Clear As Mud...A Market Perspective

SQNM Jumps on Earnings

2008-10-31T07:59:00.000-07:00

Yesterday, the bio-tech firm Sequenom reported their quarterly earnings, which saw a boost to revenue and operating margins. While the firm is still reporting a loss of .18 per share, and the CEO was cautious regarding future earnings, he maintained outlook on yearly revenue. Their balance sheet is still relatively strong, with a positive cash flow. These earnings reports also came in the wake of a newly announced pre-natal RNA study, which will involve 10,000 pregnant women, and the acquisition of pre-natal technology patents from Xenomics, another bio-tech firm.

The stock had traded somewhat uneasily between earnings, drifting below 50% of the high it made a little more than a month ago, from $29 to below $14.50. Nevertheless, it has recovered, and is currently trading above $18 at the moment. Will that hold? That, of course, is an impossible question to answer.

Between September 29 and today, you can see that the $20 price has become a strong source of resistance. I wouldn't buy any more of this stock until it breaks that line. The fundamentals are there for this stock to go up considerably, but you have to respect technical indicators in these market conditions.

Disclosure: Long SQNM

2008-10-29T09:05:00.000-07:00

At some point last week, it began to look more and more likely that the Federal Reserve would yet again cut interest rates, for the purpose of making it easier for banks to borrow and lend. At this point, with Wall Street keeping a close eye on the Fed's action, we would probably see another huge 1-day decline to make up for yesterday's massive rally if the rate cut did not come.

Of course, none of the Federal Reserve or Treasury's previous measures have encouraged banks to start lending again, so what's to say that this will? Sure, LIBOR rates will continue to come down (remember those?). And banks will likely continue to shore up their balance sheets, which is always a good thing, and a responsible course of action to take in these times. So while the market is looking for a short-term kick to restart the flow of money, banks are (for once) looking at the longer term picture. When I say longer term, of course, that is an entirely relative term. Banks are probably looking at the picture three-four months down the roads, while Wall Street is looking a week at most into the future.

That short-term tunnel vision is one of the crucial factors that put the financial system into the dire straits it is currently wading through. After all, how would you act if you could earn hundreds of thousands of extra dollars in bonuses and performance incentives for taking enormous risks? If your first risky trade doesn't pay off, the next one will. Or the one after that. Either way, you'll make up the difference in the long run, since all of your mathematical models tell you that you're in a positive-sum game. Your bosses are all doing the same thing, and since the market is liquid, it doesn't matter what kind of investment products you're buying, because you can always unload them when you need to.

At least, that's the way things were. Now, that short-term mindset has become utterly useless, as liquidity has become more and more scarce. An interesting suggestion was made by a commentator on NPR the other evening. His idea was to mandate that bonuses be awarded based on a three-year performance period, rather than one year. Of course, the red tape and cries of injured investment bankers would make this an extremely difficult measure to implement. Nevertheless, it seems reasonable to assume that if our government can regulate the use of illegal substances in sports, they are more than capable of regulating the compensation standards of executives.

These measures will likely never see the light of day, but they are interesting nonetheless, and very much worth considering.

AIG: A Play For Value

2008-10-27T10:00:00.000-07:00

AIG has become a whipping boy for the deleterious financial sector. Each day seems to bring some new scandal, some new insight into just how much greed and corruption has dominated the upper echelons in our free market economy for such a long period of time. Here are some of their less-than-meritorious headlines:

They first entered the news when the government announced that they were going to bail them out with an enormous amount of money, on the grounds that they were too big to fail.
Shortly thereafter, we heard that they had burned through the vast majority of the funds, for lord knows what reasons, and were going to require another loan.
Next, it was announced that executives had decided to pamper themselves in grand fashion immediately following the bailout, taking a weeklong retreat in California.
Last week, the insurance giant began to auction off divisions of its company in an effort to raise money against the credit default swaps and mortgage-backed securities it owns
This morning, the headlines read that AIG is taking on another loan, the third it has taken including the initial bailout.

All of these facts, of course, are accompanied by the fact that the government now has an 80% stake in the company. Naturally, it is difficult for the Treasury/Federal Reserve to rationalize against additional loans/bailouts. After all, if you have an 80% stake in a company, you would probably want it to succeed too.

All of these facts aside, nearly every analyst has said that the core of AIG's actual business remains as strong as could be expected. While each day has seen the share price drift lower, in my opinion this drift has been caused by the vitriolic anger of shareholders as they have watched this companies flaws become magnified by media scrutiny. This is a company with a tremendous amount of value on its books, hence the title of this post.

Value investing, as articulated by Benjamin Graham, prescribes the purchase of stock of companies that have been beaten down by negative publicity, sector weakness, or cyclical downturns. These companies, in spite of the swirling negativity, still have a tremendous amount of residual value on their books, even if their quarterly profits are not necessarily stellar. AIG matches these requirements to the letter. Of course, it still has a long way to go before the stock begins to recover. Nevertheless, for the patient investor, it seems almost to good to pass up at this price.

Disclosure: Long AIG

Out of Chaos Comes Order

2008-10-24T14:48:00.000-07:00

Several interesting and constructive ideas have been proposed by non-policymaking economists, most involving the redistribution of wealth that Republicans have begun to demonize as socialism. Frankly, I think that what the American people should be demanding are clawbacks. They should calling for clawbacks as forcefully as they were demanding that their representatives not pass the bailout. Will that happen? Probably not. That moment of urgency has passed, replaced by the general state of apathy and complacency as the masses have accepted their lots. Clawbacks, of course, involves compelling CEO's and other executives to repay the massive compensation packages they have received, which may or may not include bonuses, salary, and stock options. These funds should be used for any potential tax rebate, an idea has been bandied about in the circles of power ever since Bernanke brought it up earlier this week.

I am in such strong support of clawbacks because I personally think that it's a terrible idea to use taxpayer money for more short-term economic relief. After all, much of what the executives have in their bank account can be shown to be, by the transitive property, taxpayer money. Hmmmm...and that doesn't irk anyone just a little bit?

Nevertheless, the fact is that the we the people have been worn down by the constant, numbing news about the impending doom about to shake our society from its foundations. Indeed, there are some terrible things happening in the real economy. Chrysler has announced that it will be cutting 25% of salaried its workforce. One can only assume that other automakers will be following suit, perhaps more or perhaps less drastically. The sheer depression that this news causes is not going to stir anyone to action, save the poor souls who have the misfortune of being laid off. The rest of us continue to consume, albeit at a reduced rate, even as those around us undisputably become victims.

Take for the housing market. Ironically, as the subprime mess has rippled through the financial sector, in the real economy has begun to show some signs of life. The areas hit hardest by subprime foreclosures have begun to become hotspots for the bargain seekers who waited out the inflated prices of the boom to buy low, in some cases very low. I believe, along with other, more astute observers, that housing will be what leads us out of the mire. Make no mistake, I'm not calling a buy on REIT's or homebuilders. What I am saying is that the consumer market, the real economy, could be on the road to recovery, with Christmas as my timeline for the consumer to begin to show true leadership. Time will tell.

Capitalism and its Discontents, Part I

2008-10-23T14:25:00.000-07:00

Think you're playing the market? Nope! In America, the market plays you!

Just a weird couple of trading sessions that we've now put behind us. Rumors of more hedge funds blowing up, a decline in LIBOR rates coupled with cash-hoarding by banks, job losses, wild intra-day swings...oh, and pleasantly surprising earnings from quite a few companies, including Apple (AAPL), Yahoo (YHOO), Potash Corp. (POT), and Alan Greenspan backhandedly admitting failure.

President Bush has said he will make an effort the stem the ever-growing tide of foreclosures with a $40 billion aid package. Greenspan, while speaking on Capitol Hill implied that the biggest mistake the economy made was in underestimating systemic risk. Really? Really? See the funny thing about capitalism is that it assumes that greed will induce an organic distribution of wealth throughout the markets. That is the ultimate argument for capitalism that you will hear from hard-liners, yet it ignores the fact that unchecked greed never, ever, holds itself to any greater responsibility than its own self-interest. Greenspan can make as many rationalizations for deregulation as he wants, but he, and the entire rationale for capitalism, are on a very slippery slope. The irony is that all the talk about wealth distribution through competition is exactly what the design of socialism is meant to do. That was never the design for capitalism, it was just a convenient out whenever someone asked a question about ethics and conflicts of interest.

In other news, Argentina, once thought to be a model of economic stability in South America, has nationalized its citizens pension funds. Russia's credit was downgraded, and Hungary's economy is on the verge of total collapse, thanks to a banking system that could become completely insolvent within a very short amount of time. The IMF is going to have a busy month ahead of it, what with trying to restore activity and confidence in the world economy while simultaneously capitalizing off of the vulnerability of those very same economies. For insight into how the IMF works, I suggest Joseph Stiglitz "Globalism and its Discontents." Though it might as well be called "Capitalism and its Discontents." How fitting it would be.

AAPL, INFN, CAT Send Mixed Signals on Earnings

2008-10-21T20:57:00.000-07:00

But what else is new?

Apple (AAPL) posted great earnings this afternoon, on better than expected sales of iPhones and iPods. Mac sales were down, which Steve Jobs hinted he would aggressively pursue during the earnings conference call. Even so, that could only be counted as a mild disappointment, as profit was up 26% over last year, and Jobs made it clear that one of his emphases would on ensuring that Apple has a large cash reserve, which currently stands at $26 billion in assets. Not bad at all. I suspect, as many have also suggested, that the tremendous boost in iPhones sales can be attributed both to the aggressive advertising for the Apps Store, and the loss in market share that RIMM, maker of the Blackberry, has been forced to deal with.

They issued low guidance for next quarter, between $1 and $2 billion below Wall Street's estimates. This is a tradition at Apple, as it purposefully prices in the influence of any negativity that could foreseeably occur between now and Christmas. During after hours trading, AAPL shares were up more than $12 from their closing price. If they tack on any gains after that which hold in three or four days, I will take that as an extremely bullish sign. Keep in mind that no revenue from either the Apps store or Apple TV has been figured into revenue. This could come into next quarter.

My other pick, Infinera (INFN) also reported favorable earnings, breaking even for the quarter. They also issued extremely conservative guidance for next quarter, due to increased spending levels on projects they are currently developing. In my opinion, this is not a bad thing, especially for a stock that can still be considered an aggressive growth play.

It has to be noted that all of these are mixed signals about the broader economy. The CEO of Caterpillar (CAT) was on CNBC this afternoon, discussing his view of the likelihood of a long, painful period in industry and manufacturing. Caterpillar's earnings were below estimates, a trend Mr. Owens, the CEO, expected to continue. Credit is beginning to loosen, but not enough to stimulate any meaningful kind of activity in the most damaged sectors. But as I suspected, the sky has not fallen, and the world is still standing and functioning in much the same way as it has.

Disclosure: No position in AAPL, INFN, or CAT

Earnings in a Bear Market...Hold on Tight

2008-10-21T12:19:00.000-07:00

This afternoon will have a host of companies reporting quarterly earnings, with the most significant probably being Apple (AAPL). Interestingly, the majority of notable companies reporting earnings are trading down today, especially those strongly tied to consumer goods. As previously noted, while the obituary for the American consumer has been prematurely issued, there is definitely a siesta in consumer activity at the moment, which could potentially last through the holiday season.

The strong stocks at the moment remain the regional banks, along with the emerging healthcare and biotech sectors. Apple will provide an interesting bellwether on both the consumer front and the tech front, since they have broad exposure and influence over both arenas. They are a rare organization, a long-established player in the market which still acts as a growth company. Investors will be looking for something positive from Apple to go along with Google's earnings. If earnings are in line with or ahead of expectations, expect a major run from Apple stock over the next week or so. The positive implications of good earnings are just too numerous to count off.

Buying or shorting any companies going into earnings is highly speculative. Volatility in the market is still extreme, as the DOW has made a few more 2+ percentage point swings. Stocks are crazily unpredictable for the time being, though a degree of normalcy has been returning over the past week. That normalcy, however, is entirely relative to the batshit craziness of two-three weeks ago.

An interesting purchase idea (aside from Apple): Infinera (INFN), which reports earnings after the bell today. They have a very positive balance sheet, with a favorable cash-flow. They are a tech company focused on developing innovative networking strategies, and is trading in the green prior to earnings. This is a stock that could explode after earnings. Of course, they could be crushed just as easily if earnings are poor.

Disclosure: No position in AAPL or INFN.

The B in BRIC

2008-10-19T11:44:00.000-07:00

The United States emerged during the 1800's as a world power, in a truly unprecedented fashion. With virtually unlimited access to a wealth of resources, an adaptive and uniquely innovative government, cheap labor, and the incentive to build a legacy, it seems inevitable. Indeed, it was. Just as Egypt, Greece and Rome emerged united out of relative vacuums of power, thanks to their ability to harness natural resources, so to did the US become a giant in the world thanks to its power to rapidly produce raw goods at a low cost. Even as southern slaves and northern factory workers began to gain more rights, technological innovation and efficient transportation kept the cost of goods relatively low.

As this was happening, the middle class began to solidify and define its influence upon each and every facet of culture. What the middle class wanted, companies found a way to produce. And whatever goods companies marketed, the middle class found a way to purchase and consume. In this way, the modern consumer culture was born. Through every major economic crisis since the panic of 1870, the consumer reemerged, as hungry as ever to purchase whatever the latest and greatest commodity was.

These behavioral tendencies of the middle class are, of course, a natural by-product of capitalism, per Marx's theory of commodity fetishism. Wherever capitalism has thrived, commodity fetishism has largely been a persistent economic force. In Marxist terms, for clarification, a commodity is any good that can be bought or sold for a specific, yet potentially elastic, value. In the 1800's, capitalism was better suited for the United States than it had been for anywhere else in the world, specifically because of the regional dominance exhibited by the Americans.

For this reason, I am skeptical of those who claim that China will be the next great economic force in the nation. China is beset on all sides by trade rivals, and has very few true political allies. It is challenging to identify any area where it has become a true leader, save for in the sheer monstrosity of its economy. It's enormous growth in GDP has been inevitable in the sense that it is inevitable for a population of rabbits to grow when provided with enough food and a lack of predation. The rabbits aren't doing anything especially different, and they haven't gained an evolutionary advantage. They are merely responding to conditions imposed by outside forces.

No, the country I am looking towards to become the next global giant is one that is relatively isolated from any real, potential rivals, one which has opportunistically embraced free trade without allowing it to dictate a lower quality of life for its inhabitants. This would be the 'B' in BRIC, Brazil. Blessed with a wealth of natural resources and a marked increase in the intellectual and material capital required to exploit it, Brazil's economy has been booming, and is expected to weather the global downturn. This is partly due to the rapid emergence of the middle class, eerily mirroring the US's emergence in the 19th century. The willingness to consume, the ability to produce, and the financial capacity to lend are all extraordinarily healthy indicators of an economy that is set to dominate the world. Their society is extremely tolerant of differing perspectives in ways that China cannot hope of being in the near future. Their economic policies are nowhere near perfect, yet they have shown adaptility to labor and trade issues. Hot money will flow into Brazil, but if they show the ability to strengthen their currency, the volatility of foreign investment may be negated. Brazil is positioned for extraordinary gains over the next few decades. For the long investor with time and patience, look to take advantage.

Premature Obituaries

2008-10-18T11:22:00.000-07:00

There is a heavy mist hanging over the economy these days. No one can see two feet in front of their noses, and therefore no one knows exactly what is going on around them. Every so often, you run into someone, maybe a familiar face and maybe not. But it's so nice to see someone else, to hear someone else's thoughts, that you're willing to listen to whatever it is that they say, no matter how ridiculous it might be.

There are mutters of the next Great Depression floating around, mutters about a prolonged recession akin to that of 1870. Other people are saying that we need forget the negatives, that the stock market has already priced in everything that can and possibly will go wrong, and that smart money will be flying back into securities. The next bull market is underway!

I'm inclined to agree more with the latter, but I am reticent make any kind of prediction, because predictions are generally wrong. I am putting more money into stocks at this point (I believe that they are at, or have come extremely close to, a bottom). But guess what? For all his power, influence, and success, even Warren Buffet cannot actually tell the market what to do. Only the market, with all of its aggregate influences, will decide when and how the next bull market begins.

There are some statistics to consider. Over the past week, some extremely negative news has come out. Industrial and housing activity has continued to grind ever more slowly. Banks continue to sit on cash, in spite of the declining LIBOR rate. Hedge funds have lost billions of dollars of net worth, both from poor investing and from spooked investors. Yet...yet...the market actually went up this week! This does not necessarily mean that it will continue to do so. What it does show is that the massive attrition over the past year, culminating in the downward spike last week, may signal that a large portion of the negativity in the market has already been factored into the equity prices we are seeing. The market is becoming less sensitive to bad news, while good news, such as Google's earnings, are causing a far greater reaction.

The fact is that we have been in a bear market for a year. Despite the reluctance of the pundits and public officials to admit it, the facts speak for themselves. The recession began in January of last year, when the general public began to wake up to the realities of the subprime debacle. Yet the press likes to shelter us from bad news, until the cries of panic become too loud to drown out. Now, the new stations are all clamoring about a paradigm shift in the American economy, from consumerism to something more substantial. George Soros, among others, has claimed to that the heyday of the American consumer is over, thanks to the credit contraction.

This is a premature obituary, similar to the rumors being spread about the death of Steve Jobs last month. The American consumer will find new ways to spend, because it is the favorite pasttime of any true, red-blooded American. As long as our obsession with celebrity culture continues, the consumer will continue to emulate their spending habits in order validate his/her own ego. Since America is the wealthiest nation on Earth, and most of us have fairly decent jobs, banks will resume lending. How could they not? Even if we are less able to leverage ourselves to the extent that we were in the early 'oughts, retail spending will recover, I believe sooner rather than later.

DOW Make Another 800 Point Swing...Yawn

2008-10-16T10:30:00.000-07:00

It's been noted elsewhere that never before has volatility in the stock market been this extreme. Investors and corporations are being stretched to the maximum by tight credit, entrenched consumers, and illiquid assets. We are in the midst of an economic perfect storm. Hedge funds are being slowly bled out by investors and by the pressure to deleverage. This morning, I woke up to the news that Citadel and the Highland flagship fund were in some seriously hot water. This CNBC article announces that Highland is attempting to deleverage some assets at 30 cents on the dollar. 30 cents on the dollar?!?! That figure absolutely reeks of desperation.

Yet somehow, the markets found a way to close higher today. Was it due to anticipation of Google's earnings, which beat estimates handily? Was it because mortgage applications rose by 5.1% last week? Was it because the Euro financial ministers are expressing willingness to accept less-than-stellar collateral for loans to banks? Does anyone know?

Of course not. The fundamental picture of this market is that there are no fundamentals. To prove that point, take a look at the Spider retail ETF, symbol, XRT. It actually rose today, in spite of retail earnings having been absolutely pummeled yesterday. Granted, of the decline can be attributed to the woes of the auto industry. Nevertheless, it represents the third straight month of declining retail sales, indicative of the fact that average Americans have figured out how to hang onto their money.

My favorite sector is still the regional banks. This is the only sector in which buyers seem to be present for more than a few hours. As the picture for national banks has grown dire over the past three months, the picture for regional banks has steadily improved, due to their lack of exposure to the broad downturn in the housing market. Even this sector is for the strong of heart only, as it is still subject to the volatility of the overall market. The ETF which tracks regional bank stocks is KRE, and my favorite play is HBAN, though I sold out of my position in it a week and a half ago. Stop losses are a must. In a bear market this illogical, the best offense is a good defense.

The Evolution of Policy

2008-10-14T10:29:00.000-07:00

America is the free market's greatest advocate. More than any other country, our perspective on progress is shaped by the notion that the free market is the catalyst for innovation and leadership. We have had, for the past 30 years, hurled ourselves headlong towards the dream of a perfectly self-regulating, well-balanced exchange of ideas and capital, with a legion of policymakers driving us forward whenever we lagged.

The problem is that as all of this was being done, corporations that should have either folded or adapted to the demands of the market were propped up by those same policymakers, whose constituents would have been dramatically affected by the layoffs and shakeups that would have undoubtedly ensued.

My finger is specifically pointed at the automotive and energy corporations. Detroit automakers have made an art out of subsuming innovative corporations via buyouts and proxy takeovers, and then completely dismantling any semblance of innovation within their structure. Economies of scale can sometimes be efficient, but they can occasionally be wasteful. And yet, every time the automakers find themselves on the brink of collapse, lawmakers step in to save the day, ensuring that outdated technology and production methods continue to live on in an agonizing, feeble death spiral.

Likewise, the energy sector continues to draw in obscene amounts of profit, in spite of the recent downturn in oil prices. Dividends have not been substantially raised, and share buybacks have been modest. If they had pressure on them, the Chevron/Exxons/Shells/BPs of the world all have the intellectual capital, technology, and financial backing to develop feasible alternatives to the wasteful practices our economy depends on. That pressure has to begin at a grassroots level, unfortunately, where there is a significant amount of resistance to what can be perceived as anti-corporate green agendas. Having just watched to pointed documentaries on the failures of corporate America and the capitalist agenda, I can sympathize with the greenies. Nevertheless, the corporate structure is unparalleled with its ability to make actual accomplishments when those accomplishments are sufficiently incentivized. Our lawmakers just need to start behaving like public officials, for the good of the country. But I'm not holding my breath, and neither should you.

However, within recent weeks I believe that our government has taken steps in the right direction. The tepid actions of the Treasury and Fed, who are clearly making up each move as they go along, suggests disorganization. That, however, is the nature of evolution. Where scientists once believed that life evolved at a slow and steady rate, they now that acknowledge massive waves of biological change are largely responsible for creating the diversity of life we have around us now. The history of human society is not terribly different from this scenario. Revolutions occur in rapid bursts, and societies can be changed overnight. Likewise, the rapid evolution of the policies that our financial ministers have suggested adopting indicates that a revolution of another sort is currently taking place. The government has taken a startingly activist position over the past two weeks, and signs point to it becoming even moreso. This only bolsters my thesis that the best the government, given its current authority, can do to support the free market is to become a player in the free market.

Meet Mr. Market

2008-10-12T19:45:00.000-07:00

Mr. Market is one of the most ingenious analogies ever created. Of course, we owe the existence of the analogy to Benjamin Graham, an extraordinarily successful investor, among other things. In fact, it's a shame he didn't copywright the term.

The term's place in popular culture, however, comes from Warren Buffet, who was of course Mr. Graham's most successful protege. Mr. Market, as Buffet explains, is a fellow investor who is always willing to offer you a price at which you can buy or sell your interest (stocks, bonds, and warrants) in various companies. It is important to remember, when considering the price Mr. Market quotes you at, that while extremely charismatic and persuasive, he is also neurotic, and prone to wild mood swings. His mercurial nature can take him from exultant extremes to the most morose depths of depression in what can seem like no time at all. Therefore his prices must be considered as occasionally irrational.

The point of Mr. Market is that an individual investor should never buy or sell at prices the market says his interest is worth, but rather what he knows it is worth. Think about it in terms of selling a car, where you can easily fetch a few thousand more dollars for your old Honda by waiting for a better offer to come along. But if you need the cash, you'll take the $6000 that you were lowballed on by a guy who said he was willing to pay that afternoon (yes, this happened to me).

If we extrapolate this scenario into the large scale, global context, we can understand what happens during massive crashes (it's safe to call this sell-off a crash). The market realizes that certain things were overvalued, and people stop paying the same high prices. Demand drops at those levels, and all the people who are holding shares watch their net worth plummet. They begin to withdraw money from funds, and the funds have to sell their investments to pay them their share of the fund. Because this is happening en masse, the prices that other investors are willing to pay continue to drop lower and lower.

So as this cycle continues, funds realize that any money which they've borrowed to maximize their returns is going to have to be paid back. Of course, this means that they have to sell off even more holdings. But these holdings continue to fall in value, meaning that no matter how much they sell, they are still over-leveraged and their leverage ratio (whether it's 12-1 or 20-1) remains the same.

As this is happening, the banks continue to wait for their money to return, as their own portfolios continue to suffer from the low pricing of the assets that they own. They become stingier with their money than they were previously, creating a hectic scenario where no one can borrow, save on for extreme interest rates. A credit crisis ensues, where lending slows to a crawl, and people wait for Mr. Market to recover from his funk and start behaving more rationally.

For all of our sake, let's hope rationale returns sooner, rather than later. Assets are extremely underpriced at the moment, but if the demand for cash continues, then demand for other assets drops, creating high interest rates, low lending activity, and low (not to mention volatile) stock pricing. There was significant amount of positive news that emerged from the G7 conference (first time ever), but it's anyone guess what effect that will have on the market, and the average investor. All we can do is hope for the best, but hedge accordingly. Futures are up, buoyed by the Asian markets as I write this, so let's cross our fingers.

Too Little, Too Late

2008-10-09T13:38:00.001-07:00

Too little, too late has the motto for the market over the past few weeks in response to the Fed/Treasury/Government reaction to the still-developing crisis. The market has been in virtual free-fall for a week, to the dismay of news organizations and talking heads across the wide array of media available for consumption.

Remember, fear sells, in more ways than one. The markets are currently selling out of fear, and as long as the VIX continues to spike, the bears will be enjoying the ride down. As for the news organizations, they love it just as much. It's a horror movie, only money is what is being spilled before us, rather than blood. Our eyes and brains are drawn to dramatic headlines, and that spells ratings for the networks. Suddenly, the average American consumer feels compelled to educate him/herself on the state of the financial union. Words like depression are now being tossed around, where once all we heard was recession.

Remember...a quarter ago, the official data was saying that we weren't officially in a recession yet. The accuracy of that data is debatable, as we all know that while numbers don't lie, the methods that produce and analyze them can be manipulated. While it's almost unanimously agreed upon by the most economists that we are in a recession, the fact is that credit crises are as old as time (or at least the Industrial Revolution).

Given that, calls for a depression are significantly over-dramatized. Demand for raw materials is shrinking, which is the first domino to fall, generally. However, with many countries subsidizing farming and banking simultaneously, those two dominoes will be propped up for the time being, leaving the bizarre, yet preferable alternative of deflation to cope with. Companies will see profits shrink, especially those with exposure to industries that are clearly on their last legs. American cars are the big group that I'm placing in this category. For proof, look no further than the downgrade of GM today. It's hard to imagine them competing in the new world, given all that they have done to crush growth and innovation within the automotive industry.

More money will have to be drained from the system, without a doubt. But there's a saying that when the blood runs in the streets...well, you probably know the rest.

Psychological Valuation, Part 2: Fear

2008-10-08T07:26:00.000-07:00

Any guide for the beginning investor will tell you that it is foolish to trade on emotions. This is rather challenging advice to follow, however, as the market is one giant cluster of rapidly changing emotions.

At the moment, the prevailing emotions are fear and dread. If you want proof, just turn on Bloomberg or CNBC. Even Cramer sounds subdued. Pull up CNN.com. The picture on the front page is, as I type this, a trader covering his mouth with his hands. He looks like he may be watching a computer screen, but he appears to be looking through it. You can see how nauseated he is in his eyes.

Just in case you're keeping tally, this is just an hour after the Federal Reserve, along with central banks ACROSS THE WORLD, announced that rates were going to be cut in a coordinated effort to stem the bleeding and encourage economic activity. The problem with the Fed's line of thinking is that it is impossible to artificially stimulate demand. The real story that no one has been talking about is that the global economy has slowed immensely. This is why the Baltic Dry Index, which tracks shipping, has plummeted. This is why agriculture and commodity stocks have dropped off a cliff. Global growth has temporarily ground itself to a halt, and when the entire financial system is designed around perpetual demand, this is what happens. Markets halt, credit freezes, and profits shrink across sectors.

This is why the central banks see rate cuts as a less risky measure. During a slowdown, inflation becomes less of a factor as central banks try to stem further loss of value in assets. When those losses are driven by fear, however, that is an incredibly difficult task. Demand, the ultimate economic engine, cannot be manufactured, no matter how hard the Fed tries.

Now, let's take a look at some other figures. Bottom-feeders, buying at historically low prices, have boosted pending home sales (previously owned) by 7.7%. Not only that, but the increases have been seen across the United States, rather than being focused on specific regions. These are not closed sales, but they signal intent to purchase. Existing home sales numbers will be released on October 24th, and while they could potentially be lower due to the credit crunch, they should reflect these numbers.

Again, this is proof that you cannot manufacture demand. Consumer demand is an organic entity in the market. No statistic can fully predict why and how much it will fluctuate. Low prices created by foreclosed homes, however, are a great motivator. Come to think of it, I need to start making plans to buy a home....

Lehman Brothers CEO Richard Fuld Before Congress

2008-10-06T22:56:00.000-07:00

Sigh...at least we can take pleasure in watching good 'ol Dick squirm. There are numerous videos of the hearings on youtube...they might make you puke, they might make you irate enough to hit a wall. But you also might find them entertaining. Here's one for you.

Updating the Watchlist: European Markets, Bailout Watch

2008-10-06T22:29:00.000-07:00

Yesterday, I wrote that we needed to keep a close eye on the European credit markets, and the European markets went to hell, so US equities and commodities followed them. But the dollar rose, creating an absolutely bizarre market singularity as investors ran to treasuries, once again giving the government a free loan. Yes, yes, yes, these are the same people who decry their tax money being used with such impropriety by such scoundrels as the ex-bankers who act as our public officials.

The bailout details still have everyone on edge...at least, anyone who's still paying attention. Henry Paulson has pulled even more ex-Goldman Sachs boys into the fray with him. Conflict of interest could become a major factor in whether this bailout has the effects that we have all placed our faith in it having. Only time will tell, unfortunately, and it does little good to wring our hands in futile angst. These are not elected officials, and with the nation caught between the scylla and charybdis of the election year mudslinging and economic drama, little headway can be made into the tangled web of our activist economy.

Again, there was good news to be gleaned from today. The dollar strengthened against the Euro, proof that in spite of our woes, our economy, due to its relatively well-scaled structure, is significantly more manageable than the 13 country ad hoc alliance that is the European Union. Investors have been buying dollars to hedge against rate cuts in their own countries.

And best of all, my stock pick going into Monday, Huntington Bancshares (HBAN), was at one point miraculously up nearly 15% before settling at a gain of 1.2%. This is especially shocking given the fact that the DOW was down a historic 800 points.

Things To Watch This Week

2008-10-05T14:36:00.000-07:00

The major story of last week was of course the dramatic chain of events regarding the bailout, and the swirling maelstrom of issues that it eventually enveloped. Now that the bailout has finally been passed into law, the effects of it seem a bit of an anti-climax. The markets were clearly underwhelmed by the news on Friday, as the Dow Jones Industrial Average dropped more than 400 points from their highs of the day.

One rather significant trend did hold up however. Regional bank stocks have been on fire over the past three months. A chart for a good regionals ETF, KRE, is below.

As a whole, this sector has seen some pullback since the credit crisis began in earnest. Some names have been particularly strong, and have thus far weathered the storm. My play on this trend has been Huntington Bancshares (HBAN), for no other reason than pure momentum. It has been highlighted as having excellent customer service, and has generally avoided much of the attrition that afflicts the financial sector at large.

The main reason that regional banks have shown strength lately is due to the nature of the business models. As more localized entities, they either cannot afford or are not willing to adopt the risky lending practice undertaken by their larger siblings.

As with any stocks or sectors, this is a very risky play. Trends in bear markets, with the exception of high volatilty, are very rarely sustained. Watch the news on the credit markets closely, and set up tight stops if you plan on playing this, or any sector. With hedge funds continuing to sell out of positions, a stock can blow-up for no reason whatsoever.

The other two things to watch will be the developments occuring with the European banks, and the credit situation here at home in the US. If the LIBOR rate (the interest banks charge to one another on short term loans) continues to rise, then the crisis confidence will not have been abated, and the market will continue to be choppy. Likewise, if the European institutions continue to experience adversity, mutual and hedge funds will look for safe havens in bonds. This of course means that major blowouts in sectors across the board will be inevitable.

With that said, good luck to all.

Bailout Passes, Economy Saved!!

2008-10-03T18:00:00.000-07:00

Well, at least that's what the Washingtonians would like you to believe. Knee-jerk reactionists would also like you to think that you, the honest taxpayer, are being screwed over for the wealthy, who have the power, time, and resources to lobby and make it look like they're the victims. The media would have us believe that this is a necessary evil we all must undertake for the good of the shop down the street, or the guy at the farmer's market you buy tomatoes from. Many commentators suggested that the problem has been gravely overstated by those who stand to make a killing on rumor.

Perhaps the most significant piece of evidence in favor of the media and Washington's account is that California had to ask for a $7 billion loan to make payroll. This is a loan which it receives each year after completing its budget, but was unable to get it from private lenders. However, there has yet to be a true seize-up of the economy, and in fact, the US seems to be better position than the EU at the moment. So things are bad, but could without a doubt be much worse than they really are.

The level of editorializing on this subject has gotten quite out of hand, and much of it is absolutely meaningless. Facts are what is important, and over at The Daily Reckoning, they have summarized the bill that passed through Congress, bells, whistles, and all. There are quite a few bells and whistles, but what did you expect? I made the point earlier that our representatives do in fact answer to us, and that we the people are capable of making a hell of a lot of noise when we want to. The problem is that we only want to when a situation becomes irrationally distended as to appear cataclysmic.

So even though Congress has been criticized for the amount of ornaments they used to decorate this bill, the fact is that they did it because they wanted to keep their jobs safe. We the people, the loyal payers of taxes and lives, decide if they get to keep those jobs. In turn, when we make a demand, they have to keep us happy. When we bring an issue to the media in such volume that it is beyond their control to spin, they listen.

This of course presents an entirely different problem, relating to the fact that when people assemble in large groups, bad decisions are often made. The fate of the economy does not hinge upon this bill, as I mentioned the Washingtonians would have us believe. There are simply too many variables beyond the control of monetary and fiscal policy. It will be a temporary fix, until there can be further deliberation upon the issues at hand. Mortgage relief is needed, regulation policies need to be implemented, and a severely destructive macro-economic trend needs to be reversed. These are not things that happen overnight, as history can attest to. They are almost certainly not going to happen before November 4th.

Provided that we the people maintain a certain level of diligent self-advocacy, it will happen. As complicated as much of the economy is (of which the pundits constantly remind us), it still consists of buying, selling, borrowing, collecting, trading, and occasionally behaving like a jack-ass. These invariable components of capitalism are what ensure that there is a functioning market

Fertilizer Stocks (POT, MOS, IPI, etc): Trading The Chart

2008-10-02T22:11:00.000-07:00

The past few months have been ugly for commodity stocks across the board. This presents value investors with a confusing and contradictory situation. This, of course, is often the case for bear markets. By definition, bear markets are marked by fearful, irrational behaviors on the part of the aggregate investment community. Just to make a point (and to remind myself) it's always important to remember that the aggregrate investment community consists of more than the blogosphere and chatrooms/forums that litter the internet, or the Bloomberg/CNBC talking heads.

Nope, there are major upheavals throughout all sectors at the moment, and even the best are sensitive to current trends. The trend does not have to be your friend, but unless you're comfortable holding a stock through a 50% decline, you do have to respect the trend.

So let's look at the chart for Potash Corp. of Saskatchewan (POT) one of my touted stocks, in one of the most touted sectors.

I first bought into the stock in February, when it was still trading under $150. Looking at the chart, it's evident that this is an unusually volatile stock to begin with. So with that in mind, I determined to grit my teeth and hold out, always keeping the fundamentals of the stock in mind when it took a short-term dive. I lightened half of my position at $210, just before it began to spiral downwards.

Once it broke it's level of support at around 190, things turned ugly in an incredibly quick manner. It was clear that while the long-term perspective on this stock was still positive, the amount of hedge fund and individuals dumping their shares was too much for the bulls to handle. I sold another half of my position on the way up it's mini-bounce in September, and am currently still holding a quarter of my original position.

For those keeping score, those are shares I bought at $148 which are now worth (gasp) $93 on the reaction the stock had to both the massive crash in the Toronto Stock Exchange, and to fellow fertilizer company Mosaic's apparently disappointing earnings. These earnings were slightly off of analysts estimates, but still demonstrated growth in profit margins and cash flow. If that isn't proof of a bear market, I don't what is.

Again, paid $148, holding at $93.

I'm still long on the stock, and no amount of irrational market reaction is going to change my opinion, not when the numbers are still there. However, one must trade the chart, and lightening my position when the downtrend began has allowed me to make money elsewhere, which is always a positive.

It's a bear market. Did I mention that? As Warren Buffet noted though, the buying opportunities are enough to have the patient value investor salivating at the thought. Patience is the key, as it is necessary to respect the chart and wait until a breakout from the downtrend to buy in. Good luck.

Disclosure: Position in POT, none in MOS

Warren Buffet Speaks!

2008-10-02T10:08:00.000-07:00

By now, it's pretty well known that Warren Buffet supports the Fed bailout, at least as a near-term measure of stopping the bleeding. I would imagine that he also would like the idea of thoughtful, long-term measures to be taken as well, as would we all.

One complaint that has been floating around for the last week is how Mr. Buffet has managed to get better terms, and do so more expediently, on his deals to capitalize Goldman Sachs (and now General Electric, of course). One reason: because he is Warren Buffet, making him 10000 times more shrewd than any of our public officials, as well-meaning and well-informed as they may be.

Buffet is the rarest of the rare, the humanist-capitalist who has never been content to rest upon laurels, nor to take advantage of those who are already at a disadvantage. The man could probably rule the world if he wanted to, yet he regards his greatest responsibility as living up to the trust that his shareholders place in him with their money, and therefore their lives. More than the greatest investor ever, this makes him man of admirable character.

Thanks to Henry Blodget at clusterstock.com for posting this transcript of a Buffet interview on CNBC regarding his recent purchases, and the general state of the economy. I'll provide a few standout quotes.

If they (the treasury) buy the assets (in the bailout) at market price, I would love to have 1% of the profit or los that results from buying these assets from troubled financial institutions...If they buy them at market, they will realize a significant profit over time... THE KEY IS BUYING AT MARKET PRICES.
We will always have plenty of cash around Berkshire...I won't go below a certain minimum. I don't want to count on banks lending me money...I like spending, I like investing, and the cheaper things get, the better I like it. This is a good period for us, anybody (presumably meaning value investors).
There's no way a smart person can go broke except through borrowed money. All borrowed money does is, it may help you get rich a little faster, but it can help you get poorer a whole lot faster.

Have I mentioned that I admire this man as an investor and as a human being?

Volatility, Fear, Lack of Certainty...Just Another Day

2008-09-30T14:57:00.000-07:00

I intentionally avoided posting on the tumultuous events of yesterday, and in general tried to avoid thinking about them as much as possible. This was not an exercise in denial, but a means of reaching a more meaningful perspective on the insanity that has engulfed the financial markets of late. Take a look at the enormous spike in the fear index which I discussed earlier, the VIX.

Frankly, no one saw yesterday coming. Politicians, even the ones who voted against the bailout plan, were stunned when they heard that it hadn't passed. By voting against it, they were merely protecting their jobs, not necessarily making an ideological statement. But the question is, how significant was the defeat of the bill?

I've been of the inclination for some time now that while measures need to be taken, the degree to which Paulson, Bernanke and Bush hyperbolized the potential effects led most moderate and informed observers to believe that it wasn't nearly as necessary as they claimed. Of course, the markets overreacted to the news, and investors were trampled. The DOW gained back nearly 75% of its losses today, indicating that while the bailout needs to happen, the world isn't going to end just because it's been delayed. End of story.

In my opinion, the situation over in Europe has emerged as a far more significant issue, and deserves much more attention than it is received thusfar in our media. There's a good reason the Euro has been plummeting over the past few months. The EU economy is serious trouble, and has done little to acknowledge the issues that it is facing until the last few days. This blogger has an excellent summary of the events taking place across the pond. This should come as no surprise, as many of the banks have exposure both to American credit markets and to American securities and derivatives, specifically UBS, whose balance sheet has taken an enormous blow.

The banking/credit crisis has finally reared its head as a worldwide problem, not just an American/emerging markets issue that would go away with enough faith from investors. Institutions across Europe were nationalized or infused with capital to ensure their survival. Anyone who reads The Economist has probably seen this coming for quite some time. Nevertheless, it caught numerous institutions and individuals off guard. This story is particularly informative of the various maelstroms wreaking havoc in the market.

This is a global economy folks. The best sectors, the best companies, are getting absolutely crushed worldwide. This is not a fundamentals issue, but a psychological issue (see the fear index chart above). Keep everything close to your chest and you'll do fine. For example, CALM, a stock I highlighted last week, was crushed after some disappointing earnings. I lightened my exposure significantly after checking on the short positions, and avoided any serious attrition. This is still a stock with a PE ratio under 5, and great cash flow. I'm still anticipating a bounce back up to $32-33, and will wait to sell until then. Being impatient only plays into the pervasive fear which defines this bear market.

Americans And Their Money

2008-09-28T13:38:00.000-07:00

The Frenchman Alexis de Tocqueville said in the 19th century that no people in the world were as enamored of money as Americans.

More than 150 years later, his words could not be any more true. Throughout the first year or so of our current economic crisis, public discourse was largely mute on the subject of culpability. It was widely assumed that the lenders and recipients of sub-prime loans would reap their reward, and the economy would move forward, as it had following the burst of the dot-com bubble.

When Bear Stearns happened, public discourse took on a different tone. It became apparent that our economic system was one of extreme interrelation between individuals, banks, and investors/speculators, as such rendering even the elite institutions vulnerable to the subprime mess.

Yet while there was discussion, there was no action, no outcry from the public regarding the system responsible for rigging the mess. The mark-to-market derivatives, dubbed "financial weapons of mass destruction" by no less than Warren Buffet, remained a highly traded yet increasingly risky instrument of finance.

There was absolutely no public outcry until it became apparent that the government would need to take further action, which it did when the Paulson and Bernanke team suggested the RTC-style bailout of the holders of bad loans. And what an outcry it was! Congressional representatives reported being flooded with phone calls and letters from their constituents, demanding that the financial powers be held accountable to the interests of those they served.

And to the surprise of many, our Congressional representatives actually acted as such, modifying the proposal presented by the Treasury and the White House in such a way that it actually reflected much of the input they had received from their constituents.

Too little, too late. Had people actually been concerned back when these issues were first formenting at the onset of the subprime crisis, had our national media been more diligent in their reporting and discovered the extent to which mortgage-backed securities and default swaps propped up much of our shadow banking system, perhaps much of this could have been averted.

We live, however, in a reactive society, not a proactive society. Only when it becomes clear that our own money may be at stake do we bother to make the effort to exercise our civic rights and duties. When we do bother to participate, many of us ignore the historical facts, that in large part what our government is doing has great precedent. From the various panics between 1890 and the Great Depression, the government solved its problems by borrowing from the great banker of its time, JP Morgan. This is in fact a more healthy solution, in that the banks are, to grossly simplify the issues, borrowing from the government. Nothing is foolproof, as we have seen.

Part of the best effort to make thins foolproof, however, involves being more thoughtful, rather than enamored, when it comes to our money. We have all made poor choices in love at one time or another in our lives. That is the nature of humankind when we become enamored of something. That is why it is so dangerous to the fabric of our society that we are as enamored of money as we are.

Bush Rides To The Rescue, And Meanwhile...

2008-09-24T21:04:00.000-07:00

Yes, that's right, President Bush finally emerged from the fortress of solitude (aka Crawford Ranch) to make a 15-minute speech, answer no question, and then disappear back into the stillness of the night, undoubtedly to don a mask and cape and rescue the financial system and taxpayers in one remarkable display of legislative unity.

Well, at least that's the impression he gave, or tried to give. I didn't buy it for one second. Remember, much of the controversial proposal that had been presented to Congress by Henry Paulson this week was drafted by his administration. Frankly, numerous bloggers have given much more succinct accounts of the bailout plan. I haven't even attempted to, as the overwhelming choir of voices on the net has probably been sufficient for anyone who happens to stumble across my writings.

Nonetheless, I have shifted my position from uneasing, begruding support of the plan on Friday, to full-throated soapboxing opposition at this point. The need to lubricate the credit markets is obvious. That can be accomplished without $700 billion greenbacks, especially when that money could potentially be used to overpay for securities. That's just silly.

Anyways, the whole point of this posting was for me to point out...umm, the pointlessness of all this fuss. Shit happens. Free markets correct, and the government has to wake up once in a while and check out everything that has been going on. The government's job, in a democratic, modified capitalist society such as ours, is to provide the necessary measures to maintain confidence between lenders, borrowers, and purchasers. This does entail providing money, and lending to institutions whose roles are significant enough that they should not be crippled in their present form.

This also entails providing strict regulations and book-keeping standards that should be adhered to at all times under the watch of a neutral agency. That agency, of course, is supposed to be the SEC. Clearly it isn't though. Remember Enron? WorldCom? Tyco? The reasons they became such popular investments is because they thought they were smarter than everyone else, and therefore could take risks that would inevitably pay off.

Corruption is the ultimate problem. Not liquidity, credit, market confidence, etc. Corruption and greed, byproducts of unregulated capitalism, continue to plague, deceive, and destroy a world of otherwise innocent and well-meaning individuals.

Now what was this post about? Right, it started with George Bush, and somehow managed to end on the topic of corruption in the corridors of power. How did I manage to get there?

SQNM Announces Test Results, Purchase of Laboratory

2008-09-23T16:00:00.000-07:00

Talk about timing. I, for one, was not aware that results from Sequenom's (SQNM) down syndrome tests were scheduled to released today. Judging from the flat day the stock had, I don't think the market was either. Regardless, it made a great buy, as shares are now up more than 15% in after-hours trading. I'm pleasantly surprised.

You can read about it here, but just as a summary, the company announced that it's testing of down syndrome detection processes has continued to produce 100% accurate results.

Also reported here is that the company has purchased a laboratory for clinical diagnostics at what will likely amount to little overhead cost to them. The transaction was conducted via 90% stock options, also giving them a tax incentive what comes out to be $20 million. Not bad at all.

Two New Positions...SQNM and CALM

2008-09-23T08:30:00.000-07:00

By this point, the tide has turned sharply against Henry Paulson's magical bailout. And the more I read about it, the less confident I am in the priorities that he has. The devil is in the details. But more on that to come.

This morning I am adding two new positions to my account, Sequenom, Inc. (SQNM) and Cal-Maine Foods, Inc. (CALM) Both are major growth stories, and buying now serves as an excellent chance to build a position prior to the stocks making a run up to the release of their first quarter earnings reports.

SQNM is a player in the bio-tech sector, and focuses on genetics and molecular analysis for treatment of pre-natal disorders. While they have yet to turn a profit (making this yet another speculative play) revenue guidance continues to increase. This is a research-heavy sector, which adds a tremendous weight to any company's balance sheet. That being said, all of their tests have come back positive, and they just recently won patent rights for use of polymerase chain reaction technologies (a means of amplifying DNA) for noninvasive pre-natal care. Strong innovation is a significant way to add value to your company.

The chart is also strong, as it has established support at about $20 a share. I will take profits in this one, but I am also planning on leaving a portion of shares in for the long run.

The second company I am adding, Cal-Maine Foods (CALM), is one that I have been in and out of several times. They can be considered a provider of basic foods, as they provide eggs to 29 states in the US. Earnings have consistently increased over the past year, while they only trade at about 6.5 times earnings per share. They have been heavily shorted, but while volatile, the stock predictably runs before earnings.

CALM also pays a decent dividend for anyone who wants to hold it long. I consider it primarily a trade, and will take profits either just before or just after earnings are reported.

Sarah Palin

2008-09-21T13:36:00.000-07:00

The entertainment express that is the Sarah Palin VP candidacy continues...I mean, really, people take her seriously?

Quote: "Oil and coal? Of course, it's a fungible commodity and they don't flag, you know, the molecules, where it's going and where it's not. But in the sense of the Congress today, they know that there are very, very hungry domestic markets that need that oil first," Palin said. "So, I believe that what Congress is going to do, also, is not to allow the export bans to such a degree that it's Americans that get stuck to holding the bag without the energy source that is produced here, pumped here. It's got to flow into our domestic markets first."

Again, how is this woman supposed to act as a foreign stateswoman when she spews nonsensical garbage about the area of knowledge that is supposedly her forte? Sigh...at least she's starting to slip in the polls. Mccain needs to get his boys to write her a new speech before she blows up his entire campaign.

The RTC...WTF Is It?

2008-09-19T11:43:00.000-07:00

So now that Hank Paulson and Ben Bernanke ironed out a plan for our economy in a midnight Congressional session, what is the upshot of everything?

Erin Burnett of CNBC just called it a big, nasty "pail of debt." I approximate her verbage for lack of a photographic memory, but I think you get the idea. Essentially, their are free market proponents out there calling the moves of the Fed, SEC and now Congress, just another sign that big government only protects its own interests.

Well here's a cookie to the pundits who figured that out. Guess what? Big business also protects their own interests. Embattled individuals and groups at all levels of society always protect their own interests. This should not be a revelation to anyone who has been anywhere near a computer, newspaper, radio or television over the last 50 years.

But what has to assessed in all this is whether the government is just throwing in the kitchen sink in a desperate effort to give the market time to right itself, or whether this plan actually has a hope of success. Facts first folks.

Hank Paulson is calling for hundreds of billions of dollars as being necessary for this plan to work. Let's be generous and give him a cap of 600-700 billion.
When the RTC was implemented back in 1991, we were on the hook for a far greater percentage of tax revenue and GDP than we are now.
In 1991 the national debt was nearly 50% of the GDP. Currently it is 38%, positioning the Fed and Treasury far more advantageously in this current situation.
Much of the assets that will be taken into the RTC consist of good quality loans. The value of the assets, while not certain, will not decline significantly between the time that the RTC takes them on and the time it takes to sell them back (yes, I said sell them back. Once the mess is sorted out, the government won't interested in holding bad debt).
Off topic, all of the loans, including the bailout of $85 billion to AIG, have to be paid back with interest. WITH INTEREST!

The upshot of this is that the government can recoup the majority of its loans without sticking the bill to taxpayers. Are we, the citizens, going to be hurt? Of course we are. Once again, that's the nature of living in a civilized, governed society. Rationally, we should expect to see dividends in our bank accounts for essentially taking ownership of Fannie, Freddie, and AIG. I'm not sure that our trust our government enough for this to happen...but you never know. If Alaska can pay out oil dividends, America can pay out mortgage and insurance dividends, right?

Socialists Rejoice!

2008-09-18T21:05:00.000-07:00

Or at least, that would be the case any of us true proponents of socialism actually believed for one second in the reaction some in the market are taking to the actions of the government over the past few weeks, culminating in todays actions to ban short-selling, nationalize private debt. Even Nouriel Roubini is getting in on the action.

These reactions are forgivable, indeed understandable given the sheer lack of precedence for the recent turn of events. But there are a few things that people fail to take into consideration. When it's stated that taxpayers just loaned AIG two-hundred and some odd dollars, it is often neglected that the taxpayers have loaned Blackwater and Halliburton hundreds more to fund a war that many of us never supported in the first place.

That's the pain of have to pay for a democratic government. Otherwise it would be called anarchy. Rarely are decisions 100% unanimous, but when presented with choices in crises, the best one can do is to pick the lesser of two evils. I applaud Bernanke and Paulson for doing what was necessary to avoid a full-blown run on the market, which likely would have happened had the greed of the naked shorting hedge funds persisted. Their mistake, as was the mistake of the rest of our public servants, was in ignoring the problems in the financial system until the reached a critical mass.

Another issue that is utterly neglected in any commentary that I have read is that the Fed and Treasury largely function as independent institutions, the house that gives us the chips, redeems their value, and throws us out if we become too rowdy and intoxicated. That is how they were designed and envisioned, and that is the role they are fulfilling today.

Unless there is some far-reaching scheme to nationalize the whole of the American financial industry, I would be willing to bet that slowly but surely, portions of Fannie, Freddie, and AIG will all be returned to continue their business, albeit with much more scrutiny from the oversight agencies. With even staunch free-market advocates backing the need for oversight, let's hope this is the case.

And someone please either fire Christopher Cox or lend him a pair of iron balls. He's a puppet of the Bushies. Need I say more

2008-09-17T12:21:00.000-07:00

Obama hits Mccain on remarks about economic fundamentals.

Some light entertainment.

Washington's Reaction To AIG, LEH, Financial 'Storm'

2008-09-17T10:43:00.000-07:00

Within a matter of hours, John Mccain has done a complete 180 on his statement that the market had 'generally good' fundamentals, to calling for an overhaul of regulatory systems in such a way as to stem off further bleeding out of our nations economy. He and Palin continue to trumpet their claim that they are the best qualified to disrupt the 'good-old boy' network and reform the corrupt standards that led to our recession.

In short, the usual political rhetoric. I'm not the least bit surprised to hear the Republican candidates claiming that Mccain can reform the croneyism on Washington and Wall Street. After all, it would take someone as complicit and knowledgeable as he is in the workings of lobbyists and greedy bankers to know just how to reform them right? Let's not forget that his most notable political achievement, prior to running for office in 2000, was the Keating Five scandal, a story of insider corruption that cost valuable taxpayer money if ever there was one. After that, he established his 'maverick' identity by leaking, and then manipulating data regarding the Abramoff in a way that would protect his party from too much fallout.

Republicans in Congress, in step with their two Oval Office candidates, continued to reiterate their demands for access to offshore oil as a means to provide relief to the American consumer and reduce dependence on foreign oil. Democrats, in an effort to avoid gridlock, have proposed a compromise that will limit drilling to fifty miles offshore. Republicans seem unwilling to accept this compromise.

I say get real. Anyone who buys the nonsense that drilling in ANWAR and off the coasts of our nation is going to stimulate our economy and significantly reduce oil prices is not looking at the big picture. Given the precipitous drop in the price of oil over the last month, and the apparent likelihood of it continuing, the immediacy of the problem has faded. It would also take upwards of a decade to access and utilize the oil reserves off our coasts, no matter how near or far they are from our shorelines.

If our Republican congress wishes to avoid any further pain in oil, or other commodities prices for that matter, they need to vote to close the Enron loophole, and pressure the SEC into taking effective measures that will prevent the naked short selling of securities and futures contracts.

Clarifying the $50 Billion Pump From the Fed

2008-09-16T15:24:00.000-07:00

Well, I called it. No interest rate cut today from the Fed. While the rate cut and the $50 billion of cash pumped into the financial markets are clearly two different things, both essentially serve the same role. The purpose of abstaining from further cutting rates is to prevent the return of the inflation boogey-man. Only time will tell how effective that will turn out to be.

A story from NPR largely clarifies what in fact that entails, and how rate cuts largely act to restore liquidity in lending between banks.

This week's frantic news from Wall Street sent central banks around the world pumping money into the financial system, providing liquidity, or ready cash. Adam Davidson talks to Debbie Elliott about what exactly this means.

Let's say you own a big, beautiful $1-million house. The pizza delivery guy arrives with your dinner but you don't have any cash. He doesn't care how valuable your house is; he wants you to give him some money right now.

Banks basically work the same way. Every afternoon, they add up all the money they owe and all the money they have. The banks figure out whether they need money to meet their obligations. The banks that have extra money lend it to the banks that need money in the form of very short-term, overnight loans.

That constant process of lending extra cash provides the liquidity that funds the global economy.

This normally works very easily, but this past week there was a liquidity crisis. A few key banks around the world announced to everyone's surprise that they had a lot of sub-prime mortgages and that their assets were worth much less than anyone thought.

Banks began to worry: What if there are other banks that aren't disclosing how much their assets have shrunk. It caused a panic among banks, and they reduced lending to each other.

Suddenly, other banks that needed the money didn't have the ready cash to pay off the people who needed it.

The Federal Reserve, the European Central Bank and other central banks around the world stepped in, pumping extra liquidity — billions of dollars — into the system. The central banks provide extra cash all the time, but this week the amounts were much larger than normal.

But there's a potential downside to the central banks' action. Eventually, the fear is that they would pump so much money into economy that it would cause inflation. So the Fed will be keeping its eye out against that possibility and is likely to stop long before inflation sets in.

Central Banks Take Action

2008-09-16T09:03:00.000-07:00

Overnight, the European central bank announced a decision to pump its markets with $99 billion to insure liquidity. The US Fed promptly took measures of their own, putting $50 billion into our markets. Worldwide, $200 billion has been pumped into circulation.

And now our Central Bank is also saying that AIG may possibly be eligible for (gasp) another bailout. There is a logic behind this, in that AIG holds one of the largest insurance portfolios in the world. Unfortunately, it was toxic subprime mortgage holdings that did them in.

So here we are once again. The Fed may cut interest rates, even in light of the money being pumped into the market. I will laugh if they do...but you never know, not in these strange times. I agree, to a point, with the fiscal policies that have precipitated the Fed's latest moves. But they are barely keeping their heads above water as it is. With the threat of further bank failures clearly looming on the horizon, it may seem risky not to slash rates. Nevertheless, I think the central bank would prefer to keep whatever strength in the dollar that they can.

Despite their best hopes, the Fed will not be able to restore a bullish attitude to the stock markets. They are doing their best to prevent free-fall, but investors would be wise to continue to consolidate holdings into dividend plays and fixed income, strong long positions, and cash.

Capitalists Take Their Medicine

2008-09-15T22:38:00.000-07:00

Well, sort of. Capitalism actually was allowed to behave, for once, in the way that capitalism is meant to today. The government, via Bernanke and Paulson, largely agreed that they'll wait to bail anyone else out. Sorry Lehman Brothers, you guys just timed your bankruptcy incorrectly. You actually tried to clean up your balance sheets and shore up your capital, making you not too big too fail, like Bear Stearns was. I applaud this, though I lament the fate of the innocent Lehman employees whose was merely to do and die.

But really, Lehman was made a sign of and nailed to the door of the church of capitalism. If this is what the market claims it wants, this is what it gets. Employees out of jobs while executives scratch their heads in their private jets . AIG is also going belly-up, and is borrowing from its own subsidiaries to remain afloat. Bad bad bad news. The government also denied GM and the rest of the Detroit automakers the additional loans funds which had been requested a few weeks ago, which I discussed here.

As much as the government would like to pretend that Ben Bernanke can throw money out of Milton Friedman's magic helicopter to recapitalize failing businesses...well, he really can't, not with the FDIC in desperate need of that same capital. Yes, that's right, no less an expert than Nouriel Roubini himself has pitched in to agree with my view that the FDIC is funding itself on re-borrowed credit from the Treasury.

And now the Treasury and Federal Reserve are accepting stock as collateral for loans. Whatever I said about the dollar yesterday, forget it. A Harvard business professor was on NPR tonight discussing how eerily close America is to the path to insolvency, thanks to a worldwide system of exchanges and deals that moves too quickly for even the best and the brightest to adapt. That's saying something folks. And it isn't good. I have a feeling that America will pull itself out of this recession, bruised but as optimistic as always. That won't last forever though. Not in a financial system that rewards greed and exploitation as handsomely as ours.

AIG, LEH, MER...What Didn't We Understand?

2008-09-14T20:22:00.000-07:00

My father, who is an economics teacher, largely shaped my interests in the financial world. His macro vision is largely identical to my own. He sees the world as being in its late-middle capitalist stage. Government intervention is becoming more and more attractive, as the greed of private capitalists has resulted in a society of indebtedness. Marx essentially predicted that these cycles of credit addiction followed by capital deterioration would occur with more and more frequency, leading to the necessary implementation of government with greater regulatory authority.

Heresy! I know, I know, but Marx has mostly been right so far, something else my father and I agree upon.

Where we differ is our view of the current state of affairs. My father is of the opinion that our government, while far from perfect, has by and large the necessary tools to intervene during financial crises. I, on the other hand, respectfully disagree. The truths thereof, I hold, are self-evident.

Our government is awash with officials whose conflicts of interest, frankly, are astounding. Look no further than our two presidential candidates. John Mccain has accepted millions in contribution from the Saudi oil lords. Phil Gramm, he of the Enron fame, is his economic advisor. Also Phil Gramm of the "nation of whiners/mental recession" fame. A classy gent, he is.

And really, minus the Phil Gramm thing, Obama isn't much better. He has admirably shunned lobbyists, but only by virtue of accepting secondhad lobbyist dough. Both of these are instances of candidates, not through any specific character deficiency of their own, are forced to enter scenarios where a conflict of interest is going to be inevitable. Likewise, this is the case with our twin financial behemoths of Central Banking, the Fed and the Treasury. Both are overrun with ex-private sector bankers, who (shockingly) failed to do anything to intervene and prevent the current rash of bank failures, only closing the barn door after the horses had run out.

And now we have not one, not two, but three (four counting WAMU) financial firms on the verge of very near collapse. And if that were to happen? As Vernon Hill's article at Seeking Alpha points implies, the FDIC fund largely consists of the Treasury printing back money that it has borrowed over the years from the FDIC for federal spending. Oops

Now, I'm not going to suggest that the dollar will collapse as a result of any future bailouts. Not at this point. That is an absurd scenario. But how much more absurd do things have to get before we consider that possibility?

Psychological Valuation part I: Groupthink

2008-09-14T11:59:00.000-07:00

Note: This is the first part in what will be an ongoing series about market psychology, and its role in market performance.

One of my favorite books on investing is "Hedgehogging," by Barton Biggs, but not for the reason that one generally reads investment books. There are no insights into stock or fund picking strategies, no words of wisdom on retirement planning. It really has no specific advice regarding anything in particular, save that exercise is a great way to clear the mind.

What it does provide is provide insight into some of the psychological factors that play into the movements of financial markets. In particular, Mr. Biggs deals rather heavy-handedly with the tendency of intelligent individuals to engage in groupthink, or herd-mentality, behaviorisms when making critical decisions. One such anecdote he relates involves a party of investors and venture capitalists he attended at the height of the dot-com boom. By this point, he had turned against market sentiment and was betting on a crash in the values of internet stocks. As the discussion at the party turned to the market, and the investments that many of the party-goers had in the market, Biggs expressed his thoughts on the likelihood of a crash, and was largely lampooned for his opinion.

Of course we all know what happened. The bubble burst, and trillions were lost by corporations, speculators, and part-time investors. How did it happen? For starters, human beings are remarkable for their ability to rationalize all manners of behavior, both for themselves and for others. So even when behavioral patterns become extremely risky, people are able put their blinders on as long as they aren't the only ones doing so. Ironically, it is at these moments that risk is at its highest.

Intelligent investors understand this. Experienced investors know how to recognize a groupthink scenario when they see it. Savvy investors know how to use it to their advantage, whether that entails betting against the crowd or piggy-backing it until they see a optimal time to sell. But every investor is prone to falling into groupthink traps without being aware of it, no matter how keen their intuitions.

One way to track the level of groupthink that likely pervades the market is via the Chicago Options Volatility Index (VIX), also known affectional as the Fear Index. Essentially, it measures market volatility through some ingeniously conceived calculations. Below is the 5 year chart for the index.

Let's compare it with the 5 year chart for the S & P 500 index, Standard and Poor's index of 500 stocks selected on market share, liquidity and other factors.

While the VIX has no monetary value, it still fluctuates opposite the movements of the S & P 500. It was relatively level until midway through 2006, when it began making big swings with increasing frequency. Not coincidently, the S & P began its steep decline during this period.

Short-term investors are largely at the mercy of the market volatility. Momentum traders (people like Jim Cramer) will find that especially in a bear market, the volatility index serves to reflect their pain (house of pain, in Mr. Cramer's words). The market is unpredictable, money is being moved from stock to stock, sector to sector, and there is virtually no guarantee of any returns.

For long-term buy-and-hold investors, huge swings in the VIX tell me that it's time to buy, buy, buy (more Cramer-isms, I need to stop). And when it gets rough, remember that the market rewards patience.

Perspective on POT, Fertilizers

2008-09-12T18:36:00.000-07:00

First off, when it comes to investing, I do not play with options. But if did, I probably would have taken a short position in Potash Corporation (POT) back when it started to make lower lows in June/July. From a technical trading standpoint, it was stuck in a declining wedge channel, a strong bearish signal. From someone more concerned with fundamentals like myself, the only thing fundamentally wrong with the stock at that point was the psychological connection traders saw it as having to commodity prices. Psychology, especially in a nasty market like the one we're in right now, is important to be aware of for short term traders.

The stock continued to slide as news of a strike at one of their potash mines was seen as implying supply disruption. This disruption would only have been short term, but since short term traders tend to control short term price movements (take note kids) the stock divebombed.

One of the more difficult things about trying to be a long-term, growth focused investor are the huge swing in volatility that one has to digest as part of the game. The fundamentals are there for the potash spot market to continue to explode in prices. They are continuing to expand production to meet the global demand for fertilizer. Nominal hiccups in stock prices have little to do with real-world demand. And with management at POT putting their money where their mouth is with a significant share buyback plan, they are certainly doing there best to assuage nervous longs like myself.

Now let's get that strike resolved boys. In the meantime, I'll chew my nails and wait things out.

The Picture In Real Estate

2008-09-11T15:45:00.000-07:00

Roughly a year ago, two friends of mine who work in finance were spending time with me at a barbecue my parents were having. One of them disclosed that he was considering purchase a condo in Glendale (which is located about 15-20 minutes east of Los Angeles), but that he was hesitant due to his uncertainty regarding the market situations. He and my mother engaged in a lengthy discussion about the fundamentals of the market, which he was considerably more well informed on.

Needless to say, time went on to prove his point, and the housing market has yet to recover anywhere. Take a look at the chart for Vanguard's real estate ETF, VNQ:

It hasn't made any lower lows than it made in late January, but it also hasn't made any significant gains either. Now since VNQ only tracks US real estate holdings, lets take a look at the international real estate picture, as tracked by RWX, the SPDR Dow Jones Wilshire International real estate ETF over the same period.

The two have nearly mirrored each, with divergence only becoming visible towards the end of July, when the dollar began its recovery and institutions began putting money back into financial stocks. In the case of homebuilders, the commodities bust has also helped their bottom lines. I predict a re-convergence by the end of the year however, as it will become painfully apparent that the situation in real estate simply has not improved.

As the job market and credit conditions continues to deteriorate, home prices and existing home sales will continue to drop. Those calling for a bottom are ignoring the fundamentals of the market, which has largely excluded first-time buyers in a way that has not been seen in decades. The market boom largely consisted of established 30-60 year olds trading up, and up, and up, increasingly squeezing out individuals at lower income levels (or of greater financial prudence). Those first time buyers need to be lured into the market by low prices and interest rates.

Several economists (who had previously called for a bottom) are recognizing the real dangers that still face the market, and are calling for a drop of 5-10% more in home values, a level at which lending can resume with a minimum amount of risk. I fully expect employment figures to act as a leading indicator for the housing market. Look for VNQ to reconvene with RWX on its downward trajectory before it begins to track sideways.

Another Palin Story...Plus Matt Damon Pitches In

2008-09-11T13:29:00.000-07:00

Regardless of your personal politics, one has to be concerned about the increasingly contradictory oratory being issued from the Mccain/Palin campaign. I'll discuss the video posted below:

First, Mccain states to a reporter that Sarah Palin's wealth of national security experience stems from her expertise in the realm of energy. The number of logical fallacies invoked in such an exchange is just confounding. First off, the relationship between security and energy is certainly tenable on its own terms, but not on John Mccain's terms. Since Mccain has stated that the most grave threat facing our national security is radical Islamic extremism, he must not estimate Palin's experience very highly.

And just what does Governor Palin's energy expertise entail? Alaskan political patriarch Ted Stevens has just been indicted after years of investigation for pork, and Palin has unfailingly supported him. Not exactly a catalyst for change. Big oil payouts to the state have helped support social programs, demonstrating a clear conflict of interest for someone who wants to be a reformer. Most of the positives visible in Alaska's economy (job markets, low tax burden, decrease in relative cost-of-living expenses) stem directly from the boom in energy prices. Does this have anything to do with her grasp of energy policy? Not from any standpoint whatsoever.

None of energy 'expertise' is at all relative to the need for renewable energy sources that the world will continue to experience over the next several decades. Nor does it address the fact that Sarah Palin's highest level of involvement in national security still comes from residing closer to Russia than do most Americans. But then, I live closer to Mexico than most Americans as well. Maybe I can wiggle my way into an advisory position for US Immigration and Customs Enforcement.

More to come on the energy/national security correlation later. But here's a video of Matt Damon discussing Palin's VP candidacy for a little entertainment.

Damon: "I need to know if she really thinks dinosaurs were here 4000 years ago...I wanna know that, I really do, 'cause she's going to have the nuclear codes."

Watching BQI, Fertilizers

2008-09-11T13:28:00.002-07:00

So following a mixed quarterly report, Oilsands Quest (BQI) took a huge hit and fell almost 50% ($3.40 to $1.68)) after the opening bell, to rise up and finish only .49 cents down (closing price at $2.70). In spite of an announcement of earlier-than-expected regulatory approval regarding testing and implementation of oil extraction methods, day traders and hedge fund computers saw a huge discrepancy in their cash holdings vs. the cash needed to begin extraction (well duh, isn't that what investors/joint ventures are for?). In my opinion this is a huge opportunity to get in at an agreeable price...management has been aggressive in their pursuit of extraction goals, transparent in their intentions, and the company has a huge amount of potential assets. Chart is below.

Another example of a stock that has been slammed (and I mean absolutely demolished) by traders and computer programs alike is POT (and the other fertilizer stocks that follow its lead). The beginning of the downtrend coincided with the major selloff in the commodities market. I am of the opinion that all of the commodities are oversold, but that the fertilizers in particular have little fundamentally wrong with their stocks. Potash is currently negotiating a workers strike, but that should have little effect on the fact that their earnings are projected to continue to grow well into 2010. Three-month chart, again, is below.

It's my opinion that these are both major buying opportunities for longs. Both are part of a huge macro growth story in energy and food demand worldwide, and while BQI is a heavily speculative investment, POT seems like a no-brainer.

Disclosure: Own POT and BQI in portfolio.

Obamanomics

2008-09-11T13:28:00.001-07:00

Obamanomics: curiously, the term has come to enjoy a level of usage near that of 'Reagonomics.' But what the hell does Obamanomics even mean?

In searching for labels to ascribe to Obamanomics, one might fixate the topics of windfall profits taxation, market regulation, and NAFTA opposition. These are all valid positions that Obama has publicly mentioned. However, as is the case with any simple explanation, it is only as such because it has been derived from something significantly more complicated. To begin with, Obama is a major proponent of the value of the market to the national economy, and not simply a Harvard-groomed Hugo Chavez as he has been spun by his opponents. Like Bill Clinton, he is fully aware of the virtues of independent capital being allocated towards progressive institutions. That is where the catch lies, however. Progressive institutions (solar, wind, social programs) do not include wasteful derivatives, astronomical levels of executive compensation, and other forms of corporate greed. And increased tax revenue is the one necessary catalyst for these measures.

So what of his fiscal/monetary policy? How does one even begin to draw an idea of his fiscal ideology from the vagaries of his policy outline? First off, creating an expedient end to the war would shore up the dollar in a significant way. Regardless one's politics, the Bush/Cheney means of funding a war on borrowed money, rather than taxation, is shockingly absurd. Our country has so adeptly outsourced production and construction roles that the military industrial complex is in itself almost nonexistent, hence why the economy has faltered as it has. In a post-industrial country as our own, where much of our GDP is derived from private and public infrastructure rather than pure industry, we pay the difference when inflation levels begin to spiral upwards, rather than allowing a government to cushion the impact, as is the case with China. Troop withdrawal is not enough to allow the fundamentals of the dollar to recover, but Obama has also publicly stated that he would retain Henry Paulson as Fed Chairman. Foreseeable rate hikes in 2009 would also contribute greatly to appreciation of the dollar.

Of late, much has been made of the dollar's apparently spontaneous and independent recovery in the currency markets. Some commentators are claiming that this is due to dropping oil and other commodity prices, some claim it is psychological, and some attribute it to the dollar buyback, and subsequent Euro/yen selloff that several central banks around the world have engaged in. My view is that the most significant factor is in fact energy prices. Energy, quite frankly, is the new gold standard, the baseline for currency valuation. Obama's energy policy, involving significant investment into renewable energy, will do more benefit in the long run for dollar valuation than any other measure conceivable.

Small and mid-cap growth, specifically in the energy sector, would seem to be the most direct effect that investors should take note of in regards to Obama's economic policies. This is significant for a number of reasons. First, it takes market pressures off of asset valuation and inflation and shifts it over to equity and security valuation, where it rightfully belongs. Secondly, any demonstration of the government's willingness to invest in, rather than nationalize, energy and healthcare infrastructure creates an extremely attractive prospect for foreign speculators, which again is beneficial for not only the dollar, but the faltering job market. Third, it allows lending to resume in a manner that is conducive to low-interest rates in a healthy way. That is, interest rates are low due to high demand and low risk, rather than as a tool to assuage a stressed financial system.

Most significant to me is Obama's declaration that he would appoint a group of advisors comprised of unelected individuals with potentially adversarial points of view. Healthy debate is the greatest stimulus for policy innovation, which is inevitable. Roosevelt shifted the government from classical economists towards Keynesian policies, which then led towards monetarism, to a hybrid of the two, and where are now...which is the reason why Obama's willingness to reconcile Chicago school economics with an understanding of globalism's role in our everyday lives is so vital to his economic measures.

Middle-class young-ish liberals like myself are the most likely to applaud these economic values. Every other political cycle, it seems there is a generation that asks for a change in the socio-political scenery. This time, it is my generation looking to represent itself and its values through a political candidate we believe will provide long-term benefits to our interests. The wealthy have had their eight years of tax cuts and financial deregulation. And even the wealthy are currently suffering the hangover from these policies, one that is likely to last for some time yet. There is a light at the end of the tunnel, for both the wealthy Wall Street, private investors, and the working classes.

And the light at the end of the tunnel, folks, is not John Mccain (nor is it Ron Paul).

"Free" Markets: A New Chapter in an Old Debate

2008-09-11T13:27:00.000-07:00

Two significant news items made it to the presses this weekend. The first was the government (non) bailout of Fannie and Freddie. Most people have been in anticipation of this for months, if not longer. Equally foreseeable was the second item of interest, the groveling of major US automakers before the national legislators (http://www.msnbc.msn.com/id/26592074/) to increase an already approved $25 billion low-interest loan to $50 billion, and to hasten the delivery of the funds.

So what does this mean? Well, most observers would note that the government is once again making a forceful statement that it has no desire to allow the "free" market to function as such. My question is whether that is in fact the case. Per my belief that macro forces trump micro, I do not believe it is. Ever since the Great Depression, when FDR handed a significant amount of authority and influence over to John Maynard Keynes, fiscal (and monetary policy) has involved much more than, well, policy. Keynes theories demonstrated the heavily vested interests that governments have in the aggregate trends of the large-scale, (mal)functioning economy. Fannie was created in 1938 largely as a means of shoring up the liquidity of a housing market that been crippled by severe volatility for nearly a decade. It was more or less privatized in the late 60's after the government decided that a giant red blot of mortgage-incurred debt on its balance sheet was no longer desirable.

All of this paints of picture of a government which essentially acts as a large-scale private entity, protecting its vested interests as it sees necessary through the creation of liquidity and credit, and protection of capital. The whole concept of a free market, as the public commonly perceives it, is almost totally erroneous. Governments borrow to spend and consume goods and services. Public officials are as responsible, via legislature, for generating economic growth as are corporations, often doing so in the same capacity.

So as heartily as I detest the governments seeming schizophrenia regarding the free market (which I believe is more at fault for the current economic conditions), the measures it has taken to belatedly stimulate two industries that are on the verge of collapse are laudable. The true test will be whether the regulation which must follow stimulation will be diligent enough to maintain a measure of effectiveness. The government has already placed two likely allies in principal at the head of Fannie and Freddie. If and when the loan money is disbursed to automakers, an equal level of intercession at the executive level will be necessary to insure proper allocation. GM, Ford, and Daimler-Chrysler have been notoriously plagued by infighting amongst executives for years, creating a wasteful corporate environment which lags behind the best of Europe and Asia in both profit margin and market share. The loan money must, I repeat must, be used as a supplementary hedge against oil prices through technological investment and streamlining of production and marketing.

The other option, of course, would be to allow the market to dictate its own pace and terms of progress. In late-stage capitalism, with a government playing a role as active market participan

Introduction

2008-09-11T13:25:00.000-07:00

My plan is for this blog to serve as a mirror for myself and my trading/investing habits. I intend to gain some insight, through reflection and introspection, into the nature of the financial markets and how they relate to my actions.

An unfortunate side-effect of the extraordinarily complex cognitive faculties of the human brain is the propensity to overthink and muddy even the simplest of issues. In the case of the modern financial markets, where millions of perspectives are constantly interacting, it becomes difficult to keep one's head above the mire (especially when so many of these perspectives are interpreted by computer software).

It is my theory that performance is maximized when one develops a broad-scale, applicable theory of market behavior. Being staunchly Marxist in my economic views, it is therefore imperative that I take into account all aspects of historical, sociological, scientific, and political trends (origin, current trend, short and long-term expectations). This is a tall order. It is actually somewhat intimidating just to write down. Nevertheless it is essential, and all the truly singular investors take this approach (Soros, Buffett, Graham, etc.) Thus I will continue to educate myself for the purpose of gaining a greater depth of understanding about the interconnectedness of the world and the financial markets.

Along the way, I will do some sector and stock picking, and reporting, all of which will hopefully be of some use or entertainment to anyone who reads the blog. Thanks in advance, by the way.