A10, Stock Trader Dude

Here’s what I like about the book, it suggests that throughout 1870 to 1914 people experienced being able to move capital freely across borders and they expected it to continue as a routine part of life so the author looks at what global fiscal policy changes happened over the last 150 years, why changes occurred, and the divergence of European and US approaches toward global finance. The book states:Transactions routinely executed by bankers, managers, and investors during the 1990s – trading foreign stocks and bonds, borrowing in foreign currencies – had been illegal in many countries only decades, and sometimes just a year or two, earlier.– Prior to 1914 there were free capital movements (WWI interrupted the flow of capital)
– 1944 introduced capital constriction (a policy change during WWII)
– 1994, a return to free capital movement.European policy-makers conceived and promoted the liberal rules that compose the international financial architecture. US policy-makers have tended toward unilateral ad hoc globalization, while European policy-makers, and the French in particular have promoted a rule-based, “managed” globalization. The contest continues.The US approach:
Use an accumulation of unilateral policy-making and bilateral negotiation. US policy-makers prefer to manage global finance on their own or delegate to American firms Moody’s and Standard & Poor’s.European approach:
Managed by international organizations, each with powerful tools, a broad mandate, and the appropriate jurisdiction over member government’s policies. Sought to delegate to the European community, IMF, and OECD secretariat and committees.The book was published in 2007 and we learned in 2008 that rating agencies such as Moody’s and Standard & Poor’s cannot be relied upon, they didn’t accurately report the potential adversity facing firms with credit default swaps, nor did they assess sub-prime debt instruments correctly.The author contends that some discussions in the professional investment community signaled for the SEC to be involved in actively monitoring the rating agencies to make sure that the ratings agencies were consistent in their approach.By the end of 1980s, global finance was built upon and maintained by formal institutional foundations.By 1973 the average daily turnover in foreign currency markets was US $15 billion, in 1998 1.5 trillion each day and in 2004 1.9 trillion daily. Astounding growth from a market that did not exist in 1945.1870-1914 is considered a period of openly free capital movements. John Maynard Keynes once expressed something along the lines of – an investor might adventure his wealth around the world by telephone while having his morning tea.The end of system-wide fixed exchange rates helped return finance back on the path toward global mobility. But any of those professional investors that claimed they are prepared for a crisis because of what they learned from the 1997 Asian or 1998 Russian financial crisis probably were caught off guard, yet again, by the current fiscal changes in the marketplace.

CNBC never made average Joe rich in good times so why would a person listen to their crummy commentary? The party in the stock market ended in 2000. By the end of 2008 all that happened was that the people still dancing when the music had already been turned off finally got the clue that the party was over. Financial advice is for suckers. Should I also pay for advice about how to place my bets at the casino? The stock market operates as it always has throughout its history, as a kind of pyramid scheme, because in order to profit you need fresh buyers to pay higher prices than you paid. Without those buyers (whether suckers or simply the less initiated) there is no upward momentum and we have a return to lower valuations.The S&P 500 cash index had a breakdown below the November 2008 lows on 2/27/09. Anyone screaming that now is the time to invest because a rally in stocks is on the way leaves out some logical considerations, a rally will not significantly alter your net worth, it is always better to cap a loss than it is to expose your capital to a significant decline for a small return or short-term boost, and during the week of October 6th through October 10th, the market dropped 18%… so why should I listen to someone that couldn’t see the downside risk then and can’t see the downside risk now?There are plenty of insightful folks that can make a profit in good times and in relative turmoil… and they aren’t getting their advice from the financial press. They do their own thinking and their performance speaks for itself. When you think about it some of these guys make more than the media outlets that report on the market and parade analysts before the viewers… and these guys certainly make money rather than talking about making money.Currency fluctuations:Since last summer, the dollar has strengthened against most major currencies.  Here’s an example with the Euro on a weekly chart (using the Euro/dollar cross a downward movement equals a stronger dollar):The strength of the US dollar reflects that nobody has found a better reserve to store cash. Clearly the upward momentum began prior to the new administration but I’m wondering if the new president gives the international community greater hope for a more promising global outlook. McCain’s “Country First” slogan did nothing to inspire international confidence.Until global perception changes the US dollar will hold it’s value and as it rises it makes it easier for any US player to acquire international assets or companies.There is a definite US media approach to say that real estate is turning around which is really playing a game with how the data is measured. The economic report on housing starts reported a gain but considering that the data goes back roughly sixty years what the financial press is saying is that there is a very minor increase after comparing it to a sixty-year low… not enough to be of any concern yet the press is talking about a recovery in real estate! How foolish… nearly all of the gains in housing starts reported for February were for multifamily dwellings (apartments); so the number of single-family homes started remains at an all time low.This chart from Briefing.com shows that the touted gain in February housing starts is barely noticeable from a historical viewpoint  (SAAR, “seasonally adjusted annual rate”, using the monthly number to project an annual number with some allowances for seasonal tendencies). It’s using creative license to interpret the data as a recovery in the real estate sector. Stocks indices aren’t a great investment, real estate isn’t great, nor have real estate stocks been boosted by the announcement, so the only answer is to come up with a creative answer of your own about where is the best place to invest, and the answer may be not to take on any new investments until conditions are overly favorable to you… timing… when most others are out of cash and cannot continue to play the game while earnings improvements are on the cusp of returning. But that might be many years away… a professional investor comes to terms with a practical approach, you cannot force anything, you can only prepare. It’s not about being in a particular market a longtime that makes you wealthy; it’s about using your capital effectively and efficiently.

Commodities, real estate, and interest rate products:
The last bubble left to burst could be debt instruments… and perhaps in times of potential turmoil investors are holding onto US dollars or acquiring more, but it goes beyond the belief of a stable political system, the US military is still perceived as a dominant force, and if you have to think about where to stash your money there doesn’t seem to be an accepted viable second choice. When that happens that nation will experience prosperity, but until that time some regions of the world may experience substantial currency declines like Iceland and South Korea. So, fundamentally it could be said that after a long period of time investors flee the US dollar but since July 2008 the US dollar index appears to have sustained upward momentum.

As interest rates increase it could trigger a debt bubble collapse. Whether it’s corporations, municipal or national government debt some players in the game may find themselves overextended and unable to pay.So while there are people that always scream buy gold or silver whether the economy is on the cusp of a crisis or not (these are the folks that make their money by selling silver and gold coins) if there is a severe long-term crisis large quantities of gold and silver coins aren’t practical. There’s no formally established and tested medium of retail/consumer exchange. I’d rather have access to clean water. Your bartering skills will be what matters – and your time can be exchanged for goods, for example in the Community Oriented Mutual Economy which makes sense to have on offer in a community regardless of times of prosperity or gloom. Last October a family member spoke of the gold coins he purchased. He had to buy a safe and then had to have it installed. Considering the overhead it’s tough to come out ahead financially. Fortunately the price of gold rose significantly since he made his purchase but he’s not planning to sell the coins, he wants to pass it on to his children. I commented that his children would sell them – his wife smiled, she wasn’t a supporter of buying the coins.But why worry about the economy entering despair? There is a built-in safety net… rich people still want to protect their wealth so the system won’t evaporate, it’ll trudge along so the rich people can maintain their relative affluence.

Nobody is going to tell you to get out now because if the stock market recovers substantially you’ll blame him or her if you follow the advice. If financial planners and spokespeople like Suze Orman, or financial analysts in the media got you in, stop listening to them – they’re not going to help you or get you out. Orman is paid for talking, not trading or making investments, she’s not much better than mutual fund advertisements, and it’s going to be interesting to see how those funds choose to account for and gloss over their dismal performance in the coming years. I already screamed “sell, sell now, you fool” months ago but you guys want those comforting and familiar faces lying to you or reassuring you of things they cannot possibly know. They weren’t aware of the threat of TBTF and they only believed the stock market went up over the long-term because that’s all they saw in their sales careers.  But some investors are doing a calculation and reasoning that their portfolio has lost twenty percent or eight percent for the year or perhaps lost that amount over a ten to fifteen year period (if one was fortunate enough to have some above average gains to help buffer the decline over the last year or so) and those investors are exiting the market and will put what is left of their capital aside for use in more productive ventures when they arise. 7,470 in the DJIA (Dow Jones Industrial Average), represents a fifty percent decline from the peak during October 2007.  The previous bear market bottom was Oct 9, 2002 when the DJIA was at 7,286. The DJIA has recently dropped below that level and at 7,100, we not only fifty percent below the October 2007 high of 14,198.50, but some DJIA or S&P 500 investors that held long-term may consider it as forfeiting fifty percent of the twenty seven year move from the start of the bull market in 1982 to yesterday.If an investor in 1982 bought and held securities, fifty percent of the gains that had accumulated for retirement during that time have evaporated. At the current level (Tuesday’s close) of 6,726.02, there may not be established support… I’ve already discussed my feelings in other posts on the DJIA returning to 3300, which is where the index was in 1993. Of course, the index has changed since then, as did the S&P 500 as companies are removed and replaced by the selection committee (sometimes due to changes in the business environment, such as mergers or acquisitions). The index is not a uniform comparison to what it was in the early 1990s or 1980s so I’m only referencing it as a guide.Dow Industrials 1982 – 2009 Weekly changes in stock indices since 2005:
Dow 30                         S&P 500                     NASDAQ 100
Date     Close     % Change             Close     %Change     Close     % Change
Close 04     10,783.01                       1,211.12                       1,621.12
Close 05     10,717.50     -0.60%     1,248.29     -3.10%     1,645.20     1.50%
Close 06     12,463.15     16.29%     1,418.30     13.62%     1,756.90     6.79%
Close 07     13,264.82     6.43%     1,468.36     3.53%     2,084.93     18.67%
Close 08     8776.39     -33.84%     903.25     -38.49%     1211.65     -41.89%
30-Jan-09     8,000.86     -8.84%     825.88     -8.57%     1,180.25     -2.59%
6-Feb-09     8,280.59     3.50%     868.6     5.17%     1,277.49     8.24%
13-Feb-09     7,850.41     -5.20%     826.84     -4.81%     1,236.85     -3.18%
23-Feb-09     7,114.78     -9.37%     743.33     -10.10%     1,128.97     -8.72%
27-Feb-09     7,062.93     -0.73%     735.09     -1.11%     1,116.99     -1.06%
Year to Date     7,062.93     -19.52%     735.09     -18.62%     1,116.99     -7.81%So the markets indices at year-end were roughly -34% to -42% in 2008.  Those of you with mutual funds lost a bit more due to management fees. The DJIA and S&P 500 are down nearly 20% for the year (of course we’re only a little over two months in for the year).Other market components:

The book is being published again but after the market pull back over the past year good luck finding any gems of wisdom. The premise of investing by knowing what others don’t is partially common sense – that’s your edge. But just how exactly are you going to outsmart anyone? Maybe you could think in terms of long-term business trends but is that going to make you rich in this market environment when smart money is exiting the game and earnings aren’t forecast to improve for many years? So, we’re now stuck with those three questions:
Are we seeing things wrongly?
Are we seeing at all?
Is what I’m seeing actually what I’m seeing?When the ad came out for the book it mentioned why investing in cash might be the riskiest thing you do. Come on, that turned out to be the best thing or most appropriate call to action that retail investors could have done over the past year. The ad claimed: All you need is a scientific method—a simple yet disciplined query process. Come, on, there is no scientific method that works in all markets. The only clear thing mentioned in the ad was: You need an advantage over your peers. Yes, but why would someone give it to you?Let me give you a fourth question: Should I be playing the stock game at all? Wasn’t that the most important question for the past twelve months? You need a filter, investing is also knowing when not to risk. Or have you forgotten the story about J.P. Morgan receiving a stock tip from the shoeshine boy? The story goes that J.P. Morgan sold his holdings… stocks at all times cannot be a good investment.

BX has been under $5 lately. I’ve been watching it since the IPO in June 2007, and now it’s a penny stock. Forbes magazine had an article a month or two ago that said it was a buy at a little above $5 – of course, when the article was released for print the share price had already gone to $7, and then it traded down to a new low under $5 which both excited me and scared me a bit. What attracts me is the dividend. You’ll earn a return anywhere from ten to fifteen percent just holding it for the dividend even if the share price doesn’t advance. I think it will trade upward but I’m not sure how many months it could take to get a few points out of it.

Here’s the objective: capturing a few points within the next six months. I’ll make a couple of unlikely set-ups here, such as the hundred thousand is sitting in a Roth IRA account – that eliminates tax issues. This hundred thousand may only reflect one part of the overall retirement monies – for example, perhaps the other money is invested in an investment grade insurance contract. That way, the person is going to have a guaranteed income for retirement even without the hundred thousand in the Roth IRA. I’m generally not agreeable to cheap stocks (you’ll recall my last experiment with RBS failed), much less penny stocks as meaningful investments but here we go anyway:Bought: 20,000 shares at $5

***Update***

As I’m getting back from vacation I notice that BX is trading from $12 to $14. Wow, the share price has more than doubled in only a little over two months! I’m not convinced it has enough momentum to push beyond that in the near term. Sure, that’s just a feeling, so using puts and calls to hedge can still provide an income from this position.

***Update***

At most, all one could have probably got out of this position is roughly ten points from 5 or 6 to 16, but that’s worth twenty percent of our hope of reaching for seven figures. At least this one feels like a satisfying experiment.

Most companies are out of good ideas. That’s why share prices are severely depressed. It is evident that well-known companies haven’t had much to offer in terms of a promising future, Motorola has been struggling for many years to get in touch with the market, and take Microsoft for example: Management focused on bringing Vista to the market and it’s not very good, it doesn’t seem to have a substantial edge, and Microsoft for too long has been focused on things in the market that don’t matter that much – come on, browser wars, they let Google rule a profitable ad market and then Google eventually introduces a browser (Chrome).  Now Microsoft wants to put the future promise on Windows Mobile 7, fine, but now it has to compete with Google’s Android mobile OS… this recovery thing may take awhile to sort out – and maybe there will be another new and powerful challenger. I think Ballmer is a smart guy, but shouldn’t he be preparing for the semantic web? I bet the next new market leaders will be able to use the semantic web in meaningful/powerful ways that change our online experience. And with a lack of promising ideas from established companies it is evident why share prices are stagnating. Nobody wants to invest in the companies that made yesterday’s news unless they’ve got something worthwhile to engage in which aids in restoring them to glory.

“How have you been doing in the market?” the man asked on the telephone. It was a business associate that wanted me to do training in Indonesia on trading stocks for the U.S. market and how it may apply to foreign markets. Of course, even when I thought I saw a good deal on companies with well-known brands, like Dell, the share prices get lower and lower. So, although tempted I haven’t bought brand name companies at penny stock prices because it becomes a game of trying to get the stock for the cheapest price, rather than at the most opportune time. Buying something cheap doesn’t make you money, you need sustained buying pressure underneath that stock to push it up and maintain the momentum. Some folks think it’s a novelty to see such companies trading for so low… but there’s a reason for that – they were good companies with promising earnings, but that’s all in the past. What’s going to drive the share prices upward from this point? The question is, are they great companies now that will get even better?

Running money: Hedge fund honchos, monster markets and my hunt for the big score is a book that makes a point about some of the pointlessness of investing strategies, and the author provides detailed accounts of his own experiences running a fund, which not only makes an interesting read, it’s seems like you’re learning the lessons of the game as you go along. What the author felt was important was that no one can see into the future to know what a share of stock will be trading at (except at times feeling out a very short-term movement but it’s one heck of a way to live by staring at a screen all day – that’s not investing), but it might be possible to concentrate on real business trends that would hold for ten or more years that would impact a business. Seeing out to meaningful implications related to the business environment meant an escape from staring at a screen and investing on the basis of what would be important in a long-term sense. The author, and his partner in the fund didn’t want to be tied down to a screen… they had to find a way to articulate their edge to prospective investors. And eventually what you view as an edge will be commonplace and no longer the one thing you do better than anyone else. That may be the time to take a break from the game. The author ended the fund after a short but impressive track record.

Upheaval in the market place can be an opportune time for organizations to move ahead of competitors if they recognize significant opportunities and have the ability to act based on low fixed costs, cash reserves, and an ability to shift resources from unproductive business units to more promising lines of business. Forget about concepts of being agile, and being able to weather the storm – business is made based on relationships and doing whatever is most likely to lead to a sale. Companies most likely to survive an economic downturn, and perhaps improve their market position have:1.    Low fixed costs
2.    Substantial cash reserves
3.    Diverse cash flow
4.    Ability to decrease size of organization
5.    Tangible resources
6.    Brand, expertise or technology resources/advantages
7.    Customer partially locked by high switching costs
8.    Protected core market
9.    Significant patron (a powerful government sponsor or investor)
10.  Staff reduction in difficult times