Thursday, April 23, 2009

Price Volatility

I have been frustrated of late with a lot of failed breakouts by stocks and Indexes. Failed breakouts mean that the markets need more time to repair all of the damage of the 2008 Crash. Time is the key. Time allows moving averages to catch up with price. Time allows for price to catch up with fundamentals. Time allows for emotions to dissipate.

There is obviously more going on right now than just price. There is overt manipulation going on, in the form of altering how earnings are calculated (FASB) and how the markets operate day to day (the Quant Model Short Squeeze, vanishing Liquidity and the SPY squeeze today). And prices are responding by moving higher in a historically rapid fashion.

But you can’t build a strong house on weak foundation. I have chronicled how much of the gains of this rally have been news-related and done while the markets are closed. That just means there is no support for prices when things roll over again – and you know they will.

Look at the Dow (DIA). There was a nice rally off the lows (Green Lines), but since, as the rally has lost steam, there have three consolidations (blue lines) followed by huge overnight price moves (Gap Up Opens). This has made it really hard to manage money, because you want to buy when Big Money forces prices up through obvious resistance.

The purpose is to make Big Money commit enough Capital to overwhelm any selling. But when you ramp prices when the markets are closed, then there is no selling to have to battle and now all the guys who were short are getting stopped in as price jumps above their stop loss points. It is classic manipulation. It has hurt me as I have been stopped in at not so good prices on several positions.

The other game now is to just ramp prices up hard in the last hour. It starts at 12:04 PDT almost every day.

The byproduct to all of this is enormous price volatility. The Oil Service Index (OIH) has had an -8.9% selloff and a +11.2% rally in this week’s three days of trading. I owned it in both directions and sold it today. Wells Fargo was down -23.2% and then up 27.4% in the last 3 days. I sold it today, too.

I don’t really know what to do going forward. This new level of volatility is changing the dynamics of how to invest. +27% in 24 hours is not normal. That’s 3 years’ worth of return. I see the Dow move half a percent in two minutes, each time somebody hits the Futures’ buy button. Half a percent in 2 minutes? How are you supposed to manage that risk? How are you supposed to invest in the Dow when it rallies 6.7% in an hour of trading and then a few days later is down 4% in hour?

The markets have changed. They are not about generating capital for companies to invest and people to own. They are about driving asset prices higher to further policy agendas. The Government has totally fowled things up. And thus individuals are now forced to deal the unintended consequence (price volatility).

The markets now trade like a Third World Banana Republic. I used to watch the shares of Chinese Stocks and Latin American Stocks with fascination as they would gap up 5% one day and then gap down 5% a few days later, and wondered how anybody could own those and sleep at night, knowing that they could walk in the next day and be down big and have no capability to manage their risk via Stop Losses.

Our market has become the same animal. Look at this Chinese Oil Company (CEO). Look at all the gap moves (Green Circles). It looks like the Dow. What are you supposed to do with this thing?

I started buying individual companies as this rally matured, because they offered better risk-reward entries than the ETFs did. But the volatility they have experienced has been ridiculous. MasterCard (MA) was down $14 and then up $14 in like 24 hours! I sold it. I can’t handle that level of volatility.

My goal now is to stick almost completely with ETFs. I wanted to buy a lot of Sector-Specific ETFs, but am concerned about their volatility. That may force me into more Broad Market ETFs than I originally planned. My goal is to manage risk (price volatility) while still trying to make money. It has been quite a challenge.

In some ways I am too hard on myself. Here is my Bull Market- Bear Market Chart. As you can see, the rally is a blip. The market has crashed, moving averages are still way above price and it will take time to repair all the damage of the 2008 Crash. That is the forest. My accounts are pretty much flat with where they were at the end of 2007 – and I’m still beating myself up. That’s nuts… 90% of the investing world would give their right arm for that performance.

I want to see a pullback that I can buy and manage my risk. I think that once we get the pullback, Big Money will be forced to buy, for fear of missing any confirmed breakout above this rally’s ultimate high. The commitment of Capital from Big Money should go a long way towards smoothing out the daily price volatility by bringing real liquidity back into the markets.

Tuesday, April 21, 2009

California Moves to Slow Chapter 9 Filings

California AB 155 states that municipalities must get approval from a political board before it can file for Chapter 9 protection. It will be voted on soon. Expect legal challenges if it passes.

The unions love it, the cities and counties oppose it.

If you are broke, then regardless of what some political hacks say, you can pay the unions their pensions...

We continue to find new ways to put off the inevitable day of reckoning with all of our debt and entitlement obligations. Enjoy the new Bull Market, but understand that this bubble will most likely be the last one.§ion=&sub_sec=&tert=&story=27694

Pacific Grove Discusses Chapter 9

Pacific Grove, CA is contemplating filing Chapter 9 bankruptcy to get out from under the weight of its pension obligations - specifically CALPERS obligations!

Mismanagement of the retirement funds held at CALPERS has caused a great deal of expense to California Municipalities, because they are forced to accelerate contributions to make up for investment portfolio losses.

Apparently the 2000-2002 Bear Market saddled Pacific Grove with an additional $19 million in CALPERS pension obligations. So just imagine how much this Bear Market is going to cost them. Didn't CALPERS lose something like $38 billion last year?

Expect to see other towns and cities in California contemplate Chapter 9.
Fear Municipal Bonds!

Sunday, April 19, 2009

Why He Fired His Broker

Here is a pretty amazing article in the May 2009 The Atlantic Magazine –

It is the story of an average guy and how the recent Stock Market Crash has changed his thoughts on investing and his trust for the Financial Services Industry. I think it is representative of a great deal of individual investors.

“For most of our adult lives, my wife and I have behaved in the way responsible cogs of capitalism are supposed to behave—we invested in a carefully calibrated mix of equities and bonds; we bought and held; we didn’t overextend on real estate; we put the maximum in our 401(k) accounts; we gave to charity; and we saved, but we also spent: mainly on gasoline, food, and magazines. In retrospect, we didn’t have the proper appreciation for risk, but who did? We were children of the bull market… I took a random walk down Wall Street and got hit by a bus.”

Investing is a process of determining when to take risk and when to avoid risk. Now, more than every, you will need to be able to identify when to risk capital and when to protect it.

Investment Paralysis“But for now, no whining: just confusion and bemusement and fear, along with an uncharacteristic sense of paralysis. In the past six months, I’ve bought and sold virtually no equities. And I rarely take the pulse of my 401(k).
I called a psychologist to find out what could explain this weird passivity… ‘You no longer know the world you live in,’ he said. ‘You played by the rules, the rules benefited you. The world functioned according to some regularities. Right now, it’s unclear what rules apply. There is a new regime. What seemed prudent earlier has disappeared. I’m surprised Americans aren’t more panicked… Paralysis is one response to this level of insecurity.’”

Oh Brother, have the rules changed. Wall Street now rules Washington DC and we are all pawns in their game.

Merrill Lynch
“(W)e haven’t heard from our Merrill broker in nine months.”

“I should have seen the signs of dysfunction much earlier. It was more than a decade ago that our first Merrill Lynch adviser put us in a company called Boston Chicken. A Merrill analyst described it as “the restaurant concept of the ’90s.” It went bankrupt in 1998. Only later did I learn that Merrill had underwritten the initial public offering for Boston Chicken stock, and so had an interest in selling the company to its customers. There were other brilliant pieces of advice—long-term “buy and hold” recommendations that emerged from the Merrill analysis factory: Qualcomm; Sun Microsystems; Nokia; and Citibank, of course, which has recently dipped as low as a dollar a share.”

The perception of the average investor is that the Large Banks and Brokerages are making investment decisions that are good for the Company at the expense of the Client. Who can blame them for this… How many advisors did the homework and told their clients to protect their money in late 2007- early 2008? Do you know how hard it was to do this? Do you know how little resources are committed by the Banks to help clients protect their money?

Richard Bernstein – Merrill Lynch Chief Investment Strategist“Bernstein, the chief strategist, has actually been bearish for much of the past decade. Given his recent disposition toward market pessimism, I asked him why he didn’t tell Merrill’s clients to dump their equities seven months ago. ‘I said it as best as I could within reasonable professional standards,’ he said. ‘I’m not going to yell ‘Sell, sell, sell!’ I’m not going to go out and be irresponsible.’
I imagine that many of Merrill’s clients are now wishing that Bernstein had been more irresponsible.”

In the eyes of Wall Street Brokerage Firms, it is “irresponsible” to tell clients that they need to protect their capital? Are you kidding me? I go back to the Jon Stewart line “Who’s side or you on?”

People aren’t stupid. They are figuring out that things have changed and that Wall Street is now great at doing one thing – making money for itself – and is terrible at making money for clients.

Do It Yourself“I believed I could find investments for myself…every so often, I would follow the recommendations of the financial magazines, SmartMoney in particular, because for a long while I was an ardent consumer of financial pornography. No more. In the harsh light of recession, I find it hard to believe I listened to a magazine that, in August 2007, recommended American Express at $63 a share (a “conservative way to make hay from global credit-card growth”), which as I write this is selling for $13 a share.”

Maybe the magazines and Barron’s and CNBC aren’t so good at making you money either.

“It turns out that my crucial mistake was believing that the brokers and wealth managers and cable-television oracles who make up the financial-services industrial complex actually had my best interests at heart.”

People need a trusted advocate to cut through all of the double standards and false motives to be able to help clients. It is a constant uphill battle against the industry to do the right thing for clients. But it can be done and is being done by those willing to do their homework and make sacrifices for the betterment of long term relationships.

Robert Soros (George Soros’ Son)“You think a brokerage should be a place you go to pay commissions for fair and unbiased advice, right?” he asked.
“Yes,” I said.
“It’s not. It never has been.” He then cited another saying of Buffett’s: “‘Wall Street is a place where whatever can be sold will be sold.’ You are the consumer of their dreck. What they can sell to you, they will sell to you.”
“But they told us—”
“They lied.”
He went on: “You should be disheartened and disappointed. But don’t kid yourself. You’re a naive capitalist. They were never your advisers. Do not for a moment think that a brokerage firm is your friend.”

I have been saying this for a long time. Wall Street has perfected the art of making money for themselves and not for their clients. The realization of what is going on will lead people to take their money out of the large Brokers and move to more customer-focused venues that design their products and services around doing what is right for their clients and not what is best for their own interests.

My Market Niche“If the head of Merrill Lynch and every other investment firm had their way,” he continued, “no individual broker would ever recommend an individual stock or bond to a retail client again. They have essentially gotten out of the brokering-and-advising business and gone all in on the ‘wealth management’ business. The new model is to gather assets from wealthy people and then place those assets with a whole bunch of managers who will manage different pieces of it in diversified styles so you don’t lose it all at once. And by the way, people with less than $10 million need not apply.

That is a grotesque statement. I need the flexibility to be able to manage money the way it needs to be managed and not the way my company wants me to do it. Go read the recent interview with William O’Neil of Investors’ Business Daily, where he tells you that if you are sustaining 50% losses, then you have no clue what you are doing with your money. For Wall Street to advise you to buy and hold something, even when a guy like Bernstein knows that puts assets at massive risk in unconscionable.

The $250k to $10 million investor is under(un)serviced. They want somebody to be their advocate, coordinating the advice from their Tax and Estate Planning advisors and building a customized personal plan for how to achieve their goals. The winners in the investment world of the next 20 years will be those who build their businesses on these concepts.

Giving Up at the Bottom?“In retrospect, I can’t imagine what led all of us to believe that we could regularly expect double-digit annual returns on our money, for doing no work. Maybe this attitude will cause me to miss the next great run-up. No matter. I’ll take 3 or 4 percent gains a year, or 1 or 2, if necessary.”

The markets are designed to suck money in at the tops (euphoria) and get you to sell at the lows (panic). They have clearing done their job on this poor reporter. He will no doubt be the one buying at the next high.

My first goal over the last 18 months was to avoid the pain, to allow myself and my clients to be in a position where we could make decisions based upon the facts and not have the hangover of massive fear when the markets turned.

The setup is there for a significant market rally. The only question is where or not Big Money commits and starts buying in the next month or two. So far they have not, but the setup is there.

My other goal was to raise cash and have lots of capital to commit to the new leadership that would drive this new Bull Market. The leaders of the last Bull seldom lead the new one, so you need to sell past leaders when they are high in price to be able to buy the next round of leadership.

I think I achieved both of those goals. That is why you are reading my blog and not looking for a new advisor.

Why The Markets Are Rallying

Seven short weeks ago the markets were preparing for the nationalization of America’s four largest banks – Wells Fargo, Citigroup, JPMorgan and Bank of America. They were insolvent and everybody knew it (they still are any everybody knows it but the accountants).

Then the FASB (the rules agency in charge of determining accounting standards) changed the rules and presto – these banks are now “profitable”. They made it so banks could legally lie about the way they price the assets they hold. I am not bitter. I make a hell of a lot more money when stocks are going up than I do when they are going down – and make no mistake about it, these rules changes were designed to do one thing – increase stock and bond prices. The consequences of these changes will be felt later, when either through massive taxpayer losses or massive inflation.

Let’s review the recent earnings releases by some of the banks and the impact of these rules changes –

Citigroup“Trading Profits” went from a loss of -$6.8 billion in Q1 2008 to a gain of $3.8 billion in Q1 2009. This is a direct result of the marking up of the assets held in the trading account. They were “profitable” for the quarter.

JPMorgan“Fixed Income Markets revenue was a record $4.9 billion, compared with $466 million in the prior year.” That is mostly gains from the repricing of their Mortgage Bond portfolio. Their “Net Income” rose about $4.3 billion in the quarter. Guess where most of that came from?

Goldman Sachs
Because Goldman became a “Bank Holding Company”, they were forced to move their reporting period from a Fiscal Year to the Calendar Year. This allowed them to have a 4-month quarter. But to keep comparison periods equal, Goldman was able to take December 2008 and list it only as a footnote. They stuffed $1.6 billion in losses into this month and were able to post a “$1.8 billion Profit” for the quarter. Your government at work, folks…

Wells Fargo
They preannounced a massive gain, but will not release earnings for another week or so, so nobody has a clue how they achieved these “earnings”.

Insurance Companies are now cooking the books the same way the banks are cooking their books.

Rules changes allowing REITS to extend financing terms from 3 to 5 years will soon be put in place to bail them out from a massive round of required refinancing in 2010-2012. This will save them from defaulting – for the time being.

Financial Earnings
What you need to realize is that the Financial Sector represents 35% of the Earnings of the S&P 500. So a huge increase in earnings from Financials will result in a major upwards revision in earnings for the S&P 500. Whether they are real or not is not the issue. The issue is that the S&P 500 will be repriced to reflect this increase in earnings.

The Greater Fool Theory
Welcome to Banana Republic accounting and a Banana Republic stock market. You will now have to make investment decisions based on bullsh*t numbers. Stocks and Bonds are now a game of hot potato – think Internet Stocks 1998 - 2000. With the Quant Hedge-Fund model now applying to the entire economy – buy what is going up, because it is going up and use as much leverage as you can to do so.

I don’t think that was the “change” Obama intended to bring to the economy. But then again, Goldman and its employees did donate almost $1 million to Obama…