Tue, 29 Jan 2008 12:48:03 -0500

Roger, you raise very important points. But I don't think "lying with statistics" is what Ben Stein is doing. After all, 10 financial analysts can review the same statisical data and come up with very different recommendations, so to avert the same trap that Ben Stein falls into, we should avoid too much inference regarding his intentions.

Once can explain Ben Stein's "data" in many ways, including simple modeling of the stock market (in the context of stocks and flows using MIT systems model paradigms, which is what we use). Certainly Ben Stein's "intelligent design" world outlook spills over to how he looks at the stock market, but like nearly everyone who has been financially hurt, he is reacting emotionally in his own voice.

However, in reacting to Ben Stein's personal and faulty logic, one can easily create the exact opposite, which is another personal and faulty logic. In order to avoid "The Moral Hazard" the market system needs more self-correcting mechanisms (or self-regulating feedback loops) that kick in before the large financial excursions happen.

mnrtrading.blogspot.co.../

Rogue Traders and Economic Capital

Mon, 28 Jan 2008 21:32:17 -0500

Chris, I strongly agree with your general argument, and I have been making the same argument since August. Also refer to Part III of "High Noon at the Wall Street Corral"

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However, I disagree with you regarding the Feds further easing. They have no real choice at this point in time. They need to stabilize the financial markets long enough to unwind things. Then let's get down to talking serious reform.

By the way, I cite your work in that August post.

mnrtrading.blogspot.co...

Fed's Folly: Fooled by Flawed Futures?

Fri, 25 Jan 2008 20:36:04 -0500

The Fed lowered the rate, and will be forced to lower again, to take pressure off of deteriorating bond insurers. All the other stuff is noise.

mnrtrading.blogspot.co...

5 Stages of Market Grief

Thu, 10 Jan 2008 20:46:59 -0500

I liked that reference, even if I don't agree that it applies. But, I am certain we will all find it helpful in the future. Here is another perhaps relevant reference, this time by Nobel Prize winning physicist Richard Feynman;

mnrtrading.blogspot.co...

Signals of The Next Cycle

Thu, 10 Jan 2008 15:30:58 -0500

Roger, for an alternative method, actually a direct method of measuring cycles, please check out what I refer to as "Market-spectroscopy". It measures the actual cycle as modulated by the S&P.

mnrtrading.blogspot.co...

Why Is This Market Holding Up?

Mon, 07 Jan 2008 14:43:03 -0500

You might take a look at my recent statistical decomposition of the S&P for some ideas regarding the current market strength.

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2008 Bespoke Market Poll: Chance of Recession 50/50

Fri, 04 Jan 2008 21:54:19 -0500

My comments to the WSJ "recession" Poll of economists posted both at WSJ.com and

mnrtrading.blogspot.co...

stated that there was no consensus and that the arithmetic averaging of "sentiment" with actual modeling results is statistically incorrect. The 50-50 results you reported here are consistent with the notion that nobody knows, but should not be presented as a probability of recession.

Understand True “Excessive Bearishness”

Wed, 19 Dec 2007 13:36:11 -0500

You make a valid argument regarding the true turn, or inflection point, between a bull and bear market, which is a useful reminder for investors in index tracking stocks or funds, such as SPY.

I consider "bearishness" and "bullishness" to be forward looking sentiments, reflected in market volatility. Based on increased volatility (e.g. VIX) there IS more "bearishness": see also
seekingalpha.com/artic...

Triumph of Bearish Pundits

Mon, 17 Dec 2007 17:14:09 -0500

Also see Mathematics and Reality of Trading

Triumph of Bearish Pundits

Mon, 17 Dec 2007 17:03:54 -0500

The discussion or Bears vs Bulls, as that could be studied as the topic for a PhD in psychology, is fascinating. However, if you turn your attention to the mathematics of game theory, you get another view which suggests that in the end, its about making money. In game theory the words of the participants are like "poker faces" and are not as revealing their market decisions. Yes, you are exactly right when you say the result is large and potentially profitable uncertainty.

for another take:
mnrtrading.blogspot.co...

Why Markets Fell Post Fed Cut

Wed, 12 Dec 2007 23:16:33 -0500

There is little doubt that whatever action the Fed took, the "market" was going to sell, simply because the action was driven by uncertainty and no one likes uncertainty. But the recession risks, at least those presented as probabilities as in Eli's post, are not accurate. The range of recession sentiment varies from about 5% (and I am in that camp) to 100%. Now although the Wall Street Journal presents that data to indicate the average = 36% chance of recession, the data actually indicate that there is no consensus, and that is all. In terms of monetary indicators the chance of recession is very low, and in terms of productivity, the chance of recession is very low.

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Merrill Lynch: Recession's Already Here

Thu, 06 Dec 2007 15:29:14 -0500

Well I agree that the recession is here for Merrill Lynch's stock price, but the macro picture is not that clear despite the dark clouds around the consumer. Simply put, it is difficult to explain why there is enough credit being demanded by the economy to support the current yield spread if there was no growth.

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Inflation, Deflation and Your Investment Decisions

Thu, 06 Dec 2007 13:35:16 -0500

Thanks for the analysis David. Perhaps an analogy would be helpful.

Consider the economy to be a fleet of large ships. They float on a sea of capital, and if credit conditions are poor (eg. inverted yield curve) they can run aground. If the yield spread is high, credit is available and they can easily float and move forward.

Productivity drives their engines more efficiently. The opposite is inflation, which makes their engines run less efficiently.

Growth is never the result of monetary policy, it is the result of productivity gains (that is the core of capitalism). However it is certainly true that without credit, growth is restricted to cash rich sectors.

mnrtrading.blogspot.co.../

Expect Massive Holiday Apple Mac Sales - RBC Capital

Thu, 06 Dec 2007 13:17:50 -0500

When Apple adopted the Unix kernel for their OS X, so too did their business plan. As impressive as the Apple run has been, the potential for growth is still in the future.

mnrtrading.blogspot.co.../

Intel Upgraded on Strong PC Demand

Wed, 05 Dec 2007 12:43:35 -0500

There was never any serious question about AMD "competing" with Intel, even if they designed a better chip, simply because in the actual manufacturing phase, AMD could not implement such designs efficiently. We highlighted Intel in August, specifically their awesome manufacturing capabilities.

mnrtrading.blogspot.co...

Talking Neuroeconomics with Jason Zweig

Sun, 11 Nov 2007 14:54:30 -0500

I like the idea of Zweig's recently published book, which supports the broad approach to investor awareness we seek. We strongly support the use of decision trees in tracking individual investment evolution. If you like Zweig's book you'll enjoy these posts which refer to both individual and institutional investors:

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Can Microsoft Reach $50?

Mon, 05 Nov 2007 18:05:25 -0500

The valuation gymnastics required to justify MSFT at $50 are entertaining. Thanks. Ironically, Microsoft's best piece of programming, Windows CE/Mobile/Smartphone, developed at great cost and with continued large subsidy, is seeing strong competition from Apple's embedded version of OSX in the iPhone, and the soon to be released, and open, Google phone. How long before that competition spreads to the entire embedded market (e.g. automobiles)? There are opportunities for Microsoft, if they can move first and fast, with conviction and proper management, but I have not seen company-wide evidence for this yet.

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